As filed with the Securities and Exchange
Commission on May 10, 2010
Registration No.
333-164760
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
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CHINA CARBON
GRAPHITE
GROUP
,
INC.
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(Exact
name of registrant as specified in its charter)
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Nevada
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2721
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98-0550699
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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c/o
Xinghe Xingyong Carbon Co., Ltd.
787
Xicheng Wai
Chengguantown
Xinghe
County
Inner
Mongolia, China
(+86)
474-7209723
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Resident
Agents of Nevada, Inc.
711
S. Carson Street, Suite 4
Carson
City, Nevada 89701
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Christopher
S. Auguste, Esq.
Bill
Huo, Esq.
Ari
Edelman, Esq.
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of Americas
New
York, New York 10036
(212)
715-9100
Approximate
date of commencement of proposed sale to the public
:
From time to time after the
effective date of this registration statement as determined by the
Registrant.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 of the Securities Act of 1933, the
following box.
¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
¨
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Accelerated
filer
¨
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Non-accelerated
filer
¨
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Smaller
reporting company
þ
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(Do
not check if a smaller reporting company)
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The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
PROSPECTUS
Subject
to completion, dated May [__], 2010
CHINA
CARBON GRAPHITE GROUP, INC.
3,596,725
Shares of Common
Stock
This
prospectus relates to an aggregate of 3,596,725
shares of common stock, par value $0.001 per share, of China Carbon Graphite
Group, Inc., a Nevada corporation, that may be sold from time to time by the
selling stockholders named in this prospectus, which includes:
·
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2,480,500 shares of our common stock issuable, or
issued, upon the conversion of the Series B Convertible Preferred Stock
issued to the selling stockholders named in this prospectus;
and
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·
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1,116,225
shares of our common stock issuable, or
issued , upon the exercise of the warrants issued to the selling
stockholders named in this
prospectus.
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We will
not receive any proceeds from the sales of any shares of common stock by the
selling stockholders. We may, however, receive proceeds of up to $1,453,573 from
the exercise of warrants held by the selling stockholders if and when such
warrants are exercised in exchange for cash.
Our
common stock is quoted on the OTC Bulletin Board, or OTC, under the symbol
“CHGI.OB”. The closing price for our common stock on May 6, 2010 was $1. 05 per
share, as reported on the OTC.
Investing
in our common stock involves a high degree of risk. See the section entitled
“Risk Factors” beginning on page 8 to read about factors you should consider
before buying shares of our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
information in this prospectus is not complete and may be changed. No person may
sell the securities described in this document until the registration statement
filed with the Securities and Exchange Commission is declared effective. This
prospectus is not an offer to sell these securities and no person named in this
prospectus is soliciting offers to buy these securities in any state where the
offer or sale is not permitted.
The date
of this prospectus is May ___,
2010
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY
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5
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RISK FACTORS
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9
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
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21
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USE OF
PROCEEDS
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21
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DIVIDEND POLICY
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21
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MARKET FOR OUR COMMON
STOCK
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22
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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23
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OUR BUSINESS
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33
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MANAGEMENT
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40
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CORPORATE
GOVERNANCE
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41
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EXECUTIVE
COMPENSATION
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44
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CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
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44
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SELLING
STOCKHOLDERS
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45
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
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48
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DESCRIPTION OF CAPITAL
STOCK
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48
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SHARES ELIGIBLE FOR FUTURE
SALE
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52
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PLAN OF
DISTRIBUTION
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53
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LEGAL
MATTERS
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54
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EXPERTS
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55
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WHERE YOU CAN FIND MORE
INFORMATION
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55
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INDEX TO FINANCIAL
STATEMENTS F-
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F-1
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PROSPECTUS
SUMMARY
The
following summary highlights some of the information contained in this
prospectus, and it may not contain all of the information that is important to
you in making an investment decision. You should read the following summary
together with the more detailed information regarding our company and the common
stock being sold by the selling stockholders in this offering, including the
“Risk Factors” and our consolidated financial statements and related notes,
included elsewhere in this prospectus.
The
Company
Overview
of Our Business
We are engaged in the manufacture of
graphite products in the People’s Republic of China. Based on
information we receive about our industry in the course of our business, we
believe that we are the largest wholesale supplier of fine grain graphite and
high purity graphite in China and one of China’s largest producers and suppliers
of graphite products.
We manufacture three types of products:
graphite electrodes, fine grain graphite products and high purity graphite
products.
Graphite electrodes are conducting
materials used for electric arc furnaces in the manufacture of steel and in
smelting of products such as alloy steel, brown alumina, yellow phosphorus and
other metals. Fine grain graphite is widely used in smelting colored
metals and rare-earth metals as well as in the manufacture of molds. High purity
graphite is used in, among others, the metallurgy, mechanical, aviation,
electronic, atomic energy, chemical and food industries.
Our product types are differentiated
based upon qualities such as density, thermal conductivity, electrical
resistivity, thermal expansion and strength. With respect to each of
our product types, we sell products that vary in size and purity, depending on
the particular specifications requested by our distributors. We also
customize our products in various shapes. We regularly upgrade each
of our products by increasing their size, density and purity, in accordance with
customer demands.
Our
Growth Strategy
Our
long-term strategy is to expand our product offerings by manufacturing nuclear
graphite used as a reflector or moderator in nuclear reactors in China, assuming
that we are able to obtain the necessary funds. The profit margin on these
products would be significantly higher than the profit margin on our current
line of products. There are currently 11 nuclear power plants in
China, with 15 more plants currently under construction. These power
plants currently purchase their nuclear graphite from manufacturers in foreign
countries, including Japan, Germany and the United States, which involves
greater costs than purchasing from local Chinese companies. We know
of only one graphite manufacturer in China that currently produces nuclear
graphite that meets the specifications of these power plants. Only graphite rods
with a diameter of more than 840 millimeters and a purity of more than 99.9999%
may be used in nuclear power reactors. To date, we have produced only samples
that meet these standards. The largest graphite that we currently
produce in large quantities that contains such a high level of purity has a
diameter of 600 millimeters.
We also
plan to expand our business by acquiring one or more companies which we believe
meet the following requirements:
·
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producing revenues
and earnings before interest, taxes, depreciation and amortization at a
level that will have a significant impact on our
earnings;
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·
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conducting
business in an industry that is related to our present business;
and
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will
have prior to or shortly following closing, audited financial statements,
prepared in accordance with United States
GAAP.
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We have
engaged in discussions with potential target companies, but, as of the date of
this report, we have not reached any agreement with respect to any acquisitions.
On March 3, 2010, we entered into a letter of intent which provided that we
intend to enter into definitive agreements with Chiyu Carbon Graphite Ltd., a
down stream producer of graphite products in China, to acquire 100% of Chiyu
Carbon’s assets. We believe that if the acquisition closes, sales by
this entity would generate significant profits for us and that demand for these
products is currently greater than demand for some of our existing
products.
In order
to expand our product offerings, we may need to raise a substantial amount of
additional capital from equity or debt markets or to borrow additional funds
from local banks. We currently have no commitments from any financing
source. There is no assurance that we will be able to raise any funds
on terms favorable to us, or at all. In the event that we issue
shares of equity or convertible securities, holdings of our existing
stockholders would be diluted. In addition, there is no assurance
that we will successfully manage and integrate the production and sale of new
products.
Organizational
Structure
We were incorporated in Nevada on
February 13, 2003 as Achievers Magazine, Inc. On December 14, 2007,
we completed a reverse merger transaction with Talent International Investment
Limited, or Talent, a company incorporated in the British Virgin Islands, on
February 1, 2007. Following the reverse merger, our name was changed
to China Carbon Graphite Group, Inc.
As a result of the reverse merger, we
wholly own Talent. Talent wholly owns Xinghe Yongle Carbon Co., Ltd.,
or Yongle, a wholly foreign owned enterprise organized under the laws of the PRC
on September 18, 2007. On December 14, 2007, Yongle executed a series
of exclusive contractual agreements with Xinghe Xingyong Carbon Co., Ltd., or
Xingyong, an operating company organized under the laws of the PRC in December
2001, pursuant to which we have the ability to substantially influence
Xingyong’s daily operations and affairs. These agreements are
described below under “Our Business – Organizational Structure.”
Below is
a chart depicting our organizational structure:
Summary
of the Offering
Common
stock offered by selling stockholders
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The
selling stockholders are offering an aggregate of 2,480,5 00 shares of our common stock, par value
$0.001 per share, issuable, or issued, upon the conversion of shares of
Series B Convertible Preferred Stock, par value $0.001 per share and an
aggregate of 1,116,225 shares of our common stock issuable, or issued, upon the exercise of warrants
held by the selling stockholders. This number represents in the aggregate
approximately 16.84% of the outstanding shares of our common stock as of
the date of this prospectus.
(1)
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Common
stock to be outstanding immediately after this offering
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19,980,161
shares
(2)
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Proceeds
to us
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We
will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders. However, we may receive up
to an aggregate of $1,453,573 from the exercise of warrants held by the
selling stockholders if and when such warrants are exercised in exchange
for cash. We will use any such proceeds for general working
capital purposes.
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(1) Based on 19,980,161 shares of common
stock outstanding as of April 28, 2010 and the issuance of 975,000 shares of our common stock upon the conversion of
all Series B Preferred Stock held by the selling stockholders as of such date,
and the issuance of 988,225 shares of our common
stock upon the exercise of all the warrants issued to the selling stockholders
in a recent financing transaction which have not been
exercised yet.
(2) Does
not include 1,513,225 shares of our common stock issuable upon the exercise of
outstanding warrants and
125,000
shares of our
common stock issuable upon the conversion of shares of Series A Preferred
Stock.
Risks
Affecting Our Business
We are
subject to a number of risks, which you should be aware of before deciding to
purchase the securities in this offering. These risks, which are
summarized below and are described in more detail below under the heading “Risk
Factors,” include, but are not limited to, the following:
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Risks
related to our capital structure and the ownership of our operating
company;
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Inability
to raise capital or make acquisitions to fuel our
growth;
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Inability
to pay off loans if payment is demanded at
maturity;
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The
current global economic and financial
crisis;
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Credit
risk with respect to our accounts
receivable;
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Potential
inability to secure necessary raw materials in sufficient quantities, and
fluctuations in raw material
prices;
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Inability
to effectively manage rapid growth;
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Potential
loss of key members of our senior management;
and
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Potential
failure to have complied with PRC regulations regarding our
restructuring.
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Any of
the above risks could materially and adversely affect our business, financial
position and results of operations. An investment in our common stock involves
risks. You should read and consider the information set forth below in the
section entitled “Risk Factors” and all other information set forth in this
prospectus before investing in our common stock.
Corporate
Information
Our executive offices are located at
c/o Xinghe Xingyong Carbon Co., Ltd., 787 Xicheng Wai, Chengguantown, Xinghe
County, Inner Mongolia, China, and our telephone number is +(86) 474-7209723. We
maintain a website at http://www.chinacarboninc.com. Information
contained in our website shall not be deemed to be a part of this
prospectus.
RISK
FACTORS
An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto, before deciding to invest
in our common stock. Additional risks not presently known to us or that we
presently consider immaterial may also adversely affect our company. If any of
the following risks occur, our business, financial condition and results of
operations, and the value of our common stock, could be materially and adversely
affected.
Risks
Related to Our Corporate Structure
We
control Xingyong through a series of contractual arrangements, which may not be
as effective in providing control over the entity as direct ownership and may be
difficult to enforce.
We
operate our business in the PRC through our variable interest entity, Xingyong.
Xingyong holds the licenses, approvals and assets necessary to operate our
business in the PRC. We have no equity ownership interest in Xingyong and rely
on contractual arrangements with Xingyong and its shareholders that allow us to
substantially control and operate Xingyong. These contractual arrangements may
not be as effective as direct ownership in providing control over Xingyong
because Xingyong or its shareholders could breach the arrangements.
Our
contractual arrangements with Xingyong are governed by PRC law. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes
would be resolved in accordance with PRC legal procedures. If Xingyong or its
shareholders fail to perform their respective obligations under these
contractual arrangements, we may have to incur substantial costs to enforce such
arrangements and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages.
The legal
environment in the PRC is not as developed as in the United States and
uncertainties in the Chinese legal system could limit our ability to enforce
these contractual arrangements. In the event that we are unable to enforce these
contractual arrangements, our business, financial condition and results of
operations could be materially and adversely affected.
If
the PRC government determines that the contractual arrangements through which we
control Xingyong do not comply with applicable regulations, our business could
be adversely affected.
Although
we believe our contractual relationships through which we control Xingyong
comply with current licensing, registration and regulatory requirements of the
PRC, we cannot assure you that the PRC government would agree, or that new and
burdensome regulations will not be adopted in the future. If the PRC government
determines that our structure or operating arrangements do not comply with
applicable law, it could revoke our business and operating licenses, require us
to discontinue or restrict our operations, restrict our right to collect
revenues, require us to restructure our operations, impose additional conditions
or requirements with which we may not be able to comply, impose restrictions on
our business operations or on our customers, or take other regulatory or
enforcement actions against us that could be harmful to our
business.
The
controlling shareholder of Xingyong has potential conflicts of interest with us,
which may adversely affect our business.
Affiliates
of the controlling shareholder of Xingyong, Mr. Denyong Jin, are also beneficial
holders of our common shares. Mr. Jin holds a larger interest in Xingyong when
compared to the beneficial ownership of his affiliates in our shares. Conflicts
of interest between these dual relationships may arise. We cannot assure you
that when conflicts of interest arise, Mr. Jin will act in the best interests of
the Company or that conflicts of interest will be resolved in our favor. In
addition, Mr. Jin may breach or cause Xingyong to breach or refuse to renew the
existing contractual arrangements that allow us to receive economic benefits
from Xingyong. We rely on Mr. Jin to act in good faith and in the best interests
of the Company, and not use his positions for personal gain. If we cannot
resolve any conflicts of interest or disputes between us and Mr. Jin, we would
have to rely on legal proceedings, which could result in disruption of our
business and substantial uncertainty as to the outcome of any such legal
proceedings.
Risks
Related to Our Business
Since
the payments we receive from Xingyong are subject to annual negotiation, we may
not be entitled to receive all of Xingyong’s net income in the
future.
Pursuant
to the business operations agreement between Yongle and Xingyong, Xingyong is
obligated to pay between 80% and 100% of its net income to Yongle, subject to
annual negotiation. While Xingyong has to pay 100% of its net income
to Yongle for 2008 and 2009, there is no assurance that it will continue to do
so in subsequent years. Dengyong Jin, our former chief executive
officer, owns Xingyong. Mr. Jin and his family members also control
Sincere Investment (PTC), Ltd., or Sincere, our controlling
stockholder. Our profitability would be affected if the percentage of
Xingyong’s net income that is payable to us would be decreased.
Our
business and operations are experiencing a downturn following a period of rapid
growth. If we fail to manage our business effectively, our operating results
could be harmed.
Until the
third quarter of 2008, we experienced rapid growth in our operations. Since the
fourth quarter of 2008, however, as a result of the global economic crisis, the
steel industry in general has slowed, which has caused our revenues to
decline. Although we saw improvements during the third quarter of
2009, our revenues and gross margins declined significantly in the fourth
quarter. In addition, our collection of receivables has slowed and our expense
for bad debts has increased significantly. We also incurred several non-cash
expenses in the fourth quarter of 2009 which caused further declines in our net
profit. To manage our business effectively and to generate
significant profits, we need to continue to improve our operational, financial
and management controls. These system enhancements and improvements may require
significant capital expenditures and management resources. Failure to implement
these improvements could impair our ability to manage our business and could
result in a further deterioration of our financial position and the results of
our operations.
Our
principal stockholder has the power to control our business, whose interest may
differ from other stockholders.
Our
principal stockholder, Sincere, owns 47% of our common stock as of April 15,
2010. As a result, Sincere has the ability to elect all of our directors and to
approve any action requiring stockholder action, without the vote of any other
stockholders, including the outcome of corporate transactions submitted to the
stockholders for approval such as mergers, consolidations and the sale of all or
substantially all of our assets. Sincere has the power to cause or
prevent a change of control. The interest of our principal stockholder may
differ from the interests of other stockholders. Sincere is controlled by Mr.
Jin, who is our former chief executive officer and the principal shareholder and
chief executive officer of Xingyong, and his relatives.
We
will require additional financing to maintain and develop our business, which
funds may not be available to us on favorable terms, or at
all. Without additional funds, we may not be able to maintain or
expand our business.
Demand
for some of our products has declined due to a decline in sales by our steel
manufacturer customers. As a result, our goal is to acquire other
businesses in our industry that manufacture products that we do not currently
manufacture and to develop higher margin nuclear graphite, internally. To
accomplish these goals, we may need to raise a substantial amount of additional
capital from equity or debt markets or to borrow additional funds from local
banks. We currently have no commitments from any financing
source. There is no assurance that we will be able to raise any funds
on terms favorable to us, or at all. In the event that we issue
shares of equity or convertible securities, holdings of our existing
stockholders would be diluted. In addition, there is no assurance
that we will successfully manage and integrate the production and sale of new
products.
We
plan to expand our business by acquiring one or more companies. Any
such acquisition may disrupt, or otherwise have a negative impact on, our
business operations.
We intend
to expand our business through acquisitions. On March 3, 2010, we
entered into a letter of intent which provided that we intend to enter into
definitive agreements with Chiyu Carbon Graphite Ltd., a down stream producer of
graphite products in China, to acquire 100% of Chiyu Carbon’s
assets. In the event that we make acquisitions, we could have
difficulty integrating the acquired companies’ personnel and operations with our
own. In addition, the key personnel of the acquired business may not be willing
to work for us. We cannot predict the effect that any such expansion may have on
our core business. Regardless of whether we are successful in making an
acquisition, the negotiations for potential acquisitions could disrupt our
ongoing business, distract our management and employees and cause us to incur
significant expenses. In addition to the risks described above, acquisitions are
accompanied by a number of inherent risks, including, without limitation, the
following:
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the
difficulty of integrating acquired products, services or
operations;
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·
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the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
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the
difficulty of incorporating acquired rights or products into our existing
business;
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difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
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·
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difficulties
in maintaining uniform standards, controls, procedures and policies,
including disclosure controls and financial
controls;
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·
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the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
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·
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the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
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·
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the
acquisition strategy will likely require additional equity or debt
financing, resulting in additional leverage or dilution of
ownership;
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·
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the
effect of any government regulations which relate to the business
acquired, including any additional costs resulting from the failure of the
acquired company to comply with governmental regulations;
and
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·
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potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether of not successful, resulting from actions of the
acquired company prior to our
acquisition.
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Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks, and our results of operations could be
adversely affected.
If
our lenders demand payment when our loans are due, we may have difficulty in
making payments, which could impair our ability to continue operating our
business.
At
December 31, 2009, we had short-term bank loans of approximately $8.6
million. These bank loans, which are secured by a lien on our fixed
assets and land use rights, are due in June 2010. In the past, these
banks extended our loans. However, we cannot assure you that our
lenders will not demand payment on the maturity date of these
loans. If the lenders demand payment when due, we may not be able to
obtain the necessary funds to pay off these loans. Our cash reserves,
which at December 31, 2009 were $2.7 million, are insufficient to pay off such
loans when due.
Our
income has suffered from bad debt charges resulting from customers’ inability to
pay us as a result of the economic downturn.
In the
fourth quarter of 2008, we incurred a net loss of approximately $300,000. This
loss was largely the result of an increase in our bad debt expense of
approximately $200,000 and an increase in our allowance for bad debts of
$860,000. One customer accounted for approximately $450,000 of these charges.
This customer was not one of our top three customers in 2008. In
2009, bad debt provision of $289,000 was charged to our expenses. Furthermore,
the economic downturn has also affected our accounts receivable, as we have
experienced delays in collection of accounts receivable. This is
reflected in the increase in accounts receivable from $4.2 million at December
31, 2008 to $6.2 million at December 31, 2009, despite a decline in sales during
the year ended December 31, 2009. Of the outstanding accounts receivable at
December 31, 2009, approximately $735,000 were also outstanding at December 31,
2008. In particular, our graphite electrodes are sold mainly to steel
manufacturers, who have been significantly affected by the global economic
downturn. There has been a downturn in the graphite electrode market which has
impacted our business. We expect the downturn in the graphite electrode market
to extend into 2010 and we cannot predict when or whether the economic downturn
will cease to affect our business.
A
large percentage of our revenues depends on a limited number of distributors,
the loss of one or more of which could materially adversely affect our
operations and revenues.
Our
revenue is dependent in large part on significant orders from a limited number
of distributors, who may vary from period to period. During the year ended
December 31, 2009, two distributors accounted for approximately $6.4 million, or
41.2% of our revenue, and during the year ended December 31, 2008, three
distributors accounted for approximately $9.9 million, or 36.1% of our revenue.
One distributor was a principal distributor in both the year ended December 31,
2009 and the year ended December 31, 2008 and accounted for approximately $3.1
million, or 19.7%, of our sales for the year ended December 31, 2009 and $4.1
million, or 14.9%, of our sales for the year ended December 31, 2008. No other
distributor accounted for 10% of our sales in either period. We do not have
long-term contracts with these distributors. Demand for our products depends on
a variety of factors including, but not limited to, the financial condition of
our distributors, the end users of our products and their customers, and general
economic conditions. For instance, our graphite electrodes are sold mainly to
steel manufacturers, who have been significantly affected by the global economic
downturn. As a result, there has been a downturn in the graphite
electrode market which has impacted our business. We cannot predict when or
whether the economic downturn will cease to affect our business. If
sales to any of our large distributors are substantially reduced for any reason,
such reduction may have a material adverse effect on our business, financial
condition and results of operations.
If
the PRC government closes our facilities in the future, even temporarily, our
financial condition may be materially affected.
The
Chinese government closed our facilities for a period of almost two months
during the third quarter of 2008 as part of the Chinese government’s program to
reduce air pollution during the Olympics. This shutdown reduced our sales in the
first quarter of 2009 because it takes about three months to six months to
produce graphite products. If the PRC government closes our
facilities in the future, even temporarily, our financial condition may be
materially affected. If the PRC government closes our facilities in
the future, even temporarily, our financial condition may be materially
affected.
If
our competitors sell higher quality products or similar products at a lower
price, or if they are otherwise more successful in penetrating the market, our
financial condition would be affected.
We face
competition from both Chinese and international companies, many of which are
better known and have greater financial resources than us. Many of the
international companies, in particular, have longer operating histories and have
more established relationships with customers and end users. If our competitors
are successful in providing similar or better graphite products or provide
graphite products at a lower price than we offer our products, or if they are
otherwise more successful in penetrating the market, we could experience a
decline in demand for our products, which would negatively impact our sales and
results of operations.
Because
the end users of graphite products seek products that incorporate the latest
technological development, including increased purity, our failure to offer such
products could impair our ability to market our products.
Our
products are either used in the manufacturing process for other products,
particularly metals, or for incorporation in various types of products or
processes. The end users typically view both the purity of the graphite and the
bend strength, compression strength, resistivity, bulk density and porosity of
graphite as key factors in making a decision as to which products to purchase.
Accordingly, our failure or inability to offer products manufactured with the
most current manufacturing technology could adversely affect our
sales.
An
increase in the cost of raw materials will affect our revenues.
We
purchase all of our raw materials from domestic Chinese
suppliers. Because we do not have any long-term contracts with our
suppliers, any increase in the prices of our raw materials would affect the
price at which we can sell our products. If we are not able to raise
our prices to pass on increased costs to our customers, we would be unable to
maintain our profit margins. Similarly, in times of decreasing
prices, we may have to sell our products at prices which are lower than the
prices at which we purchased our raw materials. Furthermore, PRC
regulations grant broad powers to the government to adjust prices of raw
materials and manufactured products. Although the government has not
imposed price controls on our raw materials or our products, it is possible that
price controls may be implemented in the future, thereby affecting our results
of operations and financial condition.
Our
intellectual property rights are valuable, and any inability to protect them
could reduce the value of our products.
