FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2014
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _______________ to _______________
Commission
File Number: 333-114564
CHINA
CARBON GRAPHITE GROUP, INC.
(Exact
name of registrant as specified in its charter)
Nevada |
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98-0550699 |
(State
or other jurisdiction of
incorporation or organization) |
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(I.R.S.
Employer
Identification No.) |
China
Carbon Graphite Group, Inc.
20955
Pathfinder Road, Suite 200
Diamond
Bar
CA,
USA
(Address
of principal executive offices)
909-843-6518
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Exchange Act: None
Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.001
per share.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant Section 13 or 15(d) of the Exchange Act. Yes ☐ No
☒
Note –
Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act from their obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a small
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
Non-accelerated
filer |
☐ |
Smaller
reporting company |
☒ |
(Do
not check if a smaller reporting company) |
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The
number of shares of common stock held by non-affiliates as of the last business day of the registrant’s most recently completed
second fiscal quarter was 21,474,346. The aggregate market value of voting and nonvoting common stock held by non-affiliates
of the registrant, based upon the closing bid quotation for the registrant’s common stock, as reported on the OTC Markets
quotation service, as of June 30 , 2014 was $1,073,717.
The number of shares of the registrant’s common stock outstanding
as of March 31, 2015 was 31,518,518.
Documents
Incorporated by Reference: None
CHINA
CARBON GRAPHITE GROUP, INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED
DECEMBER
31, 2014
PART
I |
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ITEM
1 . |
Business. |
1 |
ITEM
1A. |
Risk
Factors. |
7 |
ITEM
1B. |
Unresolved
Staff Comments. |
18 |
ITEM
2. |
Properties. |
19 |
ITEM
3. |
Legal
Proceedings. |
19 |
ITEM
4. |
Mine
Safety Disclosures. |
19 |
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PART
II |
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ITEM
5. |
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
19 |
ITEM
6. |
Selected
Financial Data. |
22 |
ITEM
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
22 |
ITEM
7A. |
Quantitative
and Qualitative Disclosures about Market Risk. |
36 |
ITEM
8. |
Financial
Statements and Supplementary Data. |
F-1 |
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PART
III |
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ITEM
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure. |
37 |
ITEM
9A. |
Controls
and Procedures. |
38 |
ITEM
9B. |
Other
Information. |
40 |
ITEM
10. |
Directors,
Executive Officers and Corporate Governance. |
40 |
ITEM
11. |
Executive
Compensation. |
44 |
ITEM
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
45 |
ITEM
13. |
Certain
Relationships and Related Transactions, and Director Independence. |
46 |
ITEM
14. |
Principal
Accounting Fees and Services. |
46 |
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PART
IV |
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ITEM
15. |
Exhibits
and Financial Statement Schedules. |
47 |
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations
and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”
“seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking
statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this
Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.
Although
forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements
can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject
to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes
include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” You are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the
SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You can obtain additional information
about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We
undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review
and consider the various disclosures made throughout the entirety of this Annual Report on Form 10-K, which are designed to advise
interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
OTHER
PERTINENT INFORMATION
Unless
the context specifically states or implies otherwise, references in this Annual Report on Form 10-K to “we,” “us,”
and words of like import refer to China Carbon Graphite Group, Inc., its wholly-owned subsidiaries, Talent International Investment
Limited (“Talent”), XingheYongle Carbon Co., Ltd. (“Yongle”), Golden Ivy Limited (“BVI Co.,”),
Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”) and Royal Elite International
Limited (“Royal HK”).
Our business is conducted in the People's Republic of China ("China" or the "PRC"). "RMB" refers to Renminbi, or the Yuan,
the official currency of the PRC. Our consolidated financial statements are presented in U.S. dollars in accordance with U.S.
GAAP. In this Annual Report, we refer to assets, obligations, commitments and liabilities in our financial statements in U.S.
dollars. These dollar references are based on the exchange rate of RMB to U.S. dollars, determined as of a specific date.
Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of U.S. dollars,
which may result in an increase or decrease in the amount of our obligations (expressed in U.S. dollars) and the value of
our assets.
PART
I
Business Overview
We are engaged in the manufacturing
of graphene, graphene oxide and graphite bipolar plates products in the PRC. We also operate a business-to-business and business-to-consumers
Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and
consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted
through the website.
Our business scope
includes manufacturing and selling primarily the following types of graphite products:
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graphene; |
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graphene
oxide; and |
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graphite
bipolar plates |
Our
Growth Strategy
Some
of our future business plans, including promoting our online portal and potential acquisition and merger, would likely require
us to obtain additional funds from equity or debt markets, or to borrow additional funds from local banks. We currently
have no commitments from any financing sources. 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 be able to 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 17, 2007, we completed a reverse merger
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, Talent became a wholly-owned subsidiary of the Company. Talent wholly owns Yongle, which is a
wholly foreign-owned enterprise organized under the laws of the PRC. On December 14, 2007, Yongle executed a series of exclusive
contractual agreements with Xingyong, an operating company organized under the laws of the PRC. Xingyong was founded in 1986 as
a state-owned company and converted into a private enterprise in 2001.