Our trade
secrets and patents are important assets for us. Our intellectual property
consists of one patent, trade secrets relating to the design and manufacture of
graphite products and our customer lists. Various events outside of our control
pose a threat to our intellectual property rights as well as to our products.
Effective intellectual property protection may not be available in China and
other countries in which our products are sold. Intellectual property rights in
China are still developing, and there are uncertainties involved in the
protection and the enforcement of such rights.
Also, the
efforts we have taken to protect our intellectual property rights may not be
sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete.
We
depend on third party distributors over whom we have no control to market our
products to end users in international markets.
Although
the market for graphite products is international and many of the end users of
our products are located outside of the PRC, most of our direct sales are made
to distributors and customers in the PRC. We do not have any offices outside of
the PRC, and we depend on distributors based in the PRC, over whom we have no
control, to sell our products in the international market. Any problems
encountered by these third parties, including potential violations of laws of
the PRC or other countries, may affect their ability to sell our products which
would, in turn, affect our net sales.
Because
our contracts are made pursuant to individual purchase orders, and not long-term
agreements, the results of our operations can vary significantly from quarter to
quarter.
We sell
our products pursuant to purchase orders and, with the exception of one
customer, whose purchases are not material to our overall revenues, we do not
have long-term contracts with any distributors or customers. As a result, we
must continually seek new customers and new orders from existing customers. As a
result, we cannot assure you that we will have a continuing stream of revenue
from any customer. Our failure to generate new business on an ongoing basis
would materially impair our ability to operate profitably.
We
rely on highly skilled personnel and, if we are unable to hire or retain
qualified personnel, we may not be able to grow effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals, including our executive officers and Mr. Denyong Jin, the chief
executive officer of Xingyong and our former chief executive officer. We do not
have employment agreements with any of our executive officers or with Mr. Jin.
Our future success depends on our continuing ability to retain these individuals
and to hire, develop, motivate and retain other highly skilled personnel for all
areas of our organization.
Because
we consume significant amounts of electricity, any failure or interruption in
electricity services could harm our ability to operate our
business.
Our
systems are heavily reliant on the availability of electricity. If we were to
experience a major power outage, we would have to rely on back-up generators.
These back-up generators may not operate properly and their fuel supply could be
inadequate during a major power outage. This could result in a disruption of our
business.
If
we fail to obtain all required licenses, permits, or approvals, we may be unable
to expand our operations.
Before we
develop certain new products, we must obtain a variety of approvals from local
and municipal governments in the PRC. Our products may also be
required to comply with the regulations of foreign countries into which they are
ultimately sold. There is no assurance that we will be able to obtain
all required licenses, permits, or approvals from these government authorities.
If we fail to obtain all required licenses, permits or approvals, we may be
unable to expand our operations.
Compliance
with existing and future environmental laws and regulations could have a
material adverse effect on our operations and financial condition.
As a
manufacturer, we are subject to various Chinese environmental laws and
regulations on air emission, waste water discharge, solid wastes, noise and
safety. We cannot assure you that we are able to comply with these regulations
at all times, as the Chinese environmental legal requirements are evolving and
becoming more stringent. If the Chinese national government or local governments
impose more stringent regulations in the future, we may have to incur
additional, and potentially substantial, costs and expenses in order to comply
with such regulations, which may negatively affect our results of
operations. For instance, during 2009, we incurred significant
expenditures for environmental improvements required by new government
regulations. In addition, if we fail to comply with any of the
present or future environmental regulations in any material aspects, we may
suffer from negative publicity and be subject to claims for damages that may
require us to pay substantial fines or have our operations suspended or even be
forced to cease operations.
Risks
Related to Doing Business in the People’s Republic of China
Our
business operations take place primarily in the People's Republic of
China. Because Chinese laws, regulations and policies are changing,
our Chinese operations face several risks summarized below.
Limitations
on Chinese economic market reforms may discourage foreign investment in Chinese
businesses.
The value
of investments in Chinese businesses could be adversely affected by political,
economic and social uncertainties in China. The economic reforms in China in
recent years are regarded by China's central government as a way to introduce
economic market forces into China. Given the overriding desire of the central
government leadership to maintain stability in China amid rapid social and
economic changes in the country, the economic market reforms of recent years
could be slowed, or even reversed.
Any
change in policy by the Chinese government could adversely affect investments in
Chinese businesses.
Changes
in policy could result in imposition of restrictions on currency conversion,
imports or the source of supplies, as well as new laws affecting joint ventures
and foreign-owned enterprises doing business in China. Although China has been
pursuing economic reforms, events such as a change in leadership or social
disruptions that may occur upon the proposed privatization of certain
state-owned industries, could significantly affect the government's ability to
continue with its reform.
We
face economic risks in doing business in China because the Chinese economy is
more volatile than other countries.
As a
developing nation, China's economy is more volatile than those of developed
Western industrial economies. It differs significantly from that of the U.S. or
a Western European country in such respects as structure, level of development,
capital reinvestment, legal recourse, resource allocation and self-sufficiency.
Only in recent years has the Chinese economy moved from what had been a command
economy through the 1970s to one that during the 1990s encouraged substantial
private economic activity. In 1993, the Constitution of China was amended to
reinforce such economic reforms. The trends of the 1990s indicate that future
policies of the Chinese government will emphasize greater utilization of market
forces. For example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinate to state-owned companies, which are the mainstay
of the Chinese economy. However, we cannot assure you that, under some
circumstances, the government's pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of China could have a
significant adverse effect on economic conditions in the country as a whole and
on the economic prospects for our Chinese operations.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
limit our ability to acquire PRC companies and adversely affect the
implementation of our strategy as well as our business and
prospects.
The PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by PRC
residents intends to acquire a PRC company, such acquisition will be subject to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a PRC
company’s assets or equity interests to foreign entities, such as us, for equity
interests or assets of the foreign entities.
In April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a PRC company by an
offshore company controlled by PRC residents has been confirmed by a Foreign
Investment Enterprise Certificate prior to the promulgation of the January
notice, the PRC residents must each submit a registration form to the local SAFE
branch with respect to their respective ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in
China to guarantee offshore obligations.
On May
31, 2007, SAFE issued another official notice known as “Circular 106,” which
requires the owners of any Chinese company to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters in China.
If we
decide to acquire a PRC company, we cannot assure you that we or the owners of
such company, as the case may be, will be able to complete the necessary
approvals, filings and registrations for the acquisition. This may restrict our
ability to implement our acquisition strategy and adversely affect our business
and prospects. In addition, if such registration cannot be obtained, our company
will not be able to receive dividends declared and paid by our subsidiaries in
the PRC and may be forbidden from paying dividends for profit distribution or
capital reduction purposes.
Fluctuation
in the value of the RMB may have a material adverse effect on your
investment.
The
change in value of the RMB against the United States dollar and other currencies
is affected by, among other things, changes in China’s political and economic
conditions. On July 21, 2005, the Chinese government changed its decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the new policy,
the RMB is permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. This change in policy has resulted in the
appreciation of the RMB against U.S. dollar. While the international reaction to
the RMB revaluation has generally been positive, there remains significant
international pressure on the Chinese government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the RMB against the U.S. dollar. As approximately 90% of our
costs and expenses is denominated in RMB, the revaluation in July 2005 and
potential future revaluation has and could further increase our costs. In
addition, as we rely entirely on dividends paid to us by our operating
subsidiaries, any significant revaluation of the RMB may have a material adverse
effect on our revenues and financial condition, and the value of, and any of our
dividends payable on our ordinary shares in foreign currency terms.
Capital
outflow policies in the PRC may hamper our ability to remit income to the United
States.
The PRC
has adopted currency and capital transfer regulations. These regulations may
require that we comply with complex regulations for the movement of capital and
as a result we may not be able to remit all income earned and proceeds received
in connection with our operations or from the sale of our operating subsidiary
to the United States or to our stockholders.
China’s
foreign currency control policies may impair the ability of our Chinese
operating company to pay dividends to us.
Since our
operations are conducted through our Chinese operating company, we rely on
dividends and other distributions from our Chinese operating company to provide
us with cash flow to pay dividends or meet our other obligations. Any dividend
payment will be subject to foreign exchange rules governing such repatriation.
Any liquidation is subject to the relevant government agency’s approval and
supervision as well as the foreign exchange control. Current regulations in
China would permit our operating company to pay dividends to us only out of
accumulated distributable profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, our operating company will be
required to set aside at least 10% (up to an aggregate amount equal to half of
our registered capital) of its accumulated profits each year for employee
welfare. Such cash reserve may not be distributed as cash dividends. In
addition, if our operating company in China incurs debt on its own behalf in the
future, the instruments governing the debt may restrict its ability to pay
dividends or make other payments to us. The inability of our operating company
to pay dividends or make other payments to us may have a material adverse effect
on our financial condition.
Because
our funds are held in banks that do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. As a result, in the event of a bank failure, we may not have access
to funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
Since
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment. We have not obtained fire, casualty
and theft insurance, and there is no insurance coverage for our raw materials,
goods and merchandise, furniture and buildings in China. Any losses incurred by
us will have to be borne by us without any assistance, and we may not have
sufficient capital to cover material damage to, or the loss of, our production
facility due to fire, severe weather, flood or other cause, and such damage or
loss would have a material adverse effect on our financial condition, business
and prospects.
The
Chinese legal and judicial system may negatively impact foreign investors
because the Chinese legal system is not yet comprehensive.
In 1982,
the National Peoples Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in China. However, China's system of laws is not yet comprehensive.
The legal and judicial systems in China are still under development , and
enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may shift to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. We cannot assure you that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life, will not affect the
Chinese government's ability to continue to support and pursue these reforms.
Such a shift could have a material adverse effect on our business and
prospects.
The
practical effect of the People’s Republic of China’s legal system on our
business operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate
articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of the
several states. Similarly, the accounting laws and regulations of the People’s
Republic of China mandate accounting practices which are not consistent with
U.S. Generally Accepted Accounting Principles. China's accounting laws require
that an annual "statutory audit" be performed in accordance with People’s
Republic of China’s accounting standards and that the books of account of
Foreign Invested Enterprises are maintained in accordance with Chinese
accounting laws. Article 14 of the People’s Republic of China Wholly
Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to
submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation. Second, while
the enforcement of substantive rights may appear less clear than United States
procedures, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises
are Chinese registered companies, which enjoy the same status as other Chinese
registered companies in business-to-business dispute resolution. Generally, the
Articles of Association provide that all business disputes pertaining to Foreign
Invested Enterprises are to be resolved by the Arbitration Institute of the
Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive
law. Any award rendered by this arbitration tribunal is, by the express terms of
the respective Articles of Association, enforceable in accordance with the
"United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (1958)." Therefore, as a practical matter, although no
assurances can be given, the Chinese legal infrastructure, while different in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
Because
our principal assets are located outside of the United States and some of our
directors and all of our executive officers reside outside of the United States,
it may be difficult for you to enforce your rights based on the United States
Federal securities laws against us and our officers and directors in the United
States or to enforce judgments of United States courts against us or them in the
People's Republic of China.
It
may be difficult for our stockholders to affect service of process against our
subsidiaries or our officers and directors.
Our
operating subsidiaries and substantially all of our assets are located outside
of the United States. You will find it difficult to enforce your legal rights
based on the civil liability provisions of the United States Federal securities
laws against us in the courts of either the United States or the People's
Republic of China and, even if civil judgments are obtained in courts of the
United States, to enforce such judgments in the courts of the People's Republic
of China. In addition, it is unclear if extradition treaties in effect between
the United States and the People's Republic of China would permit effective
enforcement against us or those of our officers and directors that reside
outside the United States of criminal penalties, under the United States Federal
securities laws or otherwise.
The
Chinese economy is evolving and we may be harmed by any economic
reform.
Although
the Chinese government owns the majority of productive assets in China, during
the past several years the government has implemented economic reform measures
that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent
or ineffectual, we are unable to assure you that:
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We
will be able to capitalize on economic
reforms;
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The
Chinese government will continue its pursuit of economic reform
policies;
|
·
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The
economic policies, even if pursued, will be
successful;
|
·
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Economic
policies will not be significantly altered from time to time;
and
|
·
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Business
operations in China will not become subject to the risk of
nationalization.
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Since
1979, the Chinese government has reformed its economic
systems. Because many reforms are unprecedented or experimental, they
are expected to be refined and improved. Other political, economic and social
factors, such as political changes, changes in the rates of economic growth,
unemployment or inflation, or in the disparities in per capita wealth between
regions within China, could lead to further readjustment of the reform measures.
This refining and readjustment process may negatively affect our
operations.
Inflation
in China may inhibit our ability to conduct business profitably in
China.
Over the
last few years, China's economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included revaluations of the Chinese
currency, the Renminbi (RMB), restrictions on the availability of domestic
credit, and limited re-centralization of the approval process for purchases of
some foreign products. These austerity measures alone may not succeed in slowing
down the economy's excessive expansion or control inflation, and may result in
severe dislocations in the Chinese economy. The Chinese government may adopt
additional measures to further combat inflation, including the establishment of
freezes or restraints on certain projects or markets.
To date,
reforms to China's economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China's economic system
will continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices may occur from time to time in the PRC. We can
make no assurance, however, that our employees or other agents will not engage
in such conduct for which we might be held responsible. If our employees or
other agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
reputation or our business, financial condition and results of
operations.
Risks
Related to our Common Stock
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
The SEC,
as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting.
During
our assessment of the effectiveness of internal control over financial reporting
as of December 31, 2009, we identified significant deficiencies related to (i)
the U.S. GAAP expertise of our internal accounting staff, (ii) our internal
audit functions and, and (iii) a lack of segregation of duties within accounting
functions. We cannot assure you that, when our independent auditors are required
to attest to our internal controls, that they will agree with our analysis or
will not have identified other material weaknesses in our internal controls or
disclosure controls.
Our
reporting obligations as a public company place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to prevent fraud. As a result, our failure to achieve and maintain
effective internal controls over financial reporting could result in the loss of
investor confidence in the reliability of our financial statements, which in
turn could harm our business and negatively impact the trading price of our
stock. Furthermore, we anticipate that we will continue to incur considerable
costs and use significant management time and other resources in an effort to
comply with Section 404 and other requirements of the Sarbanes-Oxley
Act.
There
is a limited market for our common stock, which may make it difficult for you to
sell your stock.
Our
common stock trades on the OTC Bulletin Board under the symbol
CHGI.OB. There is a limited trading market for our common stock and
at times there is no trading in our common stock. Accordingly, there can be no
assurance as to the liquidity of any markets that may develop for our common
stock, the ability of holders of our common stock to sell our common stock, or
the prices at which holders may be able to sell our common stock. Further, many
brokerage firms will not process transactions involving low price stocks,
especially those that come within the definition of a “penny stock.” If we cease
to be quoted, holders would find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of our common stock, and the market
value of our common stock would likely decline.
If
a more active trading market for our common stock develops, the market price of
our common stock is likely to be highly volatile and subject to wide
fluctuations, and you may be unable to resell your shares at or above the price
at which you acquired them.
The
market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:
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quarterly
variations in our revenues and operating
expenses;
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developments
in the financial markets and worldwide
economies;
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announcements
of innovations or new products or services by us or our
competitors;
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announcements
by the PRC government relating to regulations that govern our
industry;
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significant
sales of our common stock or other securities in the open
market.
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variations
in interest rates;
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changes
in the market valuations of other comparable companies;
and
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changes
in accounting principles.
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If a
stockholder were to file any such class action suit against us following a
period of volatility in the price of our securities, we would incur substantial
legal fees and our management’s attention and resources would be diverted from
operating our business to respond to such litigation, which could harm our
business and reputation.
We
have not paid dividends in the past and do not expect to pay dividends for the
foreseeable future, and any return on investment may be limited to potential
future appreciation on the value of our common stock.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. The certificate of designation for the Series A Preferred
Stock prohibits us from paying dividends to the holders of our common stock
while the Series A Preferred Stock is outstanding. There are currently 125,000
shares of Series A Preferred Stock outstanding. To the extent that we
do not pay dividends, our stock may be less valuable because a return on
investment will only occur if and to the extent our stock price appreciates,
which may never occur. In addition, investors must rely on sales of their common
stock after price appreciation as the only way to realize their investment, and
if the price of our stock does not appreciate, then there will be no return on
investment. Investors seeking cash dividends should not purchase our common
stock.
The
rights of the holders of common stock may be impaired by the potential issuance
of preferred stock.
Our board
of directors has the right to create new series of preferred stock. As a result,
the board of directors may, without stockholder approval, issue preferred stock
with voting, dividend, conversion, liquidation or other rights that could
adversely affect the voting power and equity interest of the holders of common
stock. Preferred stock, which could be issued with the right to more than one
vote per share and could be utilized as a method of discouraging, delaying or
preventing a change of control. The possible impact on takeover attempts could
adversely affect the price of our common stock. Without the consent of the
holders of 75% of the outstanding shares of Series A Preferred Stock, we may not
alter or change adversely the rights of the holders of the Series A Preferred
Stock or increase the number of authorized shares of Series A Preferred Stock,
create a class of stock which is senior to or on a parity with the Series A
Preferred Stock, amend our certificate of incorporation in breach of these
provisions or agree to any of the foregoing. Although we have no present
intention to issue any additional shares of preferred stock or to create any new
series of preferred stock and the certificate of designation relating to the
Series A Preferred Stock restricts our ability to issue additional series of
preferred stock, we may issue such shares in the future.
Transactions
engaged in by our principal stockholder may have an adverse effect on the price
of our stock.
We do not
know what plans, if any, Sincere has with respect to its ownership of our stock.
In the event that Sincere sells a substantial number of shares of our common
stock, such sales could have the effect of lowering our stock price. The
perceived risk associated with the possible sale of a large number of shares by
this stockholder, or the adoption of significant short positions by hedge funds
or other significant investors, could cause some of our stockholders to sell
their stock, thus causing the price of our stock to further
decline.
Risks
Related To the Offering
When
the registration statement of which this prospectus forms a part becomes
effective, there will be a significant number of shares of our common stock
eligible for sale, which could depress the market price of our
stock.
Following the effectiveness of the
registration statement of which this prospectus forms a part, an aggregate of
2.1 million shares of our common stock underlying shares of Series B Preferred
Stock and warrants which are currently restricted will be eligible for resale to
the public market without restriction, which could harm the market price of our
stock. Furthermore, the selling stockholders may be eligible to sell
their shares of our common stock even if the registration statement of which
this prospectus forms a part is not then effective, pursuant to Rule 144, and
such sales may harm the market price of our stock.
The
exercise of outstanding shares of preferred stock and warrants issuable for
shares of our common stock may cause dilution to existing
shareholders.
There are currently outstanding 125,000
shares of Series A Preferred Stock and 975,000
shares of Series B Preferred Stock, which are convertible, in the aggregate,
into 975,000 shares of our common stock. There are currently warrants
outstanding to purchase up to an aggregate of 1,513,225 shares of our common stock. The
expiration dates of these warrants range from December 2012 to January
2015. The exercise price of these warrants ranges from $1.30 to $3.00
per share, subject to adjustment. If holders of these shares of
preferred stock or warrants convert or exercise such securities in exchange for
shares of our common stock, such transactions may have a dilutive effect on the
stock ownership of existing shareholders and may harm the market price of our
stock. Furthermore, if we were to attempt to obtain additional
financing during the term of these warrants, the terms on which we obtain such
financing may be adversely affected by the existence of these
warrants.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements. The forward-looking statements are contained
principally in the sections entitled “Prospectus Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business.” These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. These
risks and uncertainties include, but are not limited to, the factors described
in the section captioned “Risk Factors” above.
In some cases, you can identify
forward-looking statements by terms such as “anticipates,” “believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,”
“projects,” “should,” “would” and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect our current views
with respect to future events and are based on assumptions and are subject to
risks and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements.
Also, forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus, or that we filed as exhibits to the registration statement of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we expect.
Except as required by law, we assume no
obligation to update any forward-looking statements publicly, or to update the
reasons actual results could differ materially from those anticipated in any
forward-looking statements, even if new information becomes available in the
future.
USE
OF PROCEEDS
We
will not receive any proceeds from the sales of any shares of common stock by
the selling stockholders. However, we may receive up to $1,453,573 from the
exercise of warrants held by the selling stockholders if and when those warrants
are exercised in exchange for cash. Any such proceeds would be used
for general working capital purposes.
DIVIDEND
POLICY
While we
will be required to pay dividends on the shares of our Series A and Series B
Preferred Stock, we have never declared or paid cash dividends on our common
stock and have no present plans to do so in the foreseeable future. The
certificate of designation for our outstanding Series A Preferred Stock
prohibits us from paying dividends on our common stock or redeeming common stock
while any shares of Series A Preferred Stock are outstanding. There are
currently 125,000 shares of our Series A Preferred Stock
outstanding. Any future decisions regarding dividends will be made by
our board of directors. We currently intend to retain and use any future
earnings for the development and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future.
1
Should be consistent with footnote 2 in “Summary of the Offering”
above.
MARKET
FOR OUR COMMON STOCK
Our common stock is quoted on the OTC
Bulletin Board, or OTC, under the symbol “CHGI.OB”. As of May 6 , 2010, the closing price
for our common stock was $1 .0 5 per
share. The bid prices set forth below reflect inter-dealer
quotations, do not include retail markups, markdowns or commissions and do not
necessarily reflect actual transactions.
The
following table sets forth, for the periods indicated, the high and low bid
prices of our common stock.
|
|
Bid
Prices
|
|
|
|
High
|
|
|
Low
|
|
Fiscal
Year Ended December 31, 2010
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
3.33
|
|
|
$
|
1.35
|
|
Second
Quarter (through May 6, 2010)
|
|
|
2.50
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.64
|
|
|
$
|
0.10
|
|
Second
Quarter
|
|
|
0.70
|
|
|
|
0.07
|
|
Third
Quarter
|
|
|
1.76
|
|
|
|
0.61
|
|
Fourth
Quarter
|
|
|
1.65
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
3.36
|
|
|
$
|
0.25
|
|
Second
Quarter
|
|
|
2.16
|
|
|
|
1.01
|
|
Third
Quarter
|
|
|
1.40
|
|
|
|
0.52
|
|
Fourth
Quarter
|
|
|
1.26
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Approximate Number of
Holders of Our Common Stock
On April
28, 2010, there were 49 stockholders of record of our common stock.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the
results of our operations and financial condition should be read in conjunction
with our financial statements and the related notes, which appear elsewhere in
this prospectus. The following discussion includes forward-looking
statements. For a discussion of important factors that could cause
actual results to differ from our forward-looking statements, see the sections
entitled “Risk Factors” and “Cautionary Note Regarding
Forward Looking Statements”
above.
Overview
We are
engaged in the manufacture of graphite based products in the People’s Republic
of China. Our products are either used in the manufacturing process
for other products, particularly metals, or for incorporation in various types
of products or processes. Based on information we receive about our industry in
the course of our business, we believe that we are the largest wholesale
supplier of fine grain graphite and high purity graphite in China and one of
China’s largest producers and suppliers of graphite products
overall. We currently manufacture and sell the following types of
graphite products:
·
|
fine
grain graphite ; and
|
Approximately
40% to 50% of our graphite electrodes are sold directly to end users in China,
primarily consisting of steel manufacturers. All other sales are made
to over 200 distributors located throughout 22 provinces in
China. Our distributors then sell our products to end customers both
in China and in foreign countries, including, among others, Japan, the United
States, Spain, England, South Korea and India.
Until the
third quarter of 2008, we experienced rapid growth in our
operations. Since the fourth quarter of 2008, however, as a result of
the global economic crisis, the steel industry in general has slowed, which has
caused our revenues to decline. Although we saw improvements during
the third quarter of 2009, our revenues and gross margins declined significantly
in the fourth quarter. In addition, our collection of receivables has slowed and
our expense for bad debts has increased significantly. We also incurred several
non-cash expenses in the fourth quarter of 2009 which caused further declines in
our net profit. Specifically, the volume of our sales declined
because the demand for products made by steel manufacturers, who comprise a
large percentage of the end users of our graphite electrodes, decreased
significantly during 2009. We also had a decrease in the demand of
high purity graphite in 2009. In addition, our accounts receivable increased,
thereby affecting our cash flows, because we have experienced delays in payments
by our customers whose cash reserves have been negatively
affected. We expect the downturn in the graphite electrode market to
extend into 2010 and we cannot predict when or whether the economic downturn
will cease to affect our business. If the global financial crisis
continues to negatively affect our revenues and cash flows, we may need to
borrow additional funds or raise additional capital. There can be no
assurance that such sources of funding would be available upon terms favorable
to us, if at all. In the event that we raised capital through the
issuance of equity or convertible securities, the holdings of existing
shareholders would be diluted.
In
addition, our sales decreased during the year ended December 31, 2009 because of
the residual effects of the closure of our facilities for almost two months
during the third quarter of 2008. Our facility, which is located
approximately 200 miles from Beijing, was closed to reduce air pollution in
anticipation of the Olympics in Beijing in August 2008. This shutdown
reduced our sales in the fourth quarter of 2008 and the first quarter of 2009
because it takes approximately three to six months to produce our
products. There can be no assurance that the PRC government will
refrain from closing our facility in the future, which would have an adverse
effect on our results of operations and financial condition.
Furthermore,
our declining sales and profit margins during the year ended December 31, 2009
reflected the decrease in unit sales prices of graphite products, specifically
the decrease in the average unit sales price of some of our graphite electrode
products by as much as 8% to 20%. The cost of our raw materials and
other overhead expenses did not decrease in proportion with the decline in our
sales and sales prices. Our profit margins decreased most
significantly in the fourth quarter of 2009 following market improvement in the
third quarter.
In 2010,
our primary strategy is to increase our gross profits by better aligning our
overhead costs with existing levels of sales and pricing and to acquire other
businesses in our industry that manufacture products that we do not currently
manufacture which we would expect to generate significant profits. In
that regard, on March 3, 2010, we entered into a letter of intent which provided
that we intend to enter into definitive agreements with Chiyu Carbon Graphite
Ltd., a down stream producer of graphite products in China, to acquire 100% of
Chiyu Carbon’s assets. We believe that if the acquisition closes,
sales by this entity would generate significant profits for us and that demand
for these products is currently greater than demand for some of our existing
products.
RESULTS
OF OPERATIONS
Fiscal
Years Ended December 31, 2009 and 2008
The
following table sets forth the key components of our results of operations for
the periods indicated in dollar amounts and as a percentage of net sales (in
thousands of dollars):
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Sales
|
|
$
|
15,370
|
|
|
|
100.0
|
%
|
|
$
|
27,303
|
|
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
13,192
|
|
|
|
85.7
|
%
|
|
|
20,606
|
|
|
|
75.5
|
%
|
Gross
profit
|
|
|
2,177
|
|
|
|
14.3
|
%
|
|
|
6,697
|
|
|
|
24.5
|
%
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
366
|
|
|
|
2.3
|
%
|
|
|
505
|
|
|
|
1.8
|
%
|
General
and administrative
|
|
|
2,595
|
|
|
|
16.9
|
%
|
|
|
1,952
|
|
|
|
7.1
|
%
|
Depreciation
and amortization
|
|
|
75
|
|
|
|
0.5
|
%
|
|
|
68
|
|
|
|
0.3
|
%
|
Income
from operations
|
|
|
(858
|
)
|
|
|
(5.6
|
)%
|
|
|
4,172
|
|
|
|
15.3
|
%
|
Other
income
|
|
|
645
|
|
|
|
4.2
|
%
|
|
|
402
|
|
|
|
1.5
|
%
|
Other
expense
|
|
|
(117
|
)
|
|
|
(0.8
|
)%
|
|
|
(11
|
)
|
|
|
(0.1
|
)%
|
Change
in fair value of warrants
|
|
|
(309
|
)
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(834
|
)
|
|
|
(5.4
|
)%
|
|
|
(581
|
)
|
|
(2.1
|
)%
|
Income
before income tax expense
|
|
|
(1,474
|
)
|
|
|
(9.6
|
)%
|
|
|
3,982
|
|
|
|
14.6
|
%
|
Net
income (loss)
|
|
|
(1,474
|
)
|
|
|
(9.6
|
)%
|
|
|
3,982
|
|
|
|
14.6
|
%
|
Deemed
preferred stock dividend
|
|
|
(545
|
)
|
|
|
(3.5
|
)%
|
|
|
(854
|
)
|
|
|
(3.1
|
)%
|
Relative
fair value of detachable warrants issued
|
|
|
(228
|
)
|
|
|
(1.5
|
)%
|
|
|
-
|
|
|
|
-
|
|
Net
income (loss) available to common shareholders
|
|
|
(2,247
|
)
|
|
|
(14.6
|
)%
|
|
|
3,128
|
|
|
|
11.5
|
%
|
Foreign
currency translation adjustment
|
|
|
46
|
|
|
|
0.3
|
%
|
|
|
2,043
|
|
|
|
7.5
|
%
|
Total
comprehensive income
|
|
$
|
(1,428
|
)
|
|
|
(9.3
|
)%
|
|
$
|
6,025
|
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
. During the
year ended December 31, 2009, we had sales of $15.4 million, as compared to
sales of $27.3 million for the year ended December 31, 2008, which represents a
decrease of $11.9 million or approximately 43.7%, due to a decrease in sales
volume of graphite electrodes of approximately 89 %
and a decrease in sales volume of high purity graphite of approximately 20 %, as compared to 2008. Sales volume
decreased in 2009, despite signs of improvement in the third quarter, because
steel manufacturers and other purchasers of our products purchased fewer
graphite electrodes and high purity graphite as a result of the global economic
crisis. The decrease in sales also reflects a decrease in the average
unit sales prices of certain graphite electrode products, as discussed above
under “--Overview.” In addition, the closure of our facilities for
almost two months during 2008 resulted in reduced sales volume in the first
quarter of 2009.
Cost of goods
sold
. Our cost of goods sold consists of cost of raw
materials, utility, labor cost and depreciation expenses on manufacturing
facilities. During the year ended December 31, 2009, our cost of
goods sold was $13.2 million, as compared to cost of goods sold of $20.6 million
during the year ended December 31, 2008, which represents a decrease of $7.4
million, or approximately 36.0%. This decrease reflects the decrease
in sales in 2009.
Gross margin
. Our gross
margin decreased from 24.5% in 2008 to 14.3% in 2009 because the cost of our raw
materials and other overhead costs did not decrease in proportion with the
decline in our revenues, most notably during the fourth quarter of
2009.
Selling
expenses
. Our selling expenses consist of shipping and
handling expenses and exhibition expenses. These expenses decreased
from $505,000 in 2008 to $366,000 in 2009, representing a decrease of $139,000
or 27.5%. This decrease was directly associated with the decrease in
sales. This decrease was a result of lower marketing expenses of fine
grain graphite and high purity graphite products in 2009 compared to 2008 as
well as a decrease in shipping expenses as a result of lower sales in
2009. In 2008, we started to shift our product focus from graphite
electrodes to fine grain graphite and high purity graphite. We
increased our selling expenses in 2008 in order to generate sales of these new
products. However, in 2009, we were producing these products at full capacity
and therefore did not incur marketing expenses.
General and administrative
expenses
. Our general and administrative expenses consist of
salaries, office expenses, utility, business travel, amortization expenses and
public company expenses such as legal, accounting, investor relations as well as
stock compensation. These expenses increased from $2.0 million in
fiscal year 2008 to $2.6 million in 2009, representing an increase of $0.6
million, or 30%. This increase was primarily due to an increase in stock
compensation paid for services and employee stock compensation of $982,987 as
well as increased public company expenses.
Depreciation and amortization
expenses
. Depreciation and amortization expenses increased
from $68,422 in 2008 to $75,352 in 2009, representing an increase of $6,930, or
10.1%, solely as a result of the depreciation of the U.S. dollar against the
RMB.
Income from
operations
. As a result of the factors described above, we had
a loss from operations in 2009 which amounted to $0.85 million as compared to
income of $4.2 million for 2008, a decrease of approximately $5.0 million, or
120.6%.
Other income and
expenses
. Interest expense was $833,854 for 2009, as compared
with $580,808 in 2008, reflecting increased interest payments on loans from
banks. Other income, which consisted of government grants, was
$644,654 in 2009 as compared to $401,860 in 2008. The significant increase in
other expenses by $415,137 was primarily attributable to a non-cash charge of
$309,287 resulting from the change in fair value of warrants as a result of
adopting ASC 820-10, Fair value measurement for non-financial assets and
liabilities.
Income tax
. During
the years ended December 31, 2009 and 2008, we benefited from a 100% tax holiday
from the PRC enterprise tax. As a result, we had no income tax due
for these periods.
Net income
. As a
result of the: i) decrease in sales and gross margin, ii) increase in public
company expenses, iii) non-cash stock compensation of $982,987 and iv) a
non-cash charge of $309,287 as a result of adopting ASC 820-10 with respect to
warrants, our net loss for 2009 was $1.5 million, as compared to net income of
$4.0 million for 2008, a decrease of $5.5 million or 137.5%.
Foreign currency
translation
. Our financial statements are expressed in U.S.
dollars but the functional currency of our operating subsidiary is RMB. Results
of operations and cash flows are translated at average exchange rates during the
period, assets and liabilities are translated at the unified exchange rate at
the end of the period, and equity is translated at historical exchange rates.
Translation adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining
comprehensive income.
Deemed preferred stock
dividend.
As a result of the private placement on December 22,
2009, we incurred a preferred stock deemed dividend of $545,474 representing the
intrinsic value of the conversion feature of the warrants issued with the
preferred stock. The deemed preferred stock dividend is a non-cash charge
which did not affect our operations or cash flow in 2009.
As a
result of the automatic conversion of our 3% convertible notes into shares of
series A preferred stock and warrants in 2008, we incurred a preferred stock
deemed dividend of $854,300, representing the intrinsic value of the beneficial
conversion feature of the series A preferred stock resulting from the warrant
issuance. The deemed preferred stock dividend is a non-cash charge which did not
affect our operations or cash flow in 2008.
Relative
fair value of detachable warrants issued.
As a
result of the private placement on December 22, 2009, the allocated value of
$227,508 of the warrants issued with the series B preferred stock at December
22, 2009 was reported as a reduction to net income.
Net
income (loss) available to common shareholders.
Net loss
available to common shareholders was $2,247,258 for 2009 compared to net income
available to common shareholders of $3,127,988 for 2008. The loss was attributed
to the factors described above under “Net income” and non-cash charges of
approximately $0.8 million resulting from the private placement offering in
December 2009.
LIQUIDITY
AND CAPITAL RESOURCES
General
Our
primary capital needs have been to fund our working capital
requirements. Our primary sources of financing have been cash
generated from operations, short-term and long-term loans from banks in China,
and loans from a related party. At December 31, 2008, we had loans in
the aggregate amount of $10 million outstanding, which included short term bank
loans of $4.9 million, the current portion of a long term-loan of $1.9 million
and a long-term loan of $3.2 million. At December 31, 2009, we had
short-term bank loans in the aggregate amount of $8.6 million outstanding. Our
short-term bank loans, which are due in June 2010, bear interest at an annual
rate of 8.541% as to $5.2 million of the principal and 7.434% as to $3.4 million
of the principal. The short-term bank loans are secured by a security
interest on our fixed assets and land use rights. We have also
obtained a long-term bank loan, in the principal amount of $3.2 million, $1.6
million of which is due in October 2010 and the remainder in October
2011. This loan bears interest at an annual rate of
6.75%. Although we believe that we will be able to obtain extensions
of these loans when they mature, we cannot assure you that such extensions will
be granted.
We expect
that anticipated cash flows from operations, short-term and long-term bank loans
and loans from a related party will be sufficient to fund our operations through
at least the next twelve months, provided that:
·
|
We
generate sufficient business so that we are able to generate substantial
profits, which cannot be assured;
|
·
|
Our
banks continue to provide us with the necessary working capital financing;
and
|
·
|
We
are able to generate savings by improving the efficiency of our
operations.
|
In
December 2009 and January 2010, we raised an aggregate of approximately $3
million in a private placement transaction. We may require additional
equity, debt or bank funding to finance acquisitions or to allow us to produce
graphite for the nuclear industry, which are our primary growth
strategies. We can provide no assurances that we will be able to
enter into any financing agreements on terms favorable to us, if at all,
especially considering the current global instability of the capital
markets. In addition, although we expect to refinance our bank loans
when they mature, we can provide no assurances that we will be able to refinance
such loans on terms favorable to us, if at all.
At
December 31, 2009, cash and cash equivalents were $2,709,127, as compared to
$51,799 at December 31, 2008. Our working capital decreased by $0.1
million to $12.0 million at December 31, 2009 from a working capital of $12.1
million at December 31, 2008. Our cash position increased
significantly, by $2.7 million from December 31, 2008 to December 31, 2009, due
to the capital raise of $2.6 million in a private placement transaction in
December 2009.
Fiscal
Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31,
2008
The
following table sets forth information about our net cash flow for the years
indicated (in thousands of dollars):
Cash
Flows Data:
(in
thousands of U.S. dollars)
|
|
For year ended December
31
,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash flows provided by operating activities
|
|
|
1,890
|
|
|
|
5,442
|
|
Net
cash flows used in investing activities
|
|
|
(4,530
|
)
|
|
|
(3,880
|
)
|
Net
cash flows provided by (used in) financing activities
|
|
|
5,296
|
|
|
|
(1,540
|
)
|
Net cash flow provided by
operating activities was $1.9 million in fiscal 2009 as compared to net cash
flow provided by operating
activities was $5.4 million in fiscal 2008, a
decrease of $
3.7
million. Net cash flow provided by operating activities in
fiscal 2009 was mainly due to our net loss of $
1.5
million, an
increase in accounts payable of $2.0
million, an
increase in advances from customers of $0.4 million, an increase in other
payables of $0.4 million and the add-back of non-cash items of depreciation and
amortization of $
1.8
million, stock compensation of $1.0 million and change in fair value of
warrants of $0.3 million, offset by an increase in accounts receivable of $
1.1
million, a
decrease in inventory of $0.4 million and other receivable of $
0.9
million..
Net cash
flow provided by operating activities in fiscal 2008 was mainly due to our net
income of $4 million, a decrease in account receivable of $1.0 million, a
decrease in notes receivable of $0.2 million and other receivable of $0.7
million, an increase in other payable of $0.5 million and the add-back of
non-cash items of depreciation and amortization of $1.3 million, offset by a
decrease in advances from customers of $2 million and an increase in advance to
suppliers of $0.3 million
.
Net cash
flow provided by operating activities is sensitive to many factors, including
our operating results, inventory management, ability to collect accounts
receivable and timing of cash receipts and payments. For the year
ended December 31, 2009, the inventory turnover slowed down slightly compared to
December 31, 2008 due to the decreased sales of graphite
electrodes. .
Net cash
flow used in investing activities was $4.5 million for 2009 and $3.9 million for
2008. For 2009, approximately all of the $4.5 million cash flow was
used in acquisition of other properties and equipments. For 2008, the cash flow
used to pay additional compensation in relation to the land use right acquired
in 2007 was $0.6 million, the cash flow used in the acquisition of other
properties and equipments was $1.3 million and the remaining $2 million was used
in construction in progress
Net cash
flow provided by financing activities was $5.3 million for 2009. We
received proceeds from bank loans at the amount of $5.1 million and repaid $3.4
million in bank loans. We also received net proceeds of $3.3 million
from issuing common and Series B preferred stock to shareholders. In
addition, we received a repayment of approximately $0.3 million from Mr. Dengong
Jin. Net cash flow used in financing activities was $1.5 million for
2008. We received proceeds from bank loans in the amount of $9.8 million and
repaid a $6.3 million bank loan. We repaid advances from related parties in the
amount of $4.8 million. We had an advance of approximately $286,000 to a related
party. The advance was repaid to the Company in April 2009.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
not entered into any off-balance sheet arrangements.
SIGNIFICANT
ACCOUNTING ESTIMATES AND POLICIES
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements that have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets and
liabilities. On an on-going basis, we evaluate our estimates
including the allowance for doubtful accounts, the salability and recoverability
of our products, income taxes and contingencies. We base our
estimates on historical experience and on other assumptions that we believe to
be reasonable under the circumstances, the results of which form our basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Revenue
Recognition
We
recognize revenue in accordance with ASC 605-25, Revenue Recognition of
Financial Statements, formerly known as Staff Accounting Bulletin No. 104,
Revenue Recognition, which states that revenue should be recognized when the
following criteria are met: (1) persuasive evidence of an arrangement exists;
(2) the service has been rendered; (3) the selling price is fixed or
determinable; and (4) collection of the resulting receivable is reasonably
assured. Sales represent the invoiced value of goods, net of value
added tax (“VAT”), if any, and are recognized upon delivery of goods and passage
of title.
Comprehensive
Income
We have
adopted Statements of ASC 220, Comprehensive Income, formerly known as SFAS No.
130, Reporting Comprehensive Income, which establishes standards for reporting
and presentation of comprehensive income (loss) and its components in a full set
of general-purpose financial statements. We have chosen to report
comprehensive income (loss) in the statements of operations and comprehensive
income.
Income
Taxes
We
account for income taxes under the provisions of ASC 740 Income Tax, formerly
known as SFAS No. 109, Accounting for Income Taxes, which requires recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the consolidated financial statements or
tax returns. Deferred tax assets and liabilities are recognized for
the future tax consequence attributable to the difference between the tax bases
of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are measured using
the enacted tax rate expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
On March
16, 2007, China’s parliament, the National People’s Congress, adopted the
Enterprise Income Tax Law, which will take effect on January 1,
2008. The new income tax law sets unified income tax rate for
domestic and foreign companies at 25% except a 15% corporate income tax rate for
qualified high technology and science enterprises. In accordance with
this new income tax law, low preferential tax rate in accordance with both the
tax laws and administrative regulations prior to the promulgation of this Law
gradually becomes subject to the new tax rate within five years after the
implementation of this law.
We have
been recognized as a high technology and science company by the Ministry of
Science and Technology of the PRC. The Xing He District Local Tax
Authority in the Nei Mongol province granted us a 100% tax holiday with respect
to enterprise income tax for ten years 2008 through 2018. Afterwards,
based on the present tax law and our status as a qualified high technology and
science company, we will be subject to a corporation income tax rate of 15%
effective in 2019.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net
realizable value. Work in progress and finished goods are composed of
direct material, direct labor and a portion of manufacturing
overhead. Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and
dispose. Management believes that there was no obsolete inventory as
of December 31, 2009 or December 31, 2008.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Major expenditures for
betterments and renewals are capitalized while ordinary repairs and maintenance
costs are expensed as incurred. Depreciation and amortization is
provided using the straight-line method over the estimated useful life of the
assets after taking into account the estimated residual value.
Land
Use Rights
There is
no private ownership of land in China. All land ownership is held by
the government of China, its agencies and collectives. Land use
rights are obtained from government, and are typically
renewable. Land use rights can be transferred upon approval by the
land administrative authorities of China (State Land Administration Bureau) upon
payment of the required transfer fee. We own the land use right for
2,356,209 square feet, of which 290,626 square is occupied by our facilities,
for a term of 50 years, beginning from issuance date of the certificates
granting the land use right. We record the property subject to land
use rights as intangible asset.
Each
intangible asset is reviewed periodically or more often if circumstances
dictate, to determine whether its carrying value has become
impaired. We consider assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. We
also re-evaluate the amortization periods to determine whether subsequent events
and circumstances warrant revised estimates of useful lives.
Research
and development
Research
and development costs are expensed as incurred, and are included in general and
administrative expenses. These costs primarily consist of cost of
material used and salaries paid for the development of our products and fees
paid to third parties. Our research and development expense for the
years 2009 and 2008 has not been significant.
Value
added tax
Pursuant
to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject
to a tax rate of 17% (“output VAT”). The output VAT is payable after
offsetting VAT paid by us on purchases (“input VAT”). Under the
commercial practice of the PRC, the Company paid VAT and business tax based on
tax invoices issued.
The tax
invoices may be issued subsequent to the date on which revenue is recognized,
and there may be a considerable delay between the date on which the revenue is
recognized and the date on which the tax invoice is issued. In the
event that the PRC tax authorities dispute the date of which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes that
are determined to be late or deficient. In the event that a tax
penalty is assessed on late or deficient payments, the penalty will be expensed
as a period expense if and when a determination has been made by the taxing
authorities that a penalty is due. We have been granted an exemption
from VAT by the Xinghe County People’s Government and Xinghe Tax Authority on
some products for which an exchange agreement is in place for raw materials and
fuel. We have been granted an exemption from VAT by the Xing He
County People’s Government and Xing He Tax Authority on some products in which
an exchange agreement is in place for raw materials and fuel.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May
2009, the FASB issued ASC 855, “Subsequent Events”, formerly known as SFAS No.
165. SFAS No. 165 is intended to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued or were available to be issued. SFAS
165 No. is effective for interim or annual financial periods ending after June
15, 2009. The Company adopted this statement for the financial statements since
the quarter ended June 30, 2009.
In June
2009, the FASB issued ASC 860, “Transfers and servicing”, formerly known as SFAS
No. 166, a revision to SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities”, and will require more
information about transfers of financial assets and where companies have
continuing exposure to the risks related to transferred financial assets. SFAS
166 is effective at the start of a company’s first fiscal year beginning after
November 15, 2009, or January 1, 2010 for companies reporting earnings on a
calendar-year basis. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, formerly known as SFAS No. 167,
a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, and will change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under SFAS No. 167, determining whether a
company is required to consolidate an entity will be based on, among other
things, an entity's purpose and design and a company's ability to direct the
activities of the entity that most significantly impact the entity's economic
performance. SFAS No. 167 is effective at the start of a company’s first fiscal
year beginning after November 15, 2009, or January 1, 2010 for companies
reporting earnings on a calendar-year basis. The adoption of SFAS No. 167 will
not have an effect on the Company’s financial statements
In June
2009, the FASB issued SFAS No. 168, "The Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) and the Hierarchy of Generally
Accepted Accounting Principles (GAAP) - a replacement of SFAS No. 162" (SFAS
168), which establishes the FASB ASC as the source of authoritative U.S. GAAP
recognized by the FASB to be applied by non-governmental entities. As a result
of the adoption of SFAS 168, the majority of references to historically issued
accounting pronouncements are now superseded by references to the FASB ASC, with
no financial impact.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial statements.
In
November 2009, the FASB issued an ASU regarding accounting for stock dividends,
including distributions to shareholders with components of stock and cash. This
ASU clarifies that the stock portion of a distribution to shareholders that
contains components of cash and stock and allows shareholders to select their
preferred form of the distribution (with a limit on the amount of cash that will
be distributed in total) should be considered a stock dividend and included in
EPS calculations as a share issuance. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial
statements
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers
of Financial Assets—an amendment of FASB Statement No. 140.
The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,
Amendments to FASB Interpretation
No. 46(R)
. The amendments in this Accounting Standards Update replace
the quantitative-based risks and rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity
has the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In January 2010, FASB
issued ASU No. 2010-01- Accounting for Distributions to Shareholders with
Components of Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on the Company’s consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
OUR
BUSINESS
Overview
of Our Business
We are
engaged in the manufacture of graphite based products in the People’s Republic
of China. Our products are either used in the manufacturing process
for other products, particularly metals, or for incorporation in various types
of products or processes. Based on information we receive about our
industry in the course of our business, we believe that we are the largest
wholesale supplier of fine grain graphite and high purity graphite in China and
one of China’s largest producers and suppliers of graphite products
overall. We currently manufacture and sell the following types of
graphite products:
·
|
fine
grain graphite; and
|
Approximately
40% to 50% of our graphite electrodes are sold directly to end users in China,
primarily consisting of steel manufacturers. All other sales are made
to over 200 distributors located throughout 22 provinces in
China. Our distributors then sell our products to end customers both
in China and in foreign countries, including, among others, Japan, the United
States, Spain, England, South Korea and India. In 2010, our primary
strategy is to increase our gross profits by better aligning our overhead costs
with existing levels of sales and pricing and to acquire other businesses in our
industry that manufacture products that we do not currently manufacture which we
would expect to generate significant profits. To the extent that
economic conditions improve and demand for our existing products increase, we
may increase the production capacity of our current products.