PRC
law currently has limits on foreign ownership of certain companies. To comply with these foreign ownership restrictions, we operated
our businesses in the PRC through Xingyong. Xingyong has the licenses and approvals necessary to operate in the PRC. We had contractual
agreements with Xingyong and its stockholders pursuant to which we had 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 our contractual agreements with Xingyong, we were able to control Xingyong. Consequently, we consolidated Xingyong’s
financial statements with our financial statements.
Xingyong’s
principal stockholder and chief executive officer is Mr. Denyong Jin, our former chief executive officer and General Manager of
our China operations. Mr. Dengyong Jin owns 1,000,000 shares of our common stock as of December 31, 2014. Members of
Mr. Jin’s family have control of Sincere Investment (PTC), Ltd. (“Sincere”), which owns approximately 27.88%
of the outstanding shares of our common stock as of December 31, 2014.
Pursuant
to the contractual agreements between Yongle and Xingyong, Xingyong agreed to the following:
Exclusive
Technical Consulting and Services Agreement. Pursuant to the technical consulting and services agreement
entered into on December 7, 2007 between Yongle and Xingyong, Yongle has agreed to provide technical and consulting services related
to the business operations of Xingyong. As consideration for such services, Xingyong has agreed to pay to Yongle a service fee
equal to 80% to 100% of the profits of Xingyong. The exact fee is calculated and paid on a quarterly basis, and is determined
based on a number of factors, including but not limited to the complexity of the services provided and the commercial value of
the services provided. The term of the exclusive technical consulting and services agreement is 10 years from the date
thereof. Yongle may extend the term of such agreement. The parties may terminate the agreement, prior to its expiration, upon
the mutual consent of Yongle and Xingyong.
Business
Operations Agreement. Pursuant to the business operations agreement entered into on December 7, 2007 between Yongle,
Xingyong, and the shareholders of Xingyong, Xingyong has agreed not to conduct any material transaction or corporate action without
obtaining the prior written consent of Yongle. Furthermore, Xingyong and its shareholders have agreed to implement
proposals made by Yongle with respect to the operations of Xingyong’s business and the appointment of directors and officers
of Xingyong. Yongle may terminate the business operations agreement at any time. The term of the business
operations agreement is indefinite.
Option
Agreement. Yongle entered into an option agreement on December 7, 2007 with each of the shareholders of
Xingyong, as well as Xingyong itself, pursuant to which Yongle has an exclusive option to purchase, or to designate another
qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity
interests in Xingyong owned by the shareholders of Xingyong. To the extent permitted by the PRC laws, the purchase
price for the entire equity interest shall equal the actual price designated by Yongle to the extent permitted by relevant
laws and regulations. The option agreement has a ten (10) year term. Upon the request of Yongle, the parties
shall extend the term of the option agreement.
Equity
Pledge Agreement. Pursuant to an equity pledge agreement, dated December 7, 2007, each of the shareholders of Xingyong
pledged his equity interest in Xingyong to Yongle to secure Xingyong’s obligations under the VIE agreements described above.
In addition, the shareholders of Xingyong agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity
interests in Xingyong that would affect Yongle’s interests. The equity pledge agreement will expire when Xingyong fully
performs its obligations under the various VIE agreements described above.
On
June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and
its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively
“Purchasers”). Pursuant to the Agreement, the Purchasers purchased all of the rights and obligations of
Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding equity interests
of Xingyong. The purchase price under the Agreement is $1,611,707 (RMB 10 million), including $601,167 (RMB 3.73 million)
in cash and the cancellation of the registrant’s repayment obligations of $1,010,541 (RMB 6.27 million) previously advanced
by Dengyong Jin to the Company. The disposal of Xingyong became effective on June 30, 2014 after approved by majority
of shareholders at a special meeting of shareholders held on such date.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented.
Acquisition
in December 2013
On
December 23, 2013, we acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”). Pursuant to the terms
of the acquisition, we will issue an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former
shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co.. BVI Co. then became a wholly owned
subsidiary of the Company. The shares were issued on January 16, 2014.
BVI
Co. currently has two business operations as follows (collectively the “Business”):
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Manufacturing
of Graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium
ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin
films and chips. Graphite bipolar plates are primarily used in solar power storage. |
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A
business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors
can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through
the website by paying a fee for each transaction conducted through the website. |
The
Business and the facilities related thereto are all located in the People’s Republic of China (“China”). The
Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a
wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited,
a Hong Kong company, (“Royal HK”), which is wholly owned by BVI Co. The Business currently generates minimal
sales.
Royal
Shanghai was set up in Shanghai on June 9, 2010. Royal HK was set up in Hong Kong on January 8, 2010.
Organizational
Structure Chart
The
following chart sets forth our organizational structure:
![](image_001.jpg)
Our
Products
Through
our newly acquired subsidiary we now manufacture and sell the following products:
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grapheme; |
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graphene
oxide; and |
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graphite
bipolar plates. |
Graphene
Oxide has wide applications as a conductive agent, such as in lithium