Our
Growth Strategy
Our
long-term strategy is to expand our product offerings by manufacturing nuclear
graphite used as a reflector or moderator in nuclear reactors in China, assuming
that we are able to obtain the necessary funds. The profit margin on these
products would be significantly higher than the profit margin on our current
line of products. There are currently 11 nuclear power plants in
China, with 15 more plants currently under construction. These power
plants currently purchase their nuclear graphite from manufacturers in foreign
countries, including Japan, Germany and the United States, which involves
greater costs than purchasing from local Chinese companies. We know
of only one graphite manufacturer in China that currently produces nuclear
graphite that meets the specifications of these power plants. Only graphite rods
with a diameter of more than 840 millimeters and a purity of more than 99.9999%
may be used in nuclear power reactors. To date, we have produced only samples
that meet these standards. The largest graphite that we currently
produce in large quantities that contains such a high level of purity has a
diameter of 600 millimeters.
We also
plan to expand our business by acquiring one or more companies which we believe
meet the following requirements:
·
|
producing revenues
and earnings before interest, taxes, depreciation and amortization at a
level that will have a significant impact on our
earnings;
|
·
|
conducting
business in an industry that is related to our present business;
and
|
·
|
will
have prior to or shortly following closing, audited financial statements,
prepared in accordance with United States
GAAP.
|
We have
engaged in discussions with potential target companies, but, as of the date of
this report, we have not reached any agreement with respect to any acquisitions.
On March 3, 2010, we entered into a letter of intent which provided that we
intend to enter into definitive agreements with Chiyu Carbon Graphite Ltd., a
down stream producer of graphite products in China, to acquire 100% of Chiyu
Carbon’s assets. We believe that if the acquisition closes, sales by
this entity would generate significant profits for us and that demand for these
products is currently greater than demand for some of our existing
products.
In order
to expand our product offerings, we may need to raise a substantial amount of
additional capital from equity or debt markets or to borrow additional funds
from local banks. We currently have no commitments from any financing
source. There is no assurance that we will be able to raise any funds
on terms favorable to us, or at all. In the event that we issue
shares of equity or convertible securities, holdings of our existing
stockholders would be diluted. In addition, there is no assurance
that we will successfully manage and integrate the production and sale of new
products.
Organizational
Structure
We were
incorporated in Nevada on February 13, 2003 as Achievers Magazine
Inc. On December 14, 2007, we completed a reverse merger transaction
with Talent International Investment Limited, or Talent, a company incorporated
in the British Virgin Islands on February 1, 2007. Following the
reverse merger, our name was changed to China Carbon Graphite Group,
Inc.
As a
result of the reverse merger, we wholly own Talent. Talent wholly
owns Xinghe Yongle Carbon Co., Ltd., or Yongle, a wholly foreign owned
enterprise organized under the laws of the PRC on September 18,
2007. On December 14, 2007, Yongle executed a series of exclusive
contractual agreements with Xinghe Xingyong Carbon Co., Ltd., or Xingyong, an
operating company organized under the laws of the PRC in December
2001.
PRC law
currently has limits on foreign ownership of certain companies. To comply with
these foreign ownership restrictions, we operate our businesses in the PRC
through Xingyong. Xingyong has the licenses and approvals necessary to operate
its business in the PRC. We have contractual arrangements with Xingyong and its
stockholders pursuant to which we have the ability to substantially influence
Xingyong’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring stockholder approval. As a result of these
contractual arrangements, we are able to control Xingyong. Consequently, we
consolidate Xingyong’s financial statements with our financial
statements. There are certain risks related to these contractual
obligations. See “Risk Factors—Risks Related to Our Capital
Structure” below.
Xingyong’s
principal stockholder is Dengyong Jin, our former chief executive officer who,
together with family members, controls Sincere, which owns approximately 47% of
the outstanding shares of our common stock.
On
December 14, 2007, we entered into the following contractual
arrangements:
Business
Operations Agreement
Pursuant
to this agreement, Xingyong is obligated to pay between 80% and 100% of its net
income to Yongle, subject to annual negotiations between the
parties. In each of 2008 and 2009, Xingyong paid 100% of its net
income to Yongle. In order to guarantee Xingyong’s performance under this
agreement, the stockholders of Xingyong agreed to obtain Yongle’s written
consent prior to allowing Xingyong to enter into any transaction which may
materially affect Xingyong’s assets, obligations, rights or
operations.
Option
Agreement
Pursuant
to the option agreement, Yongle was granted an exclusive option to purchase all
of the capital stock of Xingyong at the lowest price permitted by PRC laws
applicable at the time of the exercise of such option. Yongle may exercise such
option, in part or whole, at any time until December 2017.
Share
Pledge Agreement
Under the
share pledge agreement, the stockholders of Xingyong, pledged all of their
equity interests in Xingyong to Yongle to guarantee Xingyong’s performance of
its obligations under all other related agreements by and between Yongle and
Xingyong. None of these shares may be transferred without the
permission of Yongle.
Exclusive
Technical and Consulting Services Agreement
Under the
exclusive technical and consulting services agreement between Yongle and
Xingyong, Yongle agreed to provide certain technical consulting and services to
Xingyong, and Xingyong agreed not to accept any technical consulting services
from any third party without the consent of Yongle. In addition, Yongle is the
sole and exclusive owner of all rights, title and interests arising from the
performance of the agreement.
Industrial
Uses of Graphite
Graphite
is considered to be the purest form of carbon. We manufacture our graphite
products by using a high temperature process whereby the heavy hydrocarbons are
broken down into simpler molecules. The resulting product provides us with a
pure grade of carbon which we use to make our products. Graphite is an excellent
conductor of heat and electricity and has a high melting temperature of 3,500
degrees Celsius. It is extremely resistant to acid, chemically inert and highly
refractory. The utility of graphite is dependent largely upon its
type.
There are
three principal types of natural graphite, each occurring in different types of
ore deposit:
·
|
Crystalline
flake graphite, or flake graphite, occurs as isolated, flat, plate-like
particles with hexagonal edges if unbroken and when broken the edges can
be irregular or angular.
|
·
|
Amorphous
graphite occurs as fine particles and is the result of thermal
metamorphism of coal, the last stage of coalification, and is sometimes
called meta-anthracite. Very fine flake graphite is sometimes called
amorphous in the trade.
|
·
|
Lump
graphite, or vein graphite, occurs in fissure veins or fractures and
appears as massive platy intergrowths of fibrous or acicular crystalline
aggregates, and is probably hydrothermal in
origin.
|
All
grades of graphite, especially high grade amorphous and crystalline graphite
that remains suspended in oil are used as lubricants. Graphite has an
extraordinarily low co-efficient of friction under most working conditions. This
property is invaluable in lubricants. It diminishes friction and tends to keep
the moving surface cool. Dry graphite as well as graphite mixed with grease and
oil is utilized as a lubricant for heavy and light bearings. Graphite grease is
used as a heavy-duty lubricant where high temperatures may tend to remove the
grease.
The flake
type graphite is found to possess extremely low resistivity to electrical
conductance. The electrical resistivity decreases with the increase of flaky
particles. The bulk density decreases progressively as the particles become more
flaky. Because of this property in flake graphite, it is used in the manufacture
of carbon electrodes, plates and brushes required in the electrical industry and
dry cell batteries. Flake graphite has been replaced to some extent by
synthetic, amorphous, crystalline graphite and acetylene black in the
manufacture of plates and brushes.
Flake
graphite containing 80-85% carbon is used for crucible manufacture; 93% carbon
and above is preferred for the manufacture of lubricants, and graphite with 40
to 70% carbon is utilized for foundry facings. Natural graphite, refined or
otherwise pure, having carbon content not less than 95% is used in the
manufacture of carbon rods for dry battery cells.
Currently,
artificially prepared graphite has replaced natural graphite to a great extent.
Artificial graphite is prepared by heating a mixture of anthracite, high grade
coal or petroleum coke, quartz and saw-dust at a temperature of 3,000ºC, out of
contact with air. Graphite carbon is deposited as residue.
Our
Products
We
currently manufacture and sell the following types of graphite
products:
·
|
fine
grain graphite; and
|
Graphite
electrodes are used as electricity-conducting materials within electric arc
furnaces for manufacture of steel and non-ferrous metals such as brown alumina,
yellow phosphorus, or other metals.
Fine
grain graphite blocks are used to make graphite crucibles in various industries
and continuous casting dies for non-ferrous metals and spark erosion tools in
the automotive industry. Fine grain graphite blocks are also machined to produce
piston rings, sealing rings as well as jigs in the molding industry. In the
space industry, fine grain graphite is used as rocket nozzles. Fine grain
graphite is widely used in smelting for colored metals and rare-earth metal
smelting as well as the manufacture of molds. We hope to penetrate
some of these markets as we increase our production capacity and market our
products to new customers.
High
purity graphite is used in the chemistry industry, semiconductor material and
precious metal smelting industry, food industry and nuclear industry. Graphite
bricks and rounds of high purity are used as moderators in an atomic reactor. In
the nuclear field, graphite is a good and convenient material as a moderator but
only if the graphite is low in certain neutron absorbing elements notably boron
and the rare earths and is of consistent quality particularly with regard to
density and orientation. High purity graphite is used in, among other things,
the metallurgy, mechanical, aviation, electronic, atomic energy, chemical and
food industries. We hope to penetrate some of these markets as we
increase our production capacity and market our products to new
customers.
Our
product types are differentiated based upon qualities such as density, thermal
conductivity, electrical resistivity, thermal expansion and
strength. With respect to each of our product types, we sell products
that vary in size and purity, depending on the particular specifications
requested by our distributors. We also customize our products in
various shapes. We regularly upgrade each of our products by
increasing their size, density and purity, in accordance with customer
demands.
In June
2009, we launched production of newly developed fine grain graphite rods with a
length of 3,500 millimeters and a purity level up to 99.99%. Based on
informal discussions with others in our industry, we believe that these rods are
currently the largest available in China’s graphite market.
Our
Manufacturing Facility
We
currently manufacture all of our products in our Inner Mongolia
facility. In 2009, our facility had the capacity to produce 15,000
tons of materials annually, in the aggregate.
The
manufacturing process of each of our products generally involves various steps,
including calcining, which is a thermal treatment process applied to raw
materials, crushing raw materials into smaller particles, screening, mixing,
forming, dipping, baking graphitization and machining. The technology
and procedures used in this process vary amongst the different products that we
manufacture. We have developed proprietary technology to support the
forming stage of production and, as discussed below under the heading
“—Intellectual Property,” we have been granted a patent by the State
Intellectual Property Office of the PRC to protect our rights to this
technology.
We employ
advanced methods of quality control and environmental management. In
this regard, we have obtained ISO90001 certification and ISO14000 certification
for all of our products.
Our
Raw Materials and Suppliers
Our
principal raw materials are coal asphalt, asphalt coke, metallurgy coke, needle
coke, metallurgy coke power, quartzose sand, coal, petroleum coke and calcined
coke, all of which are carbon rich and used in manufacturing graphite with a
high degree of density, strength and purity. We purchased all of our raw
materials from domestic Chinese suppliers in 2008 and 2009. We do not have any
long-term contracts for raw materials. Therefore, any increase in
prices of raw material will affect the price at which we can sell our
product. We purchase all of our raw materials from domestic Chinese
suppliers. Because we do not have any long-term contracts with our
suppliers, any increase in the prices of our raw materials would affect the
price at which we can sell our product. If we are not able to raise
our prices to pass on increased costs to our customers, we would be unable to
maintain our profit margins. Similarly, in times of decreasing
prices, we may have to sell our products at prices which are lower than the
prices at which we purchased our raw materials. Furthermore, PRC
regulations grant broad powers to the government to adjust prices of raw
materials and manufactured products. Although the government has not
imposed price controls on our raw materials or our products, it is possible that
price controls may be implemented in the future, thereby affecting our results
of operations and financial condition. However, because of the
diversity of available sources of these raw materials, we believe that our raw
materials are currently in adequate supply and will continue to be so in the
future.
Our Customers
Our
customers include over 200 distributors located throughout 22 provinces in China
as well as end users located in China. Our distributors sold our
products to end customers both in China and in foreign countries, including,
among others, Japan, the United States, Spain, England, South Korea and
India. These end users consist of companies in various industries,
including automobiles, defense, molding, machinery and tool
manufacturers. Our direct sales consist of sales of our graphite
electrodes to steel manufacturers and metallurgy companies located in China and
sales of our fine grain graphite and high purity graphite products to molding
companies located in China.
We
generally do not enter into long-term contracts with our distributors or
customers. Our distributors and customers generally purchase our
products pursuant to purchase orders. We currently have one long-term agreement
with one of our distributors; however, the volume of sales from such distributor
is not material to our business.
Our
distributors and customers generally purchase on credit, depending on their
credit history and volume of purchases from us. During 2009, as a
result of the global economic crisis, we experienced delays in the collection of
our accounts receivable. This is reflected in the increase in
accounts receivable from $4.2 million at December 31, 2008 to $6.2 million at
December 31, 2009, despite a decline in sales in 2009.
Sales to
two of our distributors accounted for 10% or more of our net sales in 2009, as
follows (dollars in thousands):
Name
|
|
Sales
|
|
|
Percent
of
Net
Sales
|
|
He
Ming Advanced Materials, Ltd.
|
|
|
3,052
|
|
|
|
19.7
|
%
|
Changzhou
Zhenrun Carbon Products Sales Co., Ltd.
|
|
|
3,337
|
|
|
|
21.5
|
%
|
Our
Sales and Marketing Efforts
We have
not spent a significant amount of capital on advertising. Our sales
force consists of ten people located at our Inner Mongolia facility who market
our products primarily to distributors, and, to a lesser extent, end users, in
the PRC. Our marketing effort is oriented toward working with distributors, who
purchase our products and then sell them to end users in China and in foreign
countries, including Japan, the United States, Spain, England, South Korea and
India.
Research
and Development
We have
entered into a technology cooperation agreement with Hunan University, which
sets forth the terms pursuant to which the university provides us with basic
research and we perform experiments based upon their research. We also have a
similar informal relationship with Qinghua University. The research that these
universities are currently engaged in focuses on the development of high purity
graphite with a diameter of 840 millimeters. A diameter of more than 840
millimeters and a purity of at least 99.9999% are threshold requirement for
nuclear graphite for use in nuclear power reactors. The largest
graphite that we currently produce in large quantities that contains such a high
level of purity has a diameter of 600 millimeters. Our research and
development expenses have not been significant to date.
Intellectual
Property
We hold
one Chinese patent, Patent No IL: 2004 1 0044348.7, which relates to the molding
process for high-density, high strength and wear-resistant graphite
material. However, this patent affords us only limited protection,
and any actions we take to protect our intellectual property rights may not be
adequate. Most of our intellectual property consists of trade secrets
relating to the design and manufacture of graphite products and customer lists
that are accessible only by key executives and accounting personnel. Effective
intellectual property protection may not be available in China and other
countries in which our products are sold. Intellectual property rights in China
are still developing, and there are uncertainties involved in the protection and
the enforcement of such rights.
Competition
and Competitive Advantages
We
compete with a number of domestic and international companies that manufacture
graphite products. Because of the nature of the product that we sell, we believe
that the reputation of the manufacturer and the quality of the product may be as
important as price.
In
addition to a number of domestic firms, there are three major international
firms that offer competing products. They are SGL Group, Toyo Tanso and Poco
Graphite. SGL Group is considered one of the world’s leading manufacturers of
carbon-based products. In 1974, Toyo Tanso became the first company in Japan to
develop isotropic graphite, significantly expanding the possibilities of carbon
use. Its products are now widely used in a variety of cutting edge technology
fields, including the semi-conductor and aerospace industries. Poco Graphite’s
products are produced for the semiconductor and general industrial products,
biomedical, glass industry products and electrical discharge machining (EDM)
markets.
Government
Regulations
Approvals
for New Products
Before we
develop certain new products, we must obtain a variety of approvals from local
and municipal governments in the PRC. Our products may also be
required to comply with the regulations of foreign countries into which they are
ultimately sold. There is no assurance that we will be able to obtain
all required licenses, permits, or approvals from these government authorities.
If we fail to obtain all required licenses, permits or approvals, we may be
unable to expand our operations.
Environmental
Regulations
Xingyong,
which manufactures our products, is subject to Chinese and regional
environmental laws and regulations. Our refineries and related water treatment
systems are built to meet government requirements, and we received a
manufacturing license from the government department of environmental
protection. Xingyong has passed environmental impact assessment by local
environment authorities. We believe that we and Xingyong are in compliance in
all material respects with all environmental protection laws and
regulations.
Regulations
Governing Electrical Equipment
Our
products are subject to regulations that pertain to electrical equipment, which
may materially adversely affect our business. These regulations influence the
design, components or operation of our products. New regulations and changes to
current regulations are always possible and, in some jurisdictions, regulations
may be introduced with little or no time to bring related products into
compliance with these regulations. Our failure to comply with these regulations
may restrict our ability to sell our products in the PRC. In addition, these
regulations may increase our cost of supplying the products by forcing us to
redesign existing products or to use more expensive designs or components. In
these cases, we may experience unexpected disruptions in our ability to supply
customers with products, or we may incur unexpected costs or operational
complexities to bring products into compliance. This could have an adverse
effect on our revenues, gross profit margins and results of operations and
increase the volatility of our financial results.
Circular
106 Compliance and Approval
On May
31, 2007, the SAFE issued an official notice known as “Circular 106,” which
requires the owners of any Chinese companies to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters in China. However, since the owners of
Xingyong were not stockholders of Talent, and Talent’s sole stockholder, a trust
of which the trustee and beneficiaries are family members of Mr. Jin, was not a
resident of the PRC, no SAFE application was required to be filed for Talent to
establish its offshore company, Yongle, as a “special purpose vehicle” for any
foreign ownership and capital raising activities by Xingyong.
Employees
As of
December 31, 2009, we had 553 full-time employees, of whom 462 were in
manufacturing, 36 were technical employees who were also engaged in research and
development, 40 were executive and administrative employees and 15 were sales
and marketing employees. We believe that our relationship with our employees is
good.
Properties
There is
no private ownership of land in the PRC. The government grants transferable land
use rights, which grant the right to use the land for a specified time period.
We have the land use rights to an area of 2,356,209 square feet in Xinghe
County, Inner Mongolia, China, on which we have a 290,626 square feet building
that we use for manufacturing and office space. The land use rights have terms
of 50 years, with the land use right relating to 1,207,388 square feet expiring
in 2050 and the land use right with respect to 1,148,821 square feet expiring in
2057. We believe that our facilities are sufficient to meet our current and near
future requirements and that any additional space that we may require would be
available on commercially reasonable terms.
Legal
Proceedings
We are
not aware of any material existing or pending legal proceedings against us, nor
are we involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any of our current
directors, officers or affiliates, or any registered or beneficial shareholder,
is an adverse party to or has a material interest adverse to us.
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth certain information with respect to our directors and
executive officers.
Name
|
|
Age
|
|
Position
|
Donghai
Yu
|
|
44
|
|
Chief
Executive Officer, President and Director
|
Ting
Chen
|
|
27
|
|
Chief
Financial Officer and Director
|
Philip
Yizhao Zhang
|
|
39
|
|
Director
|
John
Chen
|
|
38
|
|
Director
|
Hongbo
Liu
|
|
50
|
|
Director
|
Donghai
Yu has been our Chief Executive Officer since November 2008. Mr. Yu
served as Chief Financial Officer from December 2007 until November
2008. Since November 2007 he has also been Chief Financial Officer of
Xingyong. Mr. Yu received his MBA degree from Oklahoma City
University.
Ting Chen
has been our Chief Financial Officer since November 2008. Ms. Chen
was our Vice President of Finance and Investor Relations from January 2008 until
November 2008. Prior to that, Ms. Chen worked as an auditor at the
New York office of PricewaterhouseCoopers, from January 2005 to January
2008. Ms. Chen holds a CPA certificate and a bachelor degree in
accounting and economics from the City University of New York.
Hongbo
Liu has been a director since November 2008. Dr. Liu is a professor
at Hunan University in Hunan Province, where he has been the department chair of
Non-Metallic Materials since 2000. Dr. Liu is considered one of China’s top
scholars in carbon graphite studies. He has been granted a special annual
allowance for outstanding scholars in China by the PRC Department of State since
1997. Dr. Liu holds a doctorate degree in engineering from Hunan
University.
Philip
Yizhao Zhang is currently the chief financial officer of Universal Travel Group
(NYSE: UTA). He is also an independent director of China Green Agriculture Inc.
(NYSE: CGA), China Education Alliance, Inc. (NYSE: CEU) and Kaisa
Holdings Group (HK: 1638), respectively. Mr. Zhang has over 13 years of
experience in accounting and internal control, corporate finance, and portfolio
management. Previously, Mr. Zhang held senior positions in Energoup
Holdings Corporation (OTC BB: ENHD), Shengtai Pharmaceutical Inc. (OTC BB:
SGTI), China Natural Resources Incorporation (NASDAQ CM: CHNR)
and Chinawe Asset Management Corporation (OTC BB: CHWE). Mr. Zhang also had
experiences in portfolio management and asset trading in Guangdong South
Financial Services Corporation from 1993 to 1999. He is a certified public
accountant of the state of Delaware, and a member of the American Institute of
Certified Public Accountants (AICPA). Mr. Zhang graduated with a bachelor’s
degree in economics from Fudan University, Shanghai in 1992 and received an MBA
degree with financial analysis and accounting concentrations from the State
University of New York at Buffalo in 2003
John Chen
has served as chief financial officer and director of General Steel Holdings,
Inc. (NYSE: GSE), a Chinese steel manufacturing company, since May 2004. From
August 1997 to July 2003, Mr. Chen was senior accountant at Moore Stephens,
Wurth, Frazer and Torbet, LLP, Los Angeles, California, USA. He graduated from
Norman Bethune University of Medical Science, Changchun City, Jilin Province,
China in 1992. He received a B.S. degree in accounting from California State
Polytechnic University, Pomona, California in 1997.
There are
no agreements or understandings between any of our executive officers or
directors and any other person pursuant to which such executive officer or
director was selected to serve as a director or executive officer of our
company. Directors are elected until their successors are duly
elected and qualified. There are no family relationships among our
directors or officers.
CORPORATE
GOVERNANCE
Director
Independence
Following
the appointment of Mr. Chen and Mr. Zhang on October 28, 2009, the board has
determined that a majority of the Company’s directors are independent under
Nasdaq rules. Effective October 28, 2009, the Company created audit,
compensation and corporate governance/nominating committees and adopted
committee charters and a code of conduct. Mr. Chen and Mr. Zhang,
along with Hongbo Liu, who is also an independent director, serve as members of
each of the committees with Mr. Zhang serving as chairman of the audit
committee, Mr. Chen as chairman of the compensation committee and Mr. Liu as
chairman of the corporate governance/nominating committee.
None of
our officers or directors have any family relationships with any other officers
or directors
Audit
Committee
Our board
of directors has established an audit committee to assist it in fulfilling its
responsibilities for general oversight of the integrity of the financial
reporting process, compliance with legal and regulatory requirements, the
independent auditors’ qualifications and independence, the performance of our
independent auditors and an internal audit function and risk assessment and risk
management. Our board of directors has adopted a written charter for
the audit committee, which the audit committee reviews and reassesses for
adequacy on an annual basis. All of the members of our audit
committee are independent under the applicable rules and regulations of the SEC
and the Nasdaq.
Our audit
committee’s responsibilities include:
·
|
appointing,
evaluating and determining the compensation of our independent
auditors;
|
·
|
reviewing
and approving the scope of the annual audit, the audit fee and the
financial statements;
|
·
|
reviewing
disclosure controls and procedures, internal control over financial
reporting, any internal audit function and corporate policies with respect
to financial information;
|
·
|
discussing
with our independent auditor the scope and results of our year-end audit,
our quarterly results of operations, our internal accounting controls and
the professional services furnished by the independent auditor;
and
|
·
|
reviewing
other risks that may have a significant impact on our financial
statement
|
Commencing
with the audited financial statements for the year ended December 31, 2009, our
audit committee will meet with our representative of our independent accounting
firm with respect to our audited annual financial statements and our unaudited
quarterly financial statement before our Form 10-K or Form 10-Q is filed with
the SEC.
Compensation
Committee
Our
compensation committee discharges the board of director’s responsibilities
relating to compensation of our executive officers, produces an annual report on
executive compensation and provides general oversight of compensation
structure. Our compensation committee is currently comprised of Mr.
Chen, Mr. Zhang and Mr. Liu. Mr. Chen serves as chairman of the
compensation committee. All of the members of our compensation
committee are independent under the applicable rules and regulations of the SEC
and the Nasdaq. Our board of directors has adopted a written charter
for our compensation committee.
Our
compensation committee’s responsibilities include:
·
|
reviewing
and approving corporate goals and objectives relevant to compensation of
our executive officers;
|
·
|
evaluating
any incentive-compensation plans or equity-based
plans;
|
·
|
oversee
regulatory compliance with respect to compensation matters in consultation
with management; and
|
·
|
evaluating
any severance or similar termination payments proposed to be made to any
of our current or former executive officers or member of senior
management.
|
Corporate
Governance/Nominating Committee
Our board
of directors has established a corporate governance/nominating committee for the
purpose of reviewing all board of director-recommended and
stockholder-recommended nominees, determining each nominee’s qualifications and
making a recommendation to the full board of directors as to which persons
should be our board of director nominees. Our corporate
governance/nominating committee is currently comprised of Mr. Chen, Mr. Zhang
and Mr. Liu. Mr. Liu serves as chairman of the compensation
committee. All of the members of our compensation committee are
independent under the applicable rules and regulations of the SEC and the
Nasdaq. Our board of directors has adopted a written charter for our
corporate governance/nominating committee.
Our
corporate governance/nominating committee’s responsibilities
include:
·
|
identifying
and recommending to our board of directors criteria and procedures for
selecting board and committee
membership;
|
·
|
identifying
individuals qualified to become board
members
|
·
|
evaluating
the desirability of and recommending to the board any changes in the size
and composition of the board;
|
·
|
recommending
to our board of directors the persons to be nominated for election as
directors and each of the board’s
committees;
|
·
|
evaluation
of and successor planning for the chief executive officer and other
executive officers;
|
·
|
developing
and recommending to our board of directors a set of corporate governance
guidelines; and
|
·
|
overseeing
the evaluation of our board of directors, its committees and
management.
|
Director
Compensation
We have
entered into an agreement with Mr. Zhang and Mr. Chen, pursuant to which we
agreed to issue to each of them 25,000 shares of common stock each year for
their services as directors and committee members. Pursuant to these agreements,
we issued 25,000 shares to each of them upon their election in October 2009. The
Chief Executive Officer and Chief Financial Officer each received 20,000 shares
of common stock for their services as directors in accordance with our board of
directors’ policy to grant 20,000 shares annually to these individuals.
Beginning in May 2009, we also issued 25,000 shares of common stock to Mr. Liu
and will grant him this amount on an annual basis for his services as director
and committee member.
Code
of Ethics
On
October 28, 2009, our board of directors adopted a Code of Business Conduct and
Ethics, which applies to all directors, officers and employees. The purpose of
the Code is to promote honest and ethical conduct.
Board
Attendance
During
2009, the board of directors held thirteen meetings. The meetings
include meetings that were held by means of a conference telephone call, but do
not include actions taken by unanimous written consent. Each director
attended at least 75% of the board meetings held while he or she was a
director.
EXECUTIVE
COMPENSATION
The
following summary compensation table sets forth the compensation earned by our
named executive officers during the years ended December 31, 2007, 2008 and
2009. None of our executive officers received $100,000 or more of
compensation during these periods other than Mr. Yu.
Summary
Compensation Table
Name
and principal position
|
|
Year
|
|
Salary
|
|
|
Stock Awards
(1)
|
|
|
Total
|
|
Dengyong
Jin,
|
|
2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Former
Chief Executive Officer
|
|
2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donghai
Yu,
|
|
2009
|
|
$
|
72,000
|
|
|
$
|
$28,000
|
|
|
$
|
100,000
|
|
Chief
Executive Officer and Former
|
|
2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chief
Financial Officer
|
|
2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
This
column represents the fair value of the stock option on the grant date
determined in accordance with the provisions of ASC 718. This
amount represents the grant of a stock award to Mr. Yu in his capacity as
a director of the company.
|
Mr. Jin was our Chief Executive
Officer until November 2008, at which time Mr. Yu was appointed as our Chief
Executive Officer. Mr. Yu was our Chief Financial Officer prior to
such appointment. We have not entered into an employment agreement
with any of our executive officers.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Dengyong
Jin, our former chief executive officer, is the chief executive officer and
principal shareholder of Xingyong. Our principal stockholder, Sincere, is owned
by Lizhong Gao, the brother-in-law of Mr. Jin, who has the sole power to vote
and dispose of the shares of our company held by Sincere. Sincere holds the
shares as trustee for Mr. Jin’s wife and sister in-law.
Dengyong
Jin provided a loan to us of approximately $4.5 million on December 31, 2007. We
repaid this loan in full during the fourth quarter of 2008. In
October 2008, we advanced to Beijing Royal Yiyuan Inc, a company owned by Mr.
Jin, approximately $290,000, which was repaid in full in April 2009. Each of the
advances bore no interest and were payable on demand.
SELLING
STOCKHOLDERS
The following table sets forth certain
information regarding the selling stockholders, including the number and
percentage of shares beneficially owned by them and the number of shares offered
by them in this prospectus. Beneficial ownership is determined in accordance
with the rules of the SEC. In computing the number and percentage of shares
beneficially owned by a selling stockholder, shares of common stock underlying
preferred stock and warrants held by such stockholder that are exercisable
within 60 days of April 28, 2010 are included. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other selling stockholder. Each selling stockholder’s percentage of ownership in
the following table is based upon 19,980,161 shares of common stock outstanding
as of April 28, 2010.
The selling stockholders acquired the
securities being registered for resale in this prospectus in a private
placement, pursuant to which we issued to the selling stockholders an aggregate
of 2,480,500 shares of Series B Convertible Preferred Stock, and warrants to
purchase an aggregate of up to 1,116,225 shares of our common
stock. The aggregate purchase price was approximately $3.0
million.
The shares of Series B Preferred Stock
may be converted at the option of the holders at any time until December 22,
2011, into an aggregate of 2,480,500 shares of common stock. Of these
shares, 250,000 shares of Series B Preferred Stock have been converted into
250,000 shares of common stock. On December 22, 2011, any outstanding shares of
Series B Preferred Stock will be automatically converted into common
stock. The initial exercise price of the 992,200 warrants issued to
investors is $1.30 per share, subject to certain adjustments set forth therein,
including adjustments in the event of certain future financing transactions
conducted by us or in the event of a stock dividend or stock split. The warrants
may be exercised at any time prior to the five year anniversary of the issuance
of the warrants.
In addition, we granted Maxim Group
LLC, the placement agent, five-year warrants to purchase up to 124,025 shares of
our common stock at an exercise price of $1.32 per share.
None of the selling stockholders are
employees, suppliers or affiliates of ours or our affiliates. Within the past
three years, none of the selling stockholders has held a position as an officer
or director of ours, nor has any selling stockholder had any material
relationship of any kind with us or any of our affiliates. In addition, none of
the selling stockholders has any family relationships with our officers,
directors or controlling stockholders. Furthermore, based on representations
made to us by the selling stockholders, no selling stockholder is a registered
broker-dealer or an affiliate of a registered broker-dealer, except for Maxim
Group LLC.
Unless otherwise indicated, to our
knowledge, each person named in the table below has sole voting and investment
power (subject to community property laws where applicable) with respect to the
shares of common stock set forth opposite such person’s name. We will file a
supplement to this prospectus (or a post-effective amendment hereto, if
necessary) to name successors to any named selling stockholders who are able to
use this prospectus to resell the securities registered hereby.
Any selling stockholders who are
affiliates of broker-dealers and any participating broker-dealers may be deemed
to be “underwriters” within the meaning of the Securities Act, and any
commissions or discounts given to any such selling stockholder or broker-dealer
may be regarded as underwriting commissions or discounts under the Securities
Act. The selling stockholders have informed us that they do not have any
agreement or understanding, directly or indirectly, with any person to
distribute their common stock.
Name
of Beneficial Owner
|
|
Shares
Beneficially Owned Before the Offering
|
|
|
Maximum
Number of Shares to be Sold
|
|
|
Beneficial Shares
After the Offering
(1)
|
|
|
Percentage of Common
Stock Owned After Offering
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silver
Rock II, Ltd.
(2)
|
|
|
560,000
|
|
|
|
560,000
|
|
|
|
0
|
|
|
|
*
|
|
Chestnut
Ridge Partners, LP
(3)
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
0
|
|
|
|
*
|
|
Lumen
Capital Limited Partnership
(4)
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
0
|
|
|
|
*
|
|
Taylor
Int’l Fund, Ltd.
(5)
|
|
|
630,000
|
|
|
|
630,000
|
|
|
|
0
|
|
|
|
*
|
|
Tangiers
Investors LP
(6)
|
|
|
32,200
|
|
|
|
32,200
|
|
|
|
0
|
|
|
|
*
|
|
Matthew
M. Haden
(7)
|
|
|
87,500
|
|
|
|
87,500
|
|
|
|
0
|
|
|
|
*
|
|
Kassirer
Market Neutral LP
(8)
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
0
|
|
|
|
*
|
|
CNH
Diversified Opportunities Master Account, L.P.
(9)
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
0
|
|
|
|
*
|
|
Midsouth
Investor Fund LP
(10)
|
|
|
408,333
|
|
|
|
408,333
|
|
|
|
0
|
|
|
|
*
|
|
Lyman
O. Heidtke
(11)
|
|
|
116,667
|
|
|
|
116,667
|
|
|
|
0
|
|
|
|
*
|
|
Jayhawk
Private Equity Fund II, L.P.
(12)
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
0
|
|
|
|
*
|
|
Jeff
Tisherman
|
|
|
98,000
|
|
|
|
98,000
|
|
|
|
0
|
|
|
|
*
|
|
Maxim
Group LLC
(1 3 )
|
|
|
124,025
|
|
|
|
124,025
|
|
|
|
0
|
|
|
|
*
|
|
Total
|
|
|
3,596,725
|
|
|
|
3,596,725
|
|
|
|
0
|
|
|
|
*
|
|
* Less
than 1%
(1)
Assumes that all securities offered are sold.
(2)
Includes 160,000 shares of our common stock underlying warrants. Rima
Salam has sole voting and investment control over the securities held by Silver
Rock II, Ltd.
(3)
Kenneth Holz has sole voting and investment control over the securities held by
Chestnut Ridge Partners, LP.
(4)
Includes shares of Series B preferred stock which may be converted into 50,000
shares of our common stock and 20,000 shares of our common stock underlying
warrants. Allan Lichtenberg is the Managing Member of Lumen
Management LLC, which is the General Partner of Lumen Capital Limited
Partnership and has sole voting power and investment power over the securities
held by Lumen Capital Limited Partnership.
(5)
Includes 180,00 shares of our common stock underlying
warrants. Stephen Taylor is the Portfolio Manager of Taylor
International Fund, which is the investment manager for Taylor Int’l Fund, Ltd.
and has sole voting power and investment power over the securities held by
Taylor Int’l Fund, Ltd.
(6)
Includes 9,200 shares of our common stock underlying warrants. Edward
M. Liceaga is the Managing Member of Tangiers Capital LLC, which is the General
Partner of Tangiers Investors LP and has sole voting power and investment power
over the securities held by Tangiers Investors LP.
(7)
Includes 25,000 shares of our common stock underlying
warrants.
(8)
Includes shares of Series B preferred stock which may be converted into 50,000
shares of our common stock and 20,000 shares of our common stock underlying
warrants. Mark Kassirer is the Director and General Partner of
Kassirer Market Neutral LP and has sole voting power and investment power over
the securities held by Kassirer Market Neutral LP.
(9)
Includes shares of Series B preferred stock which may be converted into 500,000
shares of our common stock and 200,000 shares of our common stock underlying
warrants.
(10)
Includes shares of Series B preferred stock which may be converted into
291,66 7 shares of our common stock and 116,667
shares of our common stock underlying warrants. Lyman O. Heidtke is
the General Partner of Midsouth Investor Fund LP and has sole voting power and
investment power over the securities held by Midsouth Investor Fund
LP.
(11)
Includes shares of Series B preferred stock which may be converted into 83,333
shares of our common stock and 33,333 shares of our common stock underlying
warrants.
(12)
Includes 100,000 shares of our common stock underlying warrants. Kent
C. McCarthy is the managing member of Jayhawk Capital Management LLC, which is
the general partner of Jayhawk Private Equity Fund II, L.P. and has sole voting
power and investment power over the securities held by Jayhawk Private Equity
Fund II, L.P.
(1 3 ) Includes 124,025 shares of our common stock underlying
warrants.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table provides information as to shares of common stock beneficially
owned as of May 6 , 2010, by:
`
•
|
each
director;
|
•
|
each
named executive officer;
|
•
|
each
person known by us to beneficially own at least 5% of our common stock;
and
|
•
|
all
directors and executive officers as a
group.
|
Beneficial ownership is determined in
accordance with the rules of the SEC. Unless otherwise indicated below, to our
knowledge, the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned (subject to
community property laws where applicable). Unless otherwise
indicated, the address of each beneficial owner listed below is c/o Xinghe
Xingyong Carbon Co., Ltd., 787 Xicheng Wai, Chengguantown, Xinghe County, Inner
Mongolia, China.
|
|
Shares
of Common
Stock
Beneficially
Owned
|
|
|
Sincere
Investment (PTC), Ltd.
(1)
Donghai
Yu
Ting
Chen
Hongbo
Liu
Philip
Yizhao Zhang
John
Chen
All
officers and directors as a group (5 persons)
|
|
9,388,412
20,000
20,000
25,000
25,000
25,000
115,000
|
|
47.0%
*
*
*
*
*
*
|
* Less
than 1%
(1)
Lizhong Gao, our former President and Director, is the president and sole
stockholder of Sincere and has the sole power to vote and dispose of the shares
owned by Sincere. Mr. Gao is the brother-in-law of Mr. Jin, our
General Manager of China Operations, the Chief Executive Officer of Xingyong and
our former Chief Executive Officer. Sincere holds the shares as
trustee for Mr. Jin’s wife, Shulian Gao, and his sister in-law, Wenyi
Li.
DESCRIPTION OF CAPITAL STOCK
Our
authorized capitalization consists of 100,000,000 shares of common stock, par
value $0.001 per share, and 20,000,000 shares of preferred stock, par value
$0.001 per share.
Common
Stock
Holders
of our common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders. Holders of our common stock are
entitled to receive such dividends as our board of directors, in its discretion,
may declare from funds legally available. In the event of liquidation, each
outstanding share entitles its holder to participate ratably in the assets
remaining after payment of liabilities.
Our
directors are elected by a plurality vote. A single holder or group of holders
of more than 50% of the outstanding shares of common stock present and voting at
an annual stockholders meeting at which a quorum is present can elect all of our
directors. Our stockholders have no preemptive or other rights to subscribe for
or purchase additional shares of any class of stock or of any other securities.
All outstanding shares of common stock are, and those issuable upon conversion
of the preferred stock and exercise of the warrants will be, upon such
conversion or exercise, respectively, validly issued, fully paid, and
non-assessable.
The
transfer agent for our common stock is Empire Stock Transfer,
Inc. Their address is 1859 Whitney Mesa Drive, Henderson, Nevada
89014.
Preferred
Stock
Our board
of directors is authorized to issue up to 20,000,000 shares of preferred stock,
which may be issued in series from time to time in one or more series with such
designations, rights, preferences and limitations as our board of directors may
declare by resolution.
The
rights, preferences and limitations of each series of preferred stock may differ
with respect to such matters as may be determined by our board of directors,
including, without limitation, the rate of dividends, method and nature of
payment of dividends, terms of redemption, amounts payable on liquidation,
sinking fund provisions, conversion rights and voting rights. Additional shares
of preferred stock may be issued and may provide dividend and liquidation
preferences over common stockholders. Unless otherwise required by law, the
board of directors has the authority to issue shares of preferred stock without
stockholder approval. The issuance of preferred stock may have the effect of
delaying or preventing a change in control without any further action by
stockholders.
Series
A Preferred Stock
Our board
of directors has authorized the creation of Series A Preferred Stock, consisting
of 10,000,000 authorized shares, of which 125,000 shares were outstanding as of
February 1, 2010. Each share of Series A Preferred Stock is convertible at the
holder’s option (or automatically upon a change of control) into one share of
common stock. While the Series A Preferred Stock is outstanding, unless we
obtain the approval of the holders of 75% of the outstanding shares of Series A
Preferred Stock, we may not pay cash dividends or other distributions of cash,
property or evidences of indebtedness, nor redeem any shares of common stock nor
authorize or create any class of stock ranking as to dividends or distribution
upon liquidation that are senior to or pari passu with the Series A Preferred
Stock. If we issue common stock at a price, or warrants or other convertible
securities at a conversion or exercise price, which is less than the conversion
price then in effect, the conversion price shall be adjusted on a formula basis.
No dividends are payable with respect to the Series A Preferred
Stock.
Upon any
voluntary or involuntary liquidation, dissolution or winding-up, the holders of
the Series A Preferred Stock are entitled to a preference of $1.00 per share
before any distributions or payments may be made with respect to the common
stock or any other class or series of capital stock which is junior to the
Series A Preferred Stock upon the occurrence of such event.
The
holders of the Series A Preferred Stock have no voting rights. However, so long
as any shares of Series A Preferred Stock are outstanding, we may not, unless we
have the affirmative approval of the holders of 75% of the outstanding shares of
Series A Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series A Preferred Stock or alter or
amend the certificate of designation, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon liquidation senior to or
otherwise pari passu with the Series A Preferred Stock, or any of preferred
stock possessing greater voting rights or the right to convert at a more
favorable price than the Series A Preferred Stock, (c) amend our articles of
incorporation or other charter documents in breach of any of the provisions
thereof, (d) increase the authorized number of shares of Series A Preferred
Stock, or (e) enter into any agreement with respect to the
foregoing.
Series
B Preferred Stock
Our board
of directors has authorized the creation of Series B Preferred Stock, consisting
of 3,000,000 authorized shares, of which 975,000 shares were outstanding as of
May 6 , 2010. Each share of Series B
Preferred is convertible at the holder’s option (or automatically a change of
control) into one share of common stock.
Cash
dividends of 6% per annum shall payable on the first day of April, July, October
and January, commencing on April 1, 2010 The dividends are payable in cash or in
kind at our option. Payment in kind shall be made by the issuance of shares of
common stock valued at the average of the closing prices of the common stock
during the ten days ending three trading days prior to the dividend payment
date.
Upon the
two year anniversary of the issuance of the shares, we must redeem any
outstanding Series B Preferred Stock at a redemption price of $1.20 per share
plus accrued but unpaid dividends, provided that the shares of common stock
underlying the Series B Preferred are eligible for resale pursuant to an
effective registration statement or pursuant to Rule 144 under the Securities
Act and provided that the redemption applies to all outstanding shares of Series
B Preferred. If the shares of common stock issuable upon conversion
of the Series B Preferred are not eligible to be sold pursuant to a registration
statement or pursuant to Rule 144, the holders thereof shall have the option of
retaining their preferred stock.
In the
event of any liquidation, dissolution or winding up our affairs, the proceeds
shall be paid as follows: first pay $1.20 plus accrued dividends on each share
of Series B Preferred. Thereafter, the Series B Preferred participates with the
common stock on an as-converted basis. A merger or consolidation into another
corporation or a sale, lease, transfer or other disposition of all or
substantially all of our assets in a transaction in which the proceeds of such
sale are distributed to shareholders will be treated as a liquidation
event. Upon the occurrence of such event, we must redeem the Series B
Preferred unless the holders of a majority of the Series B Preferred elect
otherwise.
So long
as any shares of Series B Preferred are outstanding, we may not, without the
written consent of the holders of at least a majority of the outstanding shares
of Series B Preferred, liquidate, dissolve or wind up our affairs, or effect any
change of control; amend, alter, or repeal any provision of the Certificate of
Designation relating to the Series B Preferred; purchase, redeem or pay any
dividend on any capital stock junior to the Series B Preferred; or create or
authorize the creation of any convertible debt security if our aggregate
convertible debt would exceed $5,000,000, unless such debt is incurred in
connection with an acquisition or an expansion of our facilities.
Warrants
We
presently have outstanding warrants to purchase 1,513,225 shares of common
stock, 225,000 of which have an exercise price of $2.00 per share, 100,000 of
which have an exercise price of $3.00, 1,064,200 of which have an exercise price
of $1.30 per share and 124,025 of which have an exercise price of
$1.32. The warrants issued to the selling stockholders expire five
years from the date of the initial closing with respect to this Offering. The
holders of the warrants have no cashless exercise rights. The warrants provide
for an adjustment in the exercise price and the number of shares issuable upon
such exercise in the event of a stock split, dividend, distribution, reverse
split, combination of shares or other recapitalization. We may redeem the
warrants for $0.01 per share of common stock issuable upon exercise of the
warrants if for 20 trading days during any 30 trading day period, the price of
the common stock exceeds $2.60 per share.
The 124,025 warrants issued to Maxim
Group LLC expire five years from the date of the initial closing. The warrants
provide for cashless exercise and an adjustment in the exercise price and the
number of shares issuable upon such exercise in the event of a stock split,
dividend, distribution, reverse split, combination of shares or other
recapitalization. Such warrants have customary anti-dilution protection for
stock splits and similar events.
Indemnification
of Directors and Officers
Our officers and directors are
indemnified as provided by the Nevada Revised Statutes, or the NRS, and our
articles of incorporation.
Under the NRS, director immunity from
liability to a company or its shareholders for monetary liabilities applies
automatically unless it is specifically limited by a company’s articles of
incorporation that is not the case with our articles of incorporation. Excepted
from that immunity are:
|
(1)
|
a
willful failure to deal fairly with the company or its shareholders in
connection with a matter in which the director has a material conflict of
interest;
|
|
(2)
|
a
violation of criminal law (unless the director had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to
believe that his or her conduct was
unlawful);
|
|
(3)
|
a
transaction from which the director derived an improper personal profit;
and
|
Our bylaws and articles of
incorporation provide that we may indemnify our directors, officers, employees,
and agents, to the fullest extent permitted by the NRS. We may
purchase and maintain liability insurance, or make other arrangements for such
obligations or otherwise, to the extent permitted by the NRS.
1
Needs
to be consistent with 2 prior mentions.
SHARES
ELIGIBLE FOR FUTURE SALE
As of April 28, 2010, we had 19,980,161
shares of common stock issued and outstanding.
Shares
Covered by this Prospectus
All of the 3,596,725 shares of common
stock being registered in this offering may be sold without restriction under
the Securities Act, so long as the registration statement of which this
prospectus is a part is, and remains, effective.
Rule
144
In general, pursuant to Rule 144 under
the Securities Act, a person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the three months
preceding a sale of shares of our common stock, and who has beneficially owned
restricted securities within the meaning of Rule 144 for at least six months
(including any period of consecutive ownership of preceding non-affiliated
holders) would be entitled to sell those shares, subject only to the
availability of current public information about us. A non-affiliated person who
has beneficially owned restricted securities within the meaning of Rule 144 for
at least one year would be entitled to sell those shares without regard to the
current public information requirement.
A person (or persons whose shares are
aggregated) who is deemed to be an affiliate of ours and who has beneficially
owned restricted securities within the meaning of Rule 144 for at least six
months would be entitled to sell within any three-month period a number of
shares of our common stock that does not exceed the greater of (i) one percent
of the then outstanding shares of our common stock or (ii) the average weekly
trading volume of our common stock during the four calendar weeks preceding such
sale. Such sales are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about
us.
The selling stockholders will not be
governed by the foregoing restrictions when selling their shares pursuant to
this prospectus. The selling stockholders may sell their pursuant to
Rule 144, if available, rather than under this prospectus.
PLAN OF DISTRIBUTION
Each selling stockholder and any
pledgees, assignees and successors-in-interest of any selling stockholder may,
from time to time, sell any or all of their shares of common stock covered
hereby on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or
negotiated prices. A selling stockholder may use any one or more of
the following methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker dealer
solicits purchasers;
|
·
|
block
trades in which the broker dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker dealer as principal and resale by the broker dealer for its
account;
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
·
|
privately
negotiated transactions;
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
·
|
in
transactions through broker dealers that agree with the selling
stockholders to sell a specified number of such shares at a stipulated
price per share;
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
·
|
a
combination of any such methods of sale;
or
|
·
|
any
other method permitted pursuant to applicable
law.
|
The selling stockholders may also sell
shares under Rule 144 under the Securities Act, if available, rather than under
this prospectus.
Broker dealers engaged by the selling
stockholders may arrange for other brokers dealers to participate in
sales. Broker dealers may receive commissions or discounts from the
selling stockholders (or, if any broker dealer acts as agent for the purchaser
of shares, from the purchaser) in amounts to be negotiated, but, except as set
forth in a supplement to this prospectus, in the case of an agency transaction,
not in excess of a customary brokerage commission in compliance with FINRA Rule
2440; and in the case of a principal transaction a markup or markdown in
compliance with FINRA IM-2440.
In connection with the sale of the
common stock or interests therein, the selling stockholders may enter into
hedging transactions with broker-dealers or other financial institutions, which
may in turn engage in short sales of the common stock in the course of hedging
the positions they assume. The selling stockholders may also sell
shares of the common stock short and deliver these securities to close out their
short positions, or loan or pledge the common stock to broker-dealers that in
turn may sell these securities. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions or create one or more derivative securities which require the
delivery to such broker-dealer or other financial institution of shares offered
by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The selling stockholders and any
broker-dealers or agents that are involved in selling the shares may be deemed
to be “underwriters” within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. Each Selling Stockholder has informed us that it does
not have any written or oral agreement or understanding, directly or indirectly,
with any person to distribute the common stock. In no event shall any
broker-dealer receive fees, commissions and markups which, in the aggregate,
would exceed eight percent (8%).
The selling stockholders will be
subject to the prospectus delivery requirements of the Securities Act or any
exemption therefrom, including Rule 172 thereunder. The selling
stockholders have advised us that there is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the selling
stockholders.
The resale shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale shares of
common stock covered hereby may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and regulations
under the Exchange Act, any person engaged in the distribution of the resale
shares may not simultaneously engage in market making activities with respect to
the common stock for the applicable restricted period, as defined in Regulation
M, prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of the common stock by the
selling stockholders or any other person. We will make copies of this
prospectus available to the selling stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale (including by compliance with Rule 172 under the Securities
Act).
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus has been passed upon for
us by Holland & Hart LLP, Nevada. Kramer Levin Naftalis &
Frankel LLP has advised the company with respect to United States federal
securities laws.
EXPERTS
The
consolidated financial statements for the year ended December 31, 2008 included
herein have been audited by AGCA, Inc., an independent registered public
accounting firm, and are included herein in reliance on such report, given the
authority of said firm as an expert in auditing and accounting. The
consolidated financial statements for the year end December 31, 2009 included
herein have been audited by
BDO China
Lixin Dahua CPA Co., Ltd.
, an independent registered public accounting
firm, and are included herein in reliance on such report, given the authority of
said firm as an expert in auditing and accounting.
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with the SEC a
post-effective amendment on Form S-1 under the Securities Act with respect to
the common stock offered in this offering. This prospectus does not contain all
of the information set forth in the registration statement. For further
information with respect to us and the common stock offered in this offering, we
refer you to the registration statement and to the attached exhibits. With
respect to each such document filed as an exhibit to the registration statement,
we refer you to the exhibit for a more complete description of the matters
involved.
You may inspect our registration
statement and the attached exhibits and schedules without charge at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain copies of all or any part of our registration
statement from the SEC upon payment of prescribed fees. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330.
Our SEC filings, including the
registration statement and the exhibits filed with the registration statement,
are also available from the SEC’s website at www.sec.gov, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC.
INDEX
TO FINANCIAL STATEMENTS
CONTENTS
|
|
PAGES
|
|
|
|
|
|
Reports
of Registered Public Accounting Firms
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Balance Sheets for the Years Ended December 31, 2008 and
2009
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2008 and
2009
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity For the Years ended December
31, 2008 and 2009
|
|
|
F-6
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2009
|
|
|
F-7
|
|
|
|
|
|
|
Notes
to Financial Statements
|
|
|
F-8
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
China
Carbon Graphite Group, Inc.
Chengguantown,
Inner Mongolia
China
We have
audited the accompanying consolidated balance sheet of China Carbon Graphite
Group, Inc. and subsidiaries as of December 31, 2009 and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Carbon Graphite Group,
Inc. and subsidiaries as of December 31, 2009 and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/
BDO China Li Xin Da Hua CPA Co.,Ltd.
Shenzhen,
China
April 15,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
China
Carbon Graphite Group, Inc.
Chengguantown,
Inner Mongolia
China
We have
audited the accompanying consolidated balance sheet of China Carbon Graphite
Group, Inc. and subsidiaries as of December 31, 2008 and the related
consolidated statements of income and comprehensive income, stockholders’
equity, and cash flows for the year then ended. China Carbon Graphite Group,
Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits. The Consolidated financial statements of China Carbon Graphite
Group, Inc. and subsidiaries for the year ended December 31, 2007 were audited
by other auditors whose report dated March 20, 2008 expressed an unqualified
opinion on those statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Carbon Graphite Group, Inc.
and subsidiaries as of December 31, 2008 and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 2, the consolidated financial statements were prepared in
accordance with FASB Interpretation 46(R) – Consolidation of Variable Interest
Entities – An Interpretation of ARB No. 51.
As
discussed in Notes 2 and 16, the consolidated financial statements were prepared
on the assumption that Talent International Investment Limited will be able to
pay up the investment money to Xinghe Yongle Carbon Co., Ltd. on or before
December 31, 2009 and that the Government will not take any action to cancel the
investment due to interim default. In case Talent International Investment
Limited fails to pay the amount in full on time or that the Government takes
action to cancel the investment due to interim default, the basis of
consolidation may not be appropriate.
/s/
AGCA, Inc.
Arcadia,
California
April 10,
2009
China
Carbon Graphite Group, Inc.and subsidiaries
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,709,127
|
|
|
$
|
51,799
|
|
Trade
accounts receivable
|
|
|
5,170,419
|
|
|
|
4,224,410
|
|
Notes
receivable
|
|
|
248,452
|
|
|
|
27,720
|
|
Advance
to related party
|
|
|
-
|
|
|
|
290,409
|
|
Advance
to suppliers, net
|
|
|
790,767
|
|
|
|
1,017,088
|
|
Inventories
|
|
|
16,430,754
|
|
|
|
15,889,549
|
|
Prepaid
expenses
|
|
|
50,000
|
|
|
|
-
|
|
Other
receivables
|
|
|
1,130,795
|
|
|
|
150,694
|
|
Total
current assets
|
|
|
26,530,314
|
|
|
|
21,651,669
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
23,913,965
|
|
|
|
21,003,607
|
|
Construction
in progress
|
|
|
2,045,176
|
|
|
|
2,029,777
|
|
Land
use rights, net
|
|
|
3,548,273
|
|
|
|
3,604,324
|
|
|
|
$
|
56,037,728
|
|
|
$
|
48,289,377
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,005,583
|
|
|
$
|
1,253,265
|
|
Advance
from customers
|
|
|
1,084,206
|
|
|
|
640,346
|
|
Taxes
payable
|
|
|
370,777
|
|
|
|
362,298
|
|
Short
term bank loans
|
|
|
8,573,901
|
|
|
|
4,887,514
|
|
Long
term bank loan - current portion
|
|
|
1,613,566
|
|
|
|
1,896,647
|
|
Other
payables
|
|
|
922,109
|
|
|
|
551,096
|
|
Warrant
liabilities
|
|
|
708,091
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
15,278,233
|
|
|
|
9,591,166
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable in long term
|
|
|
1,243,842
|
|
|
|
-
|
|
Long
term bank loan - non-current portion
|
|
|
1,613,566
|
|
|
|
3,209,711
|
|
Total
liabilities
|
|
|
18,135,641
|
|
|
|
12,800,877
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Convertible
series A preferred stock, par value $0.001 per share,
|
|
|
|
|
|
|
|
|
authorized
20,000,000 shares, issued and outstanding 125,000 and
|
|
|
|
|
|
|
|
|
1,200,499
shares at December 31, 2009 and 2008, respectively
|
|
|
125
|
|
|
|
1,200
|
|
Convertible
series B preferred stock, par value $0.001 per share,
|
|
|
|
|
|
|
|
|
authorized
3,000,000 shares, issued and outstanding 2,160,500 shares
|
|
|
|
|
|
|
|
|
at
December 31, 2009 and none at 2008, respectively
|
|
|
2,161
|
|
|
|
-
|
|
Common
stock, par value $0.001 per share, authorized 100,000,000
|
|
|
|
|
|
|
|
|
shares,
issued 18,121,661 and 12,218,412 shares at
|
|
|
|
|
|
|
|
|
December
31, 2009 and 2008, respectively
|
|
|
18,122
|
|
|
|
12,218
|
|
Additional
paid-in capital
|
|
|
13,298,332
|
|
|
|
8,690,426
|
|
Accumulated
other comprehensive income
|
|
|
5,037,062
|
|
|
|
4,991,113
|
|
Retained
earnings
|
|
|
19,546,285
|
|
|
|
21,793,543
|
|
Total
stockholders' equity
|
|
|
37,902,087
|
|
|
|
35,488,500
|
|
Total
liabilities and stockholders' equity
|
|
$
|
56,037,728
|
|
|
$
|
48,289,377
|
|
The
accompanying footnotes are an integral part of these financial
statements
China
Carbon Graphite Group, Inc and subsidiaries
|
|
Consolidated
Statements of Income and Comprehensive Income
|
|
For
the Years Ended December 31, 2009 and 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
15,369,978
|
|
|
$
|
27,303,385
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
13,192,496
|
|
|
|
20,605,710
|
|
Gross
Profit
|
|
|
2,177,482
|
|
|
|
6,697,675
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
365,865
|
|
|
|
504,884
|
|
General
and administrative
|
|
|
2,594,713
|
|
|
|
1,951,642
|
|
Depreciation
and amortization
|
|
|
75,352
|
|
|
|
68,422
|
|
|
|
|
3,035,930
|
|
|
|
2,524,948
|
|
Operating
(Loss) Income Before Other Income (Expense)
|
|
|
|
|
|
|
|
|
and
Income Tax Expense
|
|
|
(858,448
|
)
|
|
|
4,172,727
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
644,654
|
|
|
|
401,860
|
|
Other
expenses
|
|
|
(117,341
|
)
|
|
|
(11,491
|
)
|
Interest
expense
|
|
|
(833,854
|
)
|
|
|
(580,808
|
)
|
Change
in fair value of warrants
|
|
|
(309,287
|
)
|
|
|
-
|
|
|
|
|
(615,828
|
)
|
|
|
(190,439
|
)
|
|
|
|
|
|
|
|
|
|
(Loss)
Income Before Income Tax Expense
|
|
|
(1,474,276
|
)
|
|
|
3,982,288
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,474,276
|
)
|
|
$
|
3,982,288
|
|
|
|
|
|
|
|
|
|
|
Deemed
preferred stock dividend
|
|
|
(545,474
|
)
|
|
|
(854,300
|
)
|
|
|
|
|
|
|
|
|
|
Relative
fair value of detachable warrants issued
|
|
|
(227,508
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
(2,247,258
|
)
|
|
$
|
3,127,988
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
45,949
|
|
|
|
2,042,869
|
|
Total
Comprehensive Income
|
|
$
|
(1,428,327
|
)
|
|
$
|
6,025,157
|
|
|
|
|
|
|
|
|
|
|
Share
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
(0.16
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
(0.15
|
)
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding,
|
|
|
|
|
|
|
|
|
basic
|
|
|
14,426,518
|
|
|
|
12,591,363
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding,
|
|
|
|
|
|
|
|
|
diluted
|
|
|
14,671,180
|
|
|
|
14,623,187
|
|
The
accompanying footnotes are an integral part of these financial
statements.
China
Carbon Graphite Group, Inc and subsidiaries
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
|
For
the Years ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Convertible series
A preferred Stock
|
|
|
Convertible
series B
preferred
Stock
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
Stock
|
|
|
Stockholders'
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
Balance
at December 31, 2007
|
|
|
13,218,412
|
|
|
$
|
13,218
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
6,637,326
|
|
|
$
|
18,814,255
|
|
|
$
|
2,948,244
|
|
|
|
1,000,000
|
|
|
$
|
(149,700
|
)
|
|
$
|
28,263,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,042,869
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,042,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,982,288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,982,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of common stock
|
|
|
(1,000,000
|
)
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(148,700
|
)
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
|
|
149,700
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,200,499
|
|
|
|
1,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,198,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
854,300
|
|
|
|
(854,300
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
12,218,412
|
|
|
$
|
12,218
|
|
|
|
1,200,499
|
|
|
$
|
1,200
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
8,690,426
|
|
|
$
|
21,793,543
|
|
|
$
|
4,991,113
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
35,488,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change of accounting principle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(398,804
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(398,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,949
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,474,276
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,474,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series B preferred stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,160,500
|
|
|
|
2,161
|
|
|
|
2,261,179
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,263,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for consulting service
|
|
|
1,675,000
|
|
|
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
839,242
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
840,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for warrants conversion
|
|
|
887,500
|
|
|
|
888
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(888
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
1,070,000
|
|
|
|
1,070
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
993,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
994,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation issued to directors
|
|
|
115,000
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,885
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock placed in escrow
|
|
|
1,080,250
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,080
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of series A preferred stock to common stock
|
|
|
1,075,499
|
|
|
|
1,075
|
|
|
|
(1,075,499
|
)
|
|
|
(1,075
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detachable
warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227,508
|
|
|
|
(227,508
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
545,474
|
|
|
|
(545,474
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
18,121,661
|
|
|
$
|
18,122
|
|
|
|
125,000
|
|
|
$
|
125
|
|
|
|
2,160,500
|
|
|
$
|
2,161
|
|
|
$
|
13,298,332
|
|
|
$
|
19,546,285
|
|
|
$
|
5,037,062
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
37,902,087
|
|
The
accompanying footnotes are an integral part of these financial
statements
China
Carbon Graphite Group, Inc and subsidiaries
|
|
Consolidated
Statements of Cash Flows
|
|
For
the Years Ended December 31, 2009 and 2008
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
Income (loss)
|
|
$
|
(1,474,276
|
)
|
|
$
|
3,982,288
|
|
Adjustments
to reconcile net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,814,034
|
|
|
|
1,254,462
|
|
Stock
compensation
|
|
|
982,917
|
|
|
|
-
|
|
Change
in fair value of warrants
|
|
|
309,287
|
|
|
|
-
|
|
Change
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,121,229
|
)
|
|
|
955,440
|
|
Notes
receivable
|
|
|
(219,819
|
)
|
|
|
228,438
|
|
Other
receivables
|
|
|
(975,894
|
)
|
|
|
657,349
|
|
Advance
to suppliers
|
|
|
231,039
|
|
|
|
(332,468
|
)
|
Inventory
|
|
|
(453,390
|
)
|
|
|
(276,827
|
)
|
Accounts
payable and accrued liabilities
|
|
|
2,035,588
|
|
|
|
303,570
|
|
Advance
from customers
|
|
|
438,859
|
|
|
|
(1,961,068
|
)
|
Taxes
payable
|
|
|
6,490
|
|
|
|
112,705
|
|
Prepaid
expenses
|
|
|
(50,000
|
)
|
|
|
-
|
|
Other
payables
|
|
|
366,750
|
|
|
|
518,341
|
|
Net
cash provided by operating activities
|
|
|
1,890,356
|
|
|
|
5,442,230
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(4,525,364
|
)
|
|
|
(1,250,458
|
)
|
Acquisition
of land use rights
|
|
|
-
|
|
|
|
(631,232
|
)
|
Construction
in progress
|
|
|
(4,367
|
)
|
|
|
(1,998,276
|
)
|
Net
cash used in investing activities
|
|
|
(4,529,731
|
)
|
|
|
(3,879,966
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuing common stock
|
|
|
994,460
|
|
|
|
-
|
|
Proceeds
from issuing series B preferred stock
|
|
|
2,263,340
|
|
|
|
-
|
|
Proceeds
from bank loans
|
|
|
5,116,630
|
|
|
|
9,838,773
|
|
Repayment
of bank loans
|
|
|
(3,369,779
|
)
|
|
|
(6,319,796
|
)
|
Advance
to related parties
|
|
|
290,975
|
|
|
|
(285,902
|
)
|
Repayment
of advances from related parties
|
|
|
-
|
|
|
|
(4,773,270
|
)
|
Convertible
notes
|
|
|
-
|
|
|
|
800,000
|
|
Repayment
for reverse acquisition
|
|
|
-
|
|
|
|
(800,000
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
5,295,626
|
|
|
|
(1,540,195
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuation
|
|
|
1,077
|
|
|
|
25,233
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
2,657,328
|
|
|
|
47,302
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
51,799
|
|
|
|
4,497
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
2,709,127
|
|
|
$
|
51,799
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
(833,854
|
)
|
|
$
|
580,808
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating activities:
|
|
|
|
|
|
|
|
|
Stock
compensation
|
|
$
|
982,987
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
Deemed
preferred dividend reflected in paid-in capital
|
|
$
|
772,982
|
|
|
$
|
854,300
|
|
Reclassfication
of warrant liability from equity
|
|
$
|
708,091
|
|
|
$
|
-
|
|
The
accompanying footnotes are an integral part of these financial
statements
|
|
China
Carbon Graphite Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
For
the years ended December 31, 2009 and 2008
1.
|
Organization
and Business
|
China
Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation,
incorporated on February 13, 2003 under the name Achievers Magazine Inc. In
connection with the reverse acquisition transaction described below, the
Company’s corporate name was changed to China Carbon Graphite Group, Inc. on
January 30, 2008.
On
December 17, 2007, the Company completed a share exchange pursuant to a share
exchange agreement, dated as of December 14, 2007, with Sincere Investment
(PTC), Ltd. (“Sincere”), a British Virgin Islands corporation, which is the sole
stockholder of Talent International Investment Limited (“Talent”), a British
Virgin Islands corporation, which is the sole stockholder of Xinghe Yongle
Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the People’s
Republic of China (the “PRC”). Pursuant to the share exchange agreement, the
Company, then known as Achievers Magazine, Inc., issued 9,388,172 shares of
common stock to Sincere in exchange for all of the outstanding common stock of
Talent, and Talent became the Company’s wholly-owned subsidiary. From and after
December 17, 2007, the Company’s sole business became the business of Talent,
its subsidiaries and its affiliated variable interest entities.
Talent
owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise
under the laws of the PRC. Yongle is a party to a series of contractual
arrangements with Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”), a corporation
organized under the laws of the PRC. Xingyong’s sole stockholder was, at the
time of the transaction, the Company’s chief executive officer. These agreements
give the Company the ability to operate and manage the business of Xingyong and
to derive the profit (or sustain the loss) from Xingyong’s business. As a
result, the operations of Xingyong are consolidated with those of the Company
for financial reporting purposes. The relationship among the above companies as
follows:
The
Company manufactures graphite electrodes, fine grain graphite, high purity
graphite and other carbon derived products.
Stock
distribution
On
January 22, 2008, the Company effected a 1.6-for-one stock distribution whereby
each share of common stock became converted into 1.6 shares of common stock. All
references to share and per share information in these financial statements
reflect this stock distribution.
2.
|
Basis
of Preparation of Financial
Statements
|
The
Company maintains its books and accounting records in Renminbi (“RMB”), and its
reporting currency is United States dollars.
The
financial statements have been prepared in order to present the financial
position and results of operations of the Company, its subsidiaries and
Xingyong, which is an affiliated company whose financial condition is
consolidated with the Company pursuant to FIN 46R, in accordance with accounting
principles generally accepted in the United States of America (“US
GAAP”).
Yongle
and Xingyong are under common control. At the time of the acquisition, Mr.
Denyong Jin was the chief executive officer and principal stockholder of
Xingong. Sincere Investment (PLC) Ltd., a British Virgin Islands company, as
trustee, is the Company’s principal stockholder. Lizhong Gao is
president and sole stockholder of Sincere. The beneficiaries of the trust are
Shulian Gao, who is Mr. Jin’s wife, and Wenyu Li, who is Mr. Jin’s
sister-in-law. Lizhong Gao is Mr. Jin’s brother-in-law.
Under
Accounting Standards Codification (“ASC”) 805, common control exists where
immediate family members hold more than 50% of the voting ownership interest in
each of the entities. Under Item 404(a) of Regulation S-K, an
immediate family member of a person includes that person’s “child, stepchild,
parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law.”
Since
more than 50% of Xingyong’s equity is owned by Mr. Jin and more than 50% of the
Company’s equity is owned by a company that is owned by Mr. Jin’s brother-in-law
and in which Mr. Jin’s wife and sister-in-law are the beneficiaries, the
companies are under common control and there is no revaluation of assets. The
following table reflects the relationship.
Denyong
Jin and members of his immediate family
|
|
|
|
Control
of Xingyong through majority stock ownership
|
|
Control
of the Company and Yongle through majority stock ownership of the Company,
with the Company being the 100% beneficial owner of Yongle
|
The
Company’s consolidated financial statements include the financial statements of
its wholly-owned subsidiaries, Talent and Yongle, as well as Xingyong, which is
a variable interest entity whose financial statements are consolidated with
those of the Company pursuant to ASC 810. All significant intercompany accounts
and transactions have been eliminated in the combination.
ASC 810
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entity’s
residual returns. Variable interest entities are those entities in which the
Company, through contractual arrangements, bears the risks of, and enjoys the
rewards normally associated with ownership of the entities, and therefore the
Company is the primary beneficiary of these entities.
Yongle is
a party to a series of contractual arrangements with Xingyong. These agreements
include a management agreement pursuant to which
80% to 100% of
Xingyong’s net income after deduction of necessary expenses, if any, is paid to
Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in
connection with its business. For the years ended December 31, 2009 and 2008,
Xingyong paid 100% of net income to Yongle. In addition, Yongle manages and
controls all of the funds of Xingyong. Yongle also has the right to purchase
Xingyong’s equipment and patents and lease its manufacturing plants, land and
remaining equipment. This agreement is designed so that Yongle can conduct its
business in China. Pursuant to two other agreements, the sole stockholder of
Xingyong, who was, at the time of the transaction, the Company’s chief executive
officer, has pledged all of his equity in Xingyong as security for performance
of Xingyong’s obligations to Yongle. As a result, Xingyong is considered a
variable interest entity.
Yongle’s
business license was issued on September 13, 2007. According to PRC rules and
regulations, Talent was required to pay 20% of its capital investment in Yongle,
or $800,000, within three months, which would have been due on December 12,
2007, and the remaining 80%, or $3,200,000, within two years from the date of
issuance of business license, which would have been September 12, 2009. On
May 21, 2009, the Company's board of directors approved the reduction of
Talent’s investment in Yongle from $4,000,000 to $100,000 and the reduction of
Yongle's registered capital from $4,000,000 to $100,000. The Company believes
that these actions effectively eliminated possible fines or penalties by the PRC
business bureau that could result from the Company’s failure to pay the
registered capital when required. All governmental approval to the
reduction in capital was obtained and the Talent paid the $100,000 investment to
Yongle in full in August 2009.
3.
Summary of Significant Accounting Policies
Use of estimates
- The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affected the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of net sales and
expenses during the reported periods.
Significant
estimates included values and lives assigned to acquired property, equipment and
intangible assets, reserves for customer returns and allowances, uncollectible
accounts receivable, slow moving, obsolete and/or damaged inventory and stock
warrant valuation. Actual results may differ from these estimates.
Cash and cash equivalents -
The Company considers all highly liquid debt instruments purchased with
maturity period of three months or less to be cash equivalents. The carrying
amounts reported in the accompanying balance sheet for cash and cash equivalents
approximate their fair value. Substantially all of the Company’s cash is held in
bank accounts in the PRC and is not protected by FDIC insurance or any other
similar insurance.
Inventory -
Inventory is
stated at the lower of cost or market. Cost is determined using the weighted
average method. Market value represents the estimated selling price in the
ordinary course of business less the estimated costs necessary to complete the
sale.
The cost
of inventories comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventories to their present location and
condition. The costs of conversion of inventories include fixed and variable
production overhead, taking into account the stage of completion.
Accounts receivable -
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred.
Property and equipment
-
Property and equipment is stated at the historical cost, less accumulated
depreciation. Land use rights are being amortized to expense on a straight line
basis over the life of the rights. Depreciation on property, plant and equipment
is provided using the straight-line method over the estimated useful lives of
the assets for both financial and income tax reporting purposes as
follows:
Expenditures
for renewals and betterments were capitalized while repairs and maintenance
costs are normally charged to the statement of operations in the year in which
they are incurred. In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic benefits expected
to be obtained from the use of the asset, the expenditure is capitalized as an
additional cost of the asset.
Upon sale
or disposal of an asset, the historical cost and related accumulated
depreciation or amortization of such asset were removed from their respective
accounts and any gain or loss is recorded in the Statements of
Income.
The
Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
is recognized equal to an amount by which the carrying value exceeds the fair
value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner
in which the property is used, and the effects of obsolescence, demand,
competition, and other economic factors. Based on this assessment there was no
impairment recorded during the years ended at December 31, 2009 and
2008.
Construction in progress
-
Construction in progress represents the costs incurred in connection with the
construction of buildings or additions to the Company’s plant facilities. No
depreciation is provided for construction in progress until such time as the
assets are completed and placed into service.
Land use rights
- There is no
private ownership of land in the PRC. The Company has acquired land use rights
to a total of 2,356,209 square feet, on which a 290,626 square feet facility is
located. The land use rights have terms of 50 years, with the land use right
relating to 1,207,388 square feet expiring in 2050 and the land use right with
respect to 1,148,821 square feet expiring in 2057. The cost of the land use
rights is amortized over the 50-year term of the land use right. The Company
evaluates the carrying value of intangible assets during the fourth quarter of
each year and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the intangible asset
below its carrying amount. There were no impairments recorded during the years
ended December 31, 2009 or 2008.
Income recognition
- Revenue
is recognized when the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) the service has been rendered; (3) the selling price is
fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied when
the goods are shipped pursuant to a purchase order.
Interest
income is recognized when earned.
Advertising
- The Company
expenses all advertising costs as incurred. There was no advertising expense for
the years ended December 31, 2009 and 2008.
Shipping and handling costs
-
The Company follows ASC 605-45, “Handling Costs, Shipping Costs”. The
Company does not charge its customers for shipping and handling. The Company
classifies shipping and handling costs as part of the operating expenses. For
the year ended December 31, 2009 and 2008, shipping and handling costs were
$349,526 and $415,467.
Segment reporting
- ASC 280,
“Segment Reporting” requires use of the “management approach” model for segment
reporting. Under this model, segment reporting is consistent with the manner
that the Company’s management organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure, or any
other manner in which management disaggregates a company.
The
Company only sells carbon graphite products and sells only to Chinese
distributors and end users and is in only one business segment.
Taxation -
Taxation on profits
earned in the PRC has been calculated on the estimated assessable profits for
the year at the rates of taxation prevailing in the PRC where the Company
operates after taking into effect the benefits from any special tax credits or
“tax holidays” allowed in the county of operations.
The
Company does not accrue United States income tax since it has no significant
operating income in the United States. Its operating subsidiaries are organized
and located in the PRC and do not conduct any business in the United
States.
In 2006,
the Financial Accounting Standards Board (FASB) issued ASC 740-10 “Accounting
for Uncertainty in Income Taxes” 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 ASC 740-10 effective January 1,
2007.
The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the state.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current government officials.
Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of December 31, 2009 is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
December 31, 2008, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
Enterprise income tax
- On
March 16, 2007, the PRC’s parliament, the National People’s Congress, adopted
the Enterprise Income Tax Law, which took effect on January 1, 2008. The new
income tax law sets unified income tax rate for domestic and foreign companies
at 25% except a 15% corporation income tax rate for qualified high technology
and science enterprises. In accordance with this new income tax law, low
preferential tax rate in accordance with both the tax laws and administrative
regulations prior to the promulgation of this Law shall gradually transit to the
new tax rate within five years after the implementation of this
law.
The
Company has been recognized as a high technology and science company by the
Ministry of Science and Technology of the PRC. Therefore, Xing He District Local
Tax Authority in the Nei Mongol province granted tax holiday from 100% of
enterprises income tax for 10 years from 2008 through 2018. Afterwards, based on
the present tax law and the Company’s status as a high technology and science
company, the Company will be subject to a corporation income tax rate of 15%
effective in 2019.
The
enterprise income tax is calculated on the basis of the statutory profit as
defined in the PRC tax laws. This statutory profit computed differently from the
Company’s net income under U.S. GAAP.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets, including tax loss and credit carry forwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and
non-current based on their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
Contingent liabilities and contingent
assets -
A contingent liability is a possible obligation that arises from
past events and whose existence will only be confirmed by the occurrence or
non-occurrence of one or more uncertain future events not wholly within the
control of the Company. It can also be a present obligation arising from past
events that is not recognized because it is not probable that the Company will
incur a liability or obligations as a result. A contingent liability, which
might occur but is not probable, is not recorded but is disclosed in the notes
to the financial statements. The Company will recognize a liability or
obligation when it is probable that the Company will incur it.
A
contingent asset is an asset, which could possibly arise from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of
one or more uncertain events not wholly within the control of the Company.
Contingent assets are not recorded but are disclosed in the notes to the
financial statements when it is likely that the Company will recognize an
economic benefit. When the benefit is virtually certain, the asset is
recognized.
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 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.
|
Effective
January 1, 2009, warrants to purchase 6,000,000 shares of the Company’s
common stock previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the strike price of
the warrants is denominated in the U.S. dollar, a currency other than the
Company’s functional currency, the Chinese Renminbi. As a
result, the warrants are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised
or expired.
On
January 1, 2009, the Company reclassified $685,200 from additional paid-in
capital, as a cumulative effect adjustment, $685,200 from beginning retained
earnings and $685,200 to warrant liabilities to recognize the fair value of such
warrants.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to a liability, as if these warrants were treated as a
derivative liability since their issuance in December 2007 (“2007 Warrants”). On
January 1, 2009, the Company reclassified $685,200 from additional paid-in
capital and $685,200 to warrant liabilities to recognize the fair value of such
warrants. In July 2009, warrants to purchase 5,875,000 shares of the Company’s
common stock were exercised through cashless conversion. The fair value of the
exercised warrants amounted to $840,173 at July 29, 2009. The remaining 125,000
warrants had a fair value of $10,913 as of December 31,
2009. Therefore, the Company recognized a total amount of
$165,886 of loss from the change in fair value of these warrants for the year
ended December 31, 2009.
On
October 15, 2009, the Company issued warrants (“2009 Warrants”) to purchase
100,000 common stock at $2 and 200,000 common stock at $3 pursuant to a
consulting agreement. The fair value of the warrants at the issuance date and
December 31, 2009 was $50,840 and $22,190, respectively. The Company recognized
$28,650 of income from change in fair value of these warrants for the year ended
December 31, 2009.
On
December 29, 2009, the Company sold 2,160,500 shares of its Series B preferred
stock with Warrants to purchase up to an aggregate of 1,064,200 shares of Common
Stock at an exercise price of $1.30 per Warrant, which are exercisable within
five years of the closing date; (the “2009 Series B Warrants”). These
warrants were treated as a derivative liability because the strike price of the
warrants is denominated in the U.S. dollar, a currency other than the Company’s
functional currency, the Chinese Renminbi. As a result, the
warrants are not considered indexed to the Company’s own stock, and as such, all
future changes in the fair value of these warrants will be recognized currently
in earnings until such time as the warrants are exercised or expired. The fair
value of the warrants at December 22, 2009 ((“issuance date”) amounted to
$342,997. The fair value of the warrants at December 31, 2009 was $520,674. As a
result, the Company recognized $177,677 of loss from the change in fair value of
these warrants for the year ended December 31, 2009.
Warrants
referred to in the preceding paragraphs do not trade in an active securities
market, and as such, the Company estimates the fair value of these warrants
using the Black-Scholes option pricing model using the following
assumptions:
2007
Warrants
|
|
Exercise
Date
|
|
|
January
1,
2009
|
|
|
|
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
3.35
|
|
|
|
4
|
|
Risk-free
interest rate
|
|
|
2.6
|
%
|
|
|
1.7
|
%
|
Expected
volatility
|
|
|
28
|
%
|
|
|
28
|
%
|
2007
Warrants
|
|
December
31,
2009
|
|
|
Issuance
Date
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
3
|
|
|
|
5
|
|
Risk-free
interest rate
|
|
|
0.06
|
%
|
|
|
3.5
|
%
|
Expected
volatility
|
|
|
19
|
%
|
|
|
100
|
%
|
2009
Warrants
|
|
December
31,
2009
|
|
|
Issuance
Date
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
4.75
|
|
|
|
5
|
|
Risk-free
interest rate
|
|
|
0.06
|
%
|
|
|
0.06
|
%
|
Expected
volatility
|
|
|
25
|
%
|
|
|
19
|
%
|
2009
Series B Warrants
|
|
December
31,
2009
|
|
|
Issuance
Date
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
5
|
|
|
|
5
|
|
Risk-free
interest rate
|
|
|
0.06
|
%
|
|
|
0.06
|
%
|
Expected
volatility
|
|
|
19
|
%
|
|
|
19
|
%
|
Expected
volatility is based on the annualized daily historical volatility over a period
of one year. The Company believes this method produces an estimate
that is representative of the Company’s expectations of future volatility over
the expected term of these warrants. The expected life is based on the remaining
term of the warrants. The risk-free interest rate is based on U.S. Treasury
securities according to the remaining term of the warrants.
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 as of December 31, 2009.
|
|
Carrying
Value at
December 31,
|
|
|
Fair
Value Measurement at
December
31, 2009
|
|
|
|
2009
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Warrant
liability
|
|
$
|
708,091
|
|
|
|
-
|
|
|
|
-
|
|
$
|
|
553,776
|
|
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.
Foreign currency translation
-
The reporting currency of the Company is the U.S. dollar. The functional
currency of the Company is the local currency, the Chinese Renminbi (“RMB”).
Results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange
rates. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. Translation adjustments for the years ended
December 31, 2009 and 2008 are $45,949 and $2,042,869, respectively. The
cumulative translation adjustment and effect of exchange rate changes on cash
for the years ended December 31, 2009 and 2008 were $1,077 and $29,740,
respectively. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
Asset and
liability accounts at December 31, 2009 and December 31, 2008 were translated at
6.8172 RMB to $1.00 USD and at 6.8542 RMB to $1.00 USD, respectively. Equity
accounts were stated at their historical rate. The average translation rates
applied to income statements for the year ended December 31, 2009 and 2008 were
6.84088 RMB and 6.96225 RMB to $1.00 USD, respectively. In accordance with ASC
230, "Statement of Cash Flows," cash flows from the Company's operations are
calculated based upon the local currencies using the average translation rate.
As a result, amounts related to assets and liabilities reported on the statement
of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet.
Earnings per share -
Basic
earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. Potentially dilutive shares
of common stock consist of the common stock issuable upon the conversion of
convertible debt, preferred stock and warrants. The Company uses if-converted
method to calculate the dilutive preferred stock and treasury stock method to
calculate the dilutive shares of warrants. For 2009, there were 425,000 shares
of common stock issuable upon exercise of anti-dilutive warrants.
Accumulated other comprehensive
income
- The Company follows ASC 220, “Comprehensive Income” to recognize
the elements of comprehensive income. Comprehensive income is comprised of net
income and all changes to the statements of stockholders' equity, except those
due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. For the Company, comprehensive income for the year ended
December 31, 2009 and 2008 included net income and foreign currency translation
adjustments.
Related parties
- Parties are
considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. Transactions with related parties are disclosed in the
financial statements.
Reclassification
- Certain
2008 amounts have been reclassified to conform to the current year’s financial
statements presentation. These reclassifications had no impact on previously
reported financial position, results of operations or cash flows.
Recent
accounting pronouncements
In May
2009, the FASB issued ASC 855, “Subsequent Events”, formerly known as SFAS No.
165. SFAS No. 165 is intended to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued or were available to be issued. SFAS
165 No. is effective for interim or annual financial periods ending after June
15, 2009. The Company adopted this statement for the financial statements since
the quarter ended June 30, 2009.
In June
2009, the FASB issued ASC 860, “Transfers and servicing”, formerly known as SFAS
No. 166, a revision to SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities”, and will require more
information about transfers of financial assets and where companies have
continuing exposure to the risks related to transferred financial assets. SFAS
166 is effective at the start of a company’s first fiscal year beginning after
November 15, 2009, or January 1, 2010 for companies reporting earnings on a
calendar-year basis. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, formerly known as SFAS No. 167,
a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, and will change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under SFAS No. 167, determining whether a
company is required to consolidate an entity will be based on, among other
things, an entity's purpose and design and a company's ability to direct the
activities of the entity that most significantly impact the entity's economic
performance. SFAS No. 167 is effective at the start of a company’s first fiscal
year beginning after November 15, 2009, or January 1, 2010 for companies
reporting earnings on a calendar-year basis. The adoption of SFAS No. 167 will
not have an effect on the Company’s financial statements
In June
2009, the FASB issued SFAS No. 168, "The Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) and the Hierarchy of Generally
Accepted Accounting Principles (GAAP) - a replacement of SFAS No. 162" (SFAS
168), which establishes the FASB ASC as the source of authoritative U.S. GAAP
recognized by the FASB to be applied by non-governmental entities. As a result
of the adoption of SFAS 168, the majority of references to historically issued
accounting pronouncements are now superseded by references to the FASB ASC, with
no financial impact.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial statements.
In
November 2009, the FASB issued an ASU regarding accounting for stock dividends,
including distributions to shareholders with components of stock and cash. This
ASU clarifies that the stock portion of a distribution to shareholders that
contains components of cash and stock and allows shareholders to select their
preferred form of the distribution (with a limit on the amount of cash that will
be distributed in total) should be considered a stock dividend and included in
EPS calculations as a share issuance. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial
statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers
of Financial Assets—an amendment of FASB Statement No. 140.
The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,
Amendments to FASB Interpretation
No. 46(R)
. The amendments in this Accounting Standards Update replace
the quantitative-based risks and rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity
has the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In January 2010, FASB
issued ASU No. 2010-01- Accounting for Distributions to Shareholders with
Components of Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on the Company’s consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
Under the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the PRC, which took effect on January 1, 2008,
domestic and foreign companies pay a unified corporate income tax of 25% except
a 15% corporation income tax rate for qualified high technology and science
enterprises.
The
Company has been granted a 100% tax holiday from enterprises income tax from the
Xing He District Local Tax Authority for the ten years 2008 through 2018. This
tax holiday could be challenged by higher taxing authorities in the PRC, which
could result in taxes and penalties owed for those years. For the years ended
December 31, 2009 and 2008, without the consideration of adjustments
on taxable income, the enterprise income tax at the statutory rates would have
been approximately $59,554 and $ 597,343, respectively.
A
reconciliation of the provision for income taxes with amounts determined by the
PRC statutory income tax rate to income before income taxes is as
follows:
|
|
2009
|
|
|
2008
|
|
Computed
tax at the PRC statutory rate of 15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expenses per books
|
|
|
|
|
|
|
|
|
6.
|
Trade
Accounts Receivable – net
|
As of
December 31, 2009 and 2008, trade accounts receivable consisted of the
following:
For the
year ended December 31, 2009 and 2008, bad debt provision of $288,915 and
$693,020 was charged to expenses. In 2008, bad debt of $196,620 was written
off.
7.
|
Advance
to suppliers, net
|
As of
December 31, 2009 and 2008, advance to suppliers consisted of the
following:
For the
year ended December 31, 2008, bad debt provision on advance to suppliers was
charged to expenses for $166,921.
In 2009,
bad debt provision of $132,842 on advance to suppliers was written
off.
As
of December 31, 2009 and 2008, inventories consisted of the
following:
Raw
materials consist primarily of asphalt, petroleum coke, needle coke and other
materials used in production. Finished goods consist of graphite electrodes,
fine grain graphite and high purity graphite. The costs of finished goods
include direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production are also included in the cost of inventory.
9.
|
Property and
Equipmen
t,
net
|
As of
December 31, 2009 and 2008, property and equipment consist of the
following:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
years ended December 31, 2009 and 2008, depreciation expense amounted to $
1,780,052 and $1,186,040 was charged to cost of goods sold
.
As of
December 31, 2009 and 2008, land use rights consist of the
following:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
use rights is as collateral to certain short term loans as of December 31, 2009,
as disclosed in Notes#13.
For
the years ended December 31, 2009 and 2008, amortization expenses were $75,352
and $68,422, respectively.
Future
amortization of the land use rights is as follows:
11. Stockholders’
equity
(a)
|
Restated
Articles of Incorporation
|
On
January 22, 2008, the Company changed its authorized capital stock to
120,000,000 shares of capital stock, of which 20,000,000 shares are shares of
preferred stock, par value $0.001 per share, and 100,000,000 shares are shares
of common stock, par value $0.001 per share. The restated articles of
incorporation give the directors the authority to issue one or more series of
preferred stock and to designate the rights, preferences, privileges and
limitation of the holders of each set. The board of directors has designated the
rights, preferences, privileges and limitation of one series of preferred stock
-- the series A convertible preferred stock (“series A preferred
stock”).
On
December 17, 2007, the Company issued its 3% promissory note in the amount of
$1,200,000. Pursuant to the agreement pursuant to which the note was issued,
upon the filing of restated articles of incorporation which provided for the
creation of a series of preferred stock and the filing of a certificate of
designation which created the series A preferred stock, the note would
automatically be converted into 1,200,499 shares of series A preferred stock and
warrants to purchase 3,000,000 shares of common stock at $1.20 per share and
3,000,000 shares of common stock at $2.00 per share. On January 22, 2008, upon
the filing of restated articles of incorporation and a statement of designation
for the series A convertible preferred stock, and the outstanding convertible
note was converted into such series A preferred stock and warrants.
The
statement of designation for the series A preferred stock provides the
following:
|
|
Each
share of series A preferred stock is convertible into one share of common
stock, at a conversion price of $1.00, subject to
adjustment.
|
|
|
While
the series A preferred stock is outstanding, if the Company issues common
stock at a price or warrants or other convertible securities at a
conversion or exercise price which is less than the conversion price then
in effect, the conversion price shall be adjusted on a formula
basis.
|
|
|
While
the Series A Preferred Stock is outstanding, without the approval of the
holders of 75% of the outstanding shares of Series A Preferred Stock, the
Company may not pay cash dividends or other distributions of cash,
property or evidences of indebtedness, nor redeem any shares of Common
Stock.
|
|
|
No
dividends are payable with respect to the series A preferred
stock.
|
|
|
Upon
any voluntary or involuntary liquidation, dissolution or winding-up, the
holders of the series A preferred stock are entitled to a preference of
$1.00 per share before any distributions or payments may be made with
respect to the common stock or any other class or series of capital stock
which is junior to the series A preferred stock upon voluntary or
involuntary liquidation, dissolution or
winding-up.
|
|
|
The
holders of the series A preferred stock have no voting rights. However, so
long as any shares of series A preferred stock are outstanding, the
Company shall not, without the affirmative approval of the holders of 75%
of the outstanding shares of series A preferred stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to
the series A preferred stock or alter or amend the certificate of
designation, (b) authorize or create any class of stock ranking as to
dividends or distribution of assets upon liquidation senior to or
otherwise pari passu with the series A preferred stock, or any of
preferred stock possessing greater voting rights or the right to convert
at a more favorable price than the series A preferred stock, (c) amend our
articles of incorporation or other charter documents in breach of any of
the provisions thereof, (d) increase the authorized number of shares of
series A preferred stock, or (e) enter into any agreement with respect to
the foregoing
|
During
the year ended December 31, 2009, we issued 950,499 shares of common stock upon
conversion of 950,499 shares of series A preferred stock. At December
31, 2009, 250,000 shares of series A preferred stock were
outstanding.
On
December 31, 2009, the Company sold 250,000 shares of common stock at $1.20 per
share. The issuance of these securities was exempt from registration under
Regulation S of the Securities and Exchange Commission under the Securities
Act. The investor is not “U.S. persons” as that term is defined in
Rule 902(k) of Regulation S under the Act, and that such investor was acquiring
our common stock, for investment purposes for their own respective accounts and
not as nominees or agents, and not with a view to the resale or distribution
thereof.
On
December 22, 2009, the Company sold in a private placement a total of 2,160,500
shares of Series B Convertible Preferred Stock and five-year warrants to
purchase 864,000 shares of common stock at an exercise price of $1.30 per share,
for an aggregate purchase price of $2,592,600. The warrants
have terms of five years and expire December 22, 2014. The Company also paid the
private placement agent $259,260 and issued a five-year warrant expiring to
purchase 108,025 shares of common stock at an exercise price of $1.32 per
share.
Pursuant
to agreements with two newly-elected independent directors, the Company issued
25,000 shares of common stock to each of these directors on November 5,
2009. On November 5, 2009, the Company issued 20,000 shares to each
of our chief executive officer and our chief financial officer. The
issuance of these shares was exempt from registration pursuant to Section 4(2)
of the Securities Act and Regulation 506 of the SEC thereunder. The fair value
of $142,000 was recorded as stock compensation expense in 2009.
On
October 12, 2009, the Company issued an aggregate of 750,000 shares of common
stock to two investors pursuant to subscription agreements dated as of July 30,
2009. The Company sold 493,760 shares at $.75 per share and 256,240 shares at
$1.00 per share. The issuance of these securities was exempt from
registration under Regulation S of he Securities and Exchange Commission under
the Securities Act. The investors are not “U.S. persons” as that term
is defined in Rule 902(k) of Regulation S under the Act, and that such investor
was acquiring our common stock, for investment purposes for their own respective
accounts and not as nominees or agents, and not with a view to the resale or
distribution thereof.
On July
29, 2009, the Company issued 887,500 shares of common stock in connection with
the cancellation of warrants to purchase 3,000,000 shares of common stock at
$1.20 per share and 2,875,000 shares of common stock at $2.00 per
share. As a result, there remain outstanding warrants to purchase
125,000 shares at $2.00 per share. The warrants expire December 3, 2012 and
provide a cashless exercise feature which can only be exercised if the
underlying shares are not covered by an effective registration
statement.
We
estimated the fair value of the warrants that were canceled at $825,896 using
the Black-Scholes option valuation model. Variables used in the option-pricing
model include (i) expected terms of warrants life of 3.4 years (ii) the
weighted-average assumption of a risk free interest rate of 2.20% based on the
yield available on a U.S. Treasury note with a term equal to the estimated term
(iii) the expected volatility of 28% equals to the historical volatility of the
Company’s share price. The fair value of the common stock issued was $834,125.
Since the fair value of the warrants cancelled approximate the fair value of the
common stocks, no additional non-cash expense was recorded.
In March
2009, the Company sold 70,000 shares of common stock to one investor at a
purchase price of $1.00 per share, for a total of $70,000. The
Company paid $2,100 as a commission to a finder. The shares were issued pursuant
to Regulation S under the Securities Act.
Pursuant
to a consulting agreement dated February 9, 2009, the Company issued 750,000
shares of common stock. Pursuant to an agreement dated July 22, 2009,
the Company issued 375,000 shares of common stock. Pursuant to an advisory
agreement dated October 23, 2009, the Company issued 450,000 shares of common
stock. The issuance of these shares was exempt from registration
pursuant to Section 4(2) of the Securities Act and Regulation 506 of the SEC
thereunder. The fair value of $840,917 was recorded as expenses in
2009.
On
December 22, 2009, the Company sold in a private placement a total of 2,160,500
shares of Series B Convertible Preferred Stock and five-year warrants to
purchase 864,000 shares of common stock at an exercise price of $1.30 per share,
for an aggregate purchase price of $2,592,600. We also issued
200,000 warrants to Series A preferred stock holders to obtain their consent to
create the aforementioned Series B Convertible preferred stock. The warrants
have terms of five years and expire December 22, 2014. The Company also paid the
private placement agent $259,260 and issued a five-year warrant expiring to
purchase 108,025 shares of common stock at an exercise price of $1.32 per
share.
Pursuant
to a consulting agreement dated October 15, 2009, the Company issued to five
year warrants to purchase 100,000 shares of common stock at $2.00 per share and
100,000 shares of common stock at $3.00 per share. The issuance of
these shares was exempt from registration pursuant to Section 4(2) of the
Securities Act and Regulation 506 of the SEC thereunder.
The
following table summarizes warrant activity for the years ended December 31,
2008 and 2009:
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual
Terms
(Years)
|
|
|
|
Aggregate
Intrinsic
Value
|
Outstanding
at December 31, 2007
|
|
|
6,000,000
|
|
|
$
|
1.60
|
|
|
|
5
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
6,000,000
|
|
|
$
|
1.60
|
|
|
|
4
|
|
|
|
|
Granted
|
|
|
1,372,225
|
|
|
$
|
1.48
|
|
|
|
5
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Cancelled
with issuance of common stock
|
|
|
5,875,000
|
|
|
$
|
1.60
|
|
|
|
4
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
1,497,225
|
|
|
|
1.30
|
|
|
|
5
|
|
|
$
|
20,990
|
Exercisable
at December 31, 2009
|
|
|
1,172,225
|
|
|
$
|
1.30
|
|
|
|
5
|
|
|
$
|
566,464
|
(d)
|
Deemed
Preferred Stock Dividend
|
Upon
completion of the private placement on December 22, 2009, the Company issued (i)
2,160,500 shares of series B preferred stock, with each share of series b
preferred stock being convertible into one share of common stock (ii) warrants
to purchase 1,064,200 shares of common stock at $1.30 per share to investors and
warrants to purchase 108,025 shares of common stock at $1.32 per share to the
placement agent. At December 22, 2009, the fair value of the warrants used to
calculate the intrinsic value of the conversion option was estimated at $286,801
and was computed using the Black-Scholes option-pricing model include
(1) risk-free interest rate at the date of grant (0.06%), (2) expected
warrant life of 5 years, (3) expected volatility of 19%, and
(4) 0% expected dividend. The Company used the market price of
its common stock at December 22, 2009, $1.38 per share, computed fair value of
the series B preferred stock at December 22, 2009 was $2,981,490 and the
effective preferred stock conversion price to be $0.95 per share. The
allocated value of $227,508 of the warrants issued with the series B preferred
stock at December 22, 2009 was reported as a reduction to retained earning. The
resulting intrinsic value of the conversion feature was $545,474 reported as a
deemed dividend.
Upon
filing of the Company’s amended and restated articles of incorporation on
January 22, 2008, $1,200,000 of convertible notes were automatically converted
into (i) 1,200,499 shares of preferred stock, with each share of series A
preferred stock being convertible into one share of common stock and (ii)
warrants to purchase 3,000,000 shares of the common stock at $1.20 and 3,000,000
shares at $2.00 per share. At December 17, 2007, the fair value of the warrants
used to calculate the intrinsic value of the conversion option was estimated at
$3,831,900 and was computed using the Black-Scholes option-pricing model based
on the assumed issuance of the warrants on the date the notes were issued.
Variables used in the option-pricing model include (1) risk-free interest
rate at the date of grant (3.5%), (2) expected warrant life of
5 years, (3) expected volatility of 100%, and (4) 0% expected
dividend. The Company used the market price of its common stock at
December 17, 2007, $0.95 per share, and computed the effective preferred stock
conversion price to be $0.24 per share. The resulting intrinsic value of
the conversion feature was $854,300 reported as a deemed
dividend.
As
the series A preferred stock does not provide for redemption by the Company or
have a finite life, upon the conversion to preferred stock, a one-time preferred
stock deemed dividend of $854,300 was recognized immediately as a non-cash
charge. The deemed preferred stock dividend of $854,300 has been recorded as
additional paid-in capital and a reduction to retained earnings in
2008.
12.
|
Accounts
payable in long term
|
Accounts
payable in long term was $1,243,822 at December 31, 2009, of which $732,881.68
was payable to employees of Beijin Royal Yiyuan Inc. with interest rate of 20%
per annual. There was no accounts payable in long term at December 31,
2008.
13.
|
Short-term
bank loans
|
As of
December 31, 2009 and 2008, short term loans consisted of the
following:
|
|
2009
|
|
|
2008
|
|
Bank
loans dated July 17, 2008, due May 6, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
|
|
|
|
|
|
|
|
Bank
loans dated July 17, 2008, due May 25, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
|
|
|
|
|
|
|
|
Bank
loans dated July 17, 2008, due June 15, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
|
|
|
|
|
|
|
|
Bank
loans dated July 17, 2008, due July 1, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
|
|
|
|
|
|
|
|
Bank
loans dated July 17, 2008, due July 13, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
|
|
|
|
|
|
|
|
Bank
loans dated June 17, 2009, due June 15, 2010 with an interest rate of
8.541%, interest payable monthly, secured by property and equipment and
land use rights
|
|
|
|
|
|
|
|
|
Bank
loan dated June 16, 2009, due June 1, 2010 with an interest rate of
7.434%, interest payable quarterly, secured by equipment and land use
rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Long-term
bank loan
|
|
2009
|
|
|
2008
|
|
Bank
loans dated October 10, 2008, due October 9, 2011 with an interest rate of
6.75%, interest payable monthly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
January 13, 2010, follow on the private placement offering in December 2009, the
Company issued and sold a total of 320,000 shares of Series B Convertible
Preferred Stock and five-year warrants to purchase an aggregate of 128,000
shares of common stock at an exercise price of $1.30 per share, for an aggregate
purchase price of $384,000.
As of
April 15, 2009, 1,505,500 shares of Series B preferred stock issued in December
2009 and January 2010 were converted into common stock. Warrants to purchase
128,000 shares of common stock at $1.30 were exercised.
CHINA
CARBON GRAPHITE GROUP, INC.
3,596,725
Shares of Common Stock
PROSPECTUS
May 10,
2010
Until May
10, all dealers that buy, sell or trade shares of our common stock, whether or
not participating in this offering, may be required to deliver a
prospectus.
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The following table sets forth the
costs and expenses, other than underwriting discounts and commissions, payable
by us in connection with the sale of common stock being registered. All amounts,
other than the SEC registration fee, are estimates. We will pay all these
expenses.
|
|
Amount to
be
|
|
|
|
Paid
|
|
SEC
Registration Fee
|
|
$
|
360.07
|
|
Legal
Fees and Expenses
|
|
|
75,000.00
|
|
Accounting
Fees and Expenses
|
|
|
8,500.00
|
|
Total
|
|
$
|
83,860.07
|
]
|
Item
14. Indemnification of Directors and Officers
Our articles of incorporation provide
for the indemnification of our present and prior directors and officers or any
person who may have served at our request as a director or officer of another
corporation in which we own shares of capital stock or of which we are a
creditor, against expenses actually and necessarily incurred by them in
connection with the defense of any actions, suits or proceedings in which they,
or any of them, are made parties, or a party, by reason of being or having been
director(s) or officer(s) of us or of such other corporation, in the absence of
negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar as indemnification by us for
liabilities arising under the Exchange Act may be permitted to our directors,
officers and controlling persons pursuant to provisions of our articles of
incorporation and bylaws, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy and is, therefore,
unenforceable. In the event that a claim for indemnification by such director,
officer or controlling person of us in the successful defense of any action,
suit or proceeding is asserted by such director, officer or controlling person
in connection with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Exchange Act and will be
governed by the final adjudication of such issue.
At the present time, there is no
pending litigation or proceeding involving a director, officer, employee or
other agent of ours in which indemnification would be required or permitted. We
are not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
Item
15. Recent Sales of Unregistered Securities
On December 17, 2007, we completed a
share exchange agreement with Sincere. Pursuant to the share exchange
agreement, Sincere transferred to us all of the capital stock of Talent in
exchange for 9,388,172 shares of our common stock, which were issued to
Sincere. As a result, Talent became our wholly-owned subsidiary and
our business became the business of Sincere and its affiliated
companies.
On February 9, 2009, we entered into a
consulting agreement with Ventana Capital Partners, Inc., or
Ventana. Pursuant to the consulting agreement, we issued Ventana an
aggregate of 750,000 shares of our common stock as consideration for Ventana’s
and public relations services. The consulting agreement expired in
August 9, 2009. The issuance of the shares was exempt from
registration pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. Ventana represented to us that it is an accredited
investor.
In 2009,
we retired outstanding warrants to purchase an aggregate of 5,875,000 shares of
common stock through the issuance of 887,500 shares of common
stock. The issuance of these shares was exempt from registration
pursuant to Rule 144 promulgated under the Securities Act. The shares were
issued to persons who are not affiliates of ours upon cashless exercise of
warrants that were issued in December 2007.
On December 22, 2009, we sold in a
private placement to the selling stockholders a total of 2,160,500 shares of
Series B Convertible Preferred Stock and five-year warrants to purchase an
aggregate 864,000 shares of common stock at an exercise price of $1.30 per
share, for an aggregate purchase price of $2,592,600. The
warrants have terms of five years and expire December 22, 2014.
We engaged Maxim Group LLC as exclusive
placement agent for the private placement. As consideration for
Maxim’s services, we paid Maxim $259,260 and issued Maxim a five-year warrant to
purchase 124,025 shares of common stock at an exercise price of $1.32 per
share.
The warrants issued to the investors
are immediately exercisable and have a term of five years. We have
the right to redeem the warrants, on 20 trading days’ notice, for $0.01 per
share of common stock issuable upon exercise of the warrants if, for 20 trading
days during any 30 trading day period, the price of the common stock is greater
than $2.60 per share. To the extent that the warrants are not exercised by 5:30
PM, New York City time, on the date set for redemption, the holders of the
warrants will have no right under the warrant other than to receive the $0.01
redemption price on presentation of his or her warrant.
The warrants issued to Maxim are the
same as the warrants issued to the investors except that the Maxim warrants are
not exercisable until six months after issuance, may be exercised on a cashless
basis and are not subject to redemption, and the exercise price is
$1.32.
In connection with the private
placement and pursuant to the transaction agreements, we deposited into escrow
1,080,250 shares of common stock, which are to be held in escrow to be returned
to us or delivered to the investors, depending on whether we meet certain
financial performance targets for the years ending December 31, 2010 and
December 31, 2011. The performance target for 2010 is net income, as
defined therein, of at least $5,100,000. The performance target for 2011 is net
income of at least $10,000,000. If we complete an underwritten equity
financing with gross proceeds in excess of $15,000,000 prior to August 31, 2010,
the performance target for 2011 is net income of at least
$20,000,000. In determining net income, to the extent that any
excluded items are deducted in computing net income, there shall be added back
the amount of such excluded items. Excluded items means: (i) any
income tax, enterprise tax or similar tax in excess of 25% of income before
income taxes; and (ii) any items of expense or deduction arising directly or
indirectly from the private placement and the transaction contemplated by the
private placement.
In connection with the consent required
from the Series A holders for the issuance of the Series B Preferred Stock, we
issued to holders of the Series A Preferred Stock warrants to purchase an
aggregate of 200,000 shares at an exercise price of $1.30 per share. These
warrants bear the same terms and provisions as the warrants issued to the
investors in the private placement.
On January 13, 2010, we issued and
sold, pursuant to a second closing, a total of 320,000 shares of Series B
Convertible Preferred Stock and five-year warrants to purchase an aggregate of
128,000 shares of common stock at an exercise price of $1.30 per share, for an
aggregate purchase price of $384,000, bringing the total gross proceeds raised
in the private placement to $2,976,600 for which the Company issued an aggregate
of 2,480,500 shares of Series B Convertible Preferred Stock and warrants to
purchase an aggregate of 992,200 shares of common stock.
In connection with the second closing,
we deposited into escrow an additional 160,000 shares of common stock, making a
total of 1,240,250 shares of common stock that are to be held in escrow to be
returned to the Company or delivered to the investors in the first and second
closings of the private placement.
Maxim
Group LLC served as exclusive placement agent for the private
placement. At the second closing, the Company paid Maxim $38,400 and
issued Maxim a five-year warrant expiring to purchase 16,000 shares of common
stock at an exercise price of $1.32 per share, bringing total consideration to
Maxim in the private placement to $298,000 and warrants to purchase an aggregate
of 124,025 shares of common stock.
The issuance of the Series B Preferred
Stock and warrants to the investors in the private placement and the issuance of
the warrants to the holders of the Series A Preferred Stock was exempt from
registration under Section 4(2) of the Securities Act and Rule 506 of the SEC
thereunder. Each of the investors is an “accredited investor,” as
defined in Rule 501 of SEC under the Securities Act, and acquired the Company’s
common stock for investment purposes for its own accounts and not with a view to
the resale or distribution thereof. The certificates for the Series B
Preferred Stock and the warrants bear a restricted stock legend.
We
deposited into escrow 1,240,250 shares of common stock, which are to be held in
escrow to be returned to us or delivered to the investors, depending on whether
we meet certain financial performance targets for the years ending December 31,
2010 and December 31, 2011. The performance target for 2010 is net
income, as defined, of at least $5,100,000. The performance target for 2011 is
net income of at least $10,000,000. If we complete an underwritten
equity financing with gross proceeds in excess of $15,000,000 prior to August
31, 2010, the performance target for 2011 is net income of at least
$20,000,000. In determining net income, to the extent that any
excluded items are deducted in computing net income, there shall be added back
the amount of such excluded items. Excluded items means: (i) any
income tax, enterprise tax or similar tax in excess of 25% of income before
income taxes; and (ii) any items of expense or deduction arising directly or
indirectly from the private placement and the transaction contemplated by the
private placement.
On
December 31, 2009, we issued 250,000 shares of common stock to investors at
$1.20 per share. This transaction was exempt from registration
under Section 4(2) of the Securities Act and Rule 506 of the SEC
thereunder. The investor is an “accredited investor,” as defined in
Rule 501 of SEC under the Securities Act, and acquired the Company’s common
stock for investment purposes for its own accounts and not with a view to the
resale or distribution thereof.
On
January 20, 2009, we issued 450,000 shares of common stock to
consultants. This transaction was exempt from registration under
Section 4(2) of the Securities Act and Rule 506 of the SEC
thereunder. The investor is an “accredited investor,” as defined in
Rule 501 of SEC under the Securities Act, and acquired the Company’s common
stock for investment purposes for its own accounts and not with a view to the
resale or distribution thereof.
Item
16. Exhibits and Financial Statement Schedules
The
following exhibits are included as part of this registration
statement.
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Exchange
Agreement dated as of December 14, 2007, by and between the Company and
Sincere Investment (PTC), Ltd.*
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series A Convertible Preferred Stock, as
filed with the State of Nevada**
|
|
|
|
3.2
|
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series B Preferred Stock, as filed with the
State of Nevada******
|
|
|
|
3.3
|
|
Amended
and Restated Bylaws of the Company***
|
|
|
|
4.1
|
|
3%
Convertible Promissory Note payable to the order of XingGuang Investment
Corporation Limited*
|
|
|
|
4.2
|
|
Promissory
note payable to Anna Krimshtein PLC, as escrow agent*
|
|
|
|
4.3
|
|
Form
of Warrant issued to the investors******
|
|
|
|
4.4
|
|
Warrant
issued to Maxim Group LLC******
|
|
|
|
5.1
|
|
Opinion
of Holland & Hart LLP.++
|
|
|
|
10.1
|
|
Securities
purchase agreement dated December 14, 2007, between the Registrant and
XingGuang Investment Corporation Limited
*
|
10.2
|
|
Business
Operations Agreement dated December 7, 2007, between Xinghe Xingyong
Carbon Co., Ltd. and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
|
|
10.3
|
|
Exclusive
Technical and Consulting Services Agreement dated December 7, 2007,
between Xinghe Xingyong Carbon Co., Ltd. and Xinghe Yongle Carbon Co.,
Ltd. (English Translation)*
|
|
|
|
10.4
|
|
Option
Agreement dated December 7, 2007, between Xinghe Xingyong Carbon Co., Ltd.
and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
|
|
10.5
|
|
Equity
Pledge Agreement dated December 7, 2007, among Xinghe Xingyong Carbon Co.,
Ltd., Xinghe Yongle Carbon Co., Ltd. and Dengyong Jin (English
Translation)*
|
|
|
|
10.6
|
|
China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $1.20 per share)*
|
|
|
|
10.7
|
|
China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $2.00 per share)*
|
|
|
|
10.8
|
|
Consulting
Agreement, dated February 9, 2009, between the Registrant and Ventanta
Capital Partners****
|
|
|
|
10.9
|
|
Amendment
to Securities Purchase Agreement, dated April 8, 2009, between the
Registrant and XingGuang Investment Corporation,
Limited*****
|
|
|
|
10.10
|
|
Form
of Subscription Agreement, dated December 22, 2009, by and between the
Registrant and the investors set forth therein******
|
|
|
|
10.11
|
|
Registration
Rights Agreement, dated December 22, 2009, by and between the Registrant,
Maxim Group LLC, and the investors set forth
therein******
|
|
|
|
10.12
|
|
Securities
Escrow Agreement, dated December 22, 2009, by and between the Registrant,
Maxim Group LLC, and the investors set forth
therein******
|
|
|
|
23.1
|
|
Consent
of AGCA, Inc. LLP, independent registered public accounting
firm.+
|
|
|
|
23.2
|
|
Consent
of
BDO
China Lixin Dahua CPA Co., Ltd.
, an independent registered public
accounting firm.
|
|
|
|
23.3
|
|
Consent
of Holland & Hart LLP, included in Exhibit 5.1.
|
|
|
|
24
|
|
Power
of Attorney (set forth on the signature page of the original Form
S-1))
|
*
|
Incorporated
by reference to the Form 8-K filed by the Registrant on December 31,
2007.
|
**
|
Incorporated
by reference to the Form 8-K filed by the Registrant on January 29,
2008.
|
***
|
Incorporated
by reference to the Form 8-K filed by the Registrant on November, 3
2009.
|
****
|
Incorporated
by reference to the Form 8-K filed by the Registrant on February 13,
2009.
|
*****
|
Incorporated
by reference to the Form 8-K filed by the Registrant on April 13,
2009.
|
******
|
Incorporated
by reference to the Form 8-K filed by the Registrant on December 28,
2009.
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement; and
(c) To
include material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(b)
For
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities, the registrant
undertakes that in a primary offering of securities of the registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the registrant relating to the offering
required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(iv) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(d) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
(4) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness.
Provided, however,
that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of first
use.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wu Lan Cha Bu, Xinhe
County, on the 10th day of May ,
2010.
|
CHINA
CARBON GRAPHITE GROUP, INC.
|
|
|
|
By:
|
/
s/ Donghai
Yu
|
|
|
Donghai
Yu
|
|
|
Chief
Executive Officer
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Donghai Yu
|
|
Chief
Executive Officer, President and Director
|
|
May 10, 2010
|
Donghai
Yu
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ting Chen
|
|
Chief
Financial Officer and Director
|
|
May 10, 2010
|
Ting
Chen
|
|
(Principal
Financial Officer and
|
|
|
|
|
Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Hongbo Liu
*
|
|
Director
|
|
May 10, 2010
|
Hongbo
Liu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Yizhao Zhang
*
|
|
Director
|
|
May 10, 2010
|
Yizhao
Zhang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John Chen
*
|
|
Director
|
|
May 10, 2010
|
John
Chen
|
|
|
|
|
|
|
|
|
|
*By:
/s/ Ting Chen
|
|
|
|
May 10, 2010
|
Ting
Chen
|
|
|
|
|
Attorney-in-fact
|
|
|
|
|
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Exchange
Agreement dated as of December 14, 2007, by and between the Company and
Sincere Investment (PTC), Ltd.*
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series A Convertible Preferred Stock, as
filed with the State of Nevada**
|
|
|
|
3.2
|
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series B Preferred Stock, as filed with the
State of Nevada******
|
|
|
|
3.3
|
|
Amended
and Restated Bylaws of the Company***
|
|
|
|
4.1
|
|
3%
Convertible Promissory Note payable to the order of XingGuang Investment
Corporation Limited*
|
|
|
|
4.2
|
|
Promissory
note payable to Anna Krimshtein PLC, as escrow agent*
|
|
|
|
4.3
|
|
Form
of Warrant issued to the investors******
|
|
|
|
4.4
|
|
Warrant
issued to Maxim Group LLC******
|
|
|
|
5.1
|
|
Opinion
of Holland & Hart LLP.++
|
|
|
|
10.1
|
|
Securities
purchase agreement dated December 14, 2007, between the Registrant and
XingGuang Investment Corporation Limited *
|
|
|
|
10.2
|
|
Business
Operations Agreement dated December 7, 2007, between Xinghe Xingyong
Carbon Co., Ltd. and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
|
|
10.3
|
|
Exclusive
Technical and Consulting Services Agreement dated December 7, 2007,
between Xinghe Xingyong Carbon Co., Ltd. and Xinghe Yongle Carbon Co.,
Ltd. (English Translation)*
|
|
|
|
10.4
|
|
Option
Agreement dated December 7, 2007, between Xinghe Xingyong Carbon Co., Ltd.
and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
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10.5
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Equity
Pledge Agreement dated December 7, 2007, among Xinghe Xingyong Carbon Co.,
Ltd., Xinghe Yongle Carbon Co., Ltd. and Dengyong Jin (English
Translation)*
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10.6
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China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $1.20 per share)*
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10.7
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China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $2.00 per share)*
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10.8
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Consulting
Agreement, dated February 9, 2009, between the Registrant and Ventanta
Capital Partners****
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10.9
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Amendment
to Securities Purchase Agreement, dated April 8, 2009, between the
Registrant and XingGuang Investment Corporation,
Limited*****
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10.10
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Form
of Subscription Agreement, dated December 22, 2009, by and between the
Registrant and the investors set forth therein******
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10.11
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Registration
Rights Agreement, dated December 22, 2009, by and between the Registrant,
Maxim Group LLC, and the investors set forth
therein******
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10.12
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Securities
Escrow Agreement, dated December 22, 2009, by and between the Registrant,
Maxim Group LLC, and the investors set forth
therein******
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23.1
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Consent
of AGCA, Inc., independent registered public accounting
firm.+
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23.2
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Consent
of
BDO
China Lixin Dahua CPA Co., Ltd.
, an independent registered public
accounting firm.+
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23.3
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Consent
of Holland & Hart LLP, included in Exhibit 5.1.
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24
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Power
of Attorney (set forth on the signature page of the original Form
S-1)
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*
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Incorporated
by reference to the Form 8-K filed by the Registrant on December 31,
2007.
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**
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Incorporated
by reference to the Form 8-K filed by the Registrant on January 29,
2008.
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***
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Incorporated
by reference to the Form 8-K filed by the Registrant on November, 3
2009.
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****
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Incorporated
by reference to the Form 8-K filed by the Registrant on February 13,
2009.
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*****
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Incorporated
by reference to the Form 8-K filed by the Registrant on April 13,
2009.
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******
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Incorporated
by reference to the Form 8-K filed by the Registrant on December 28,
2009.
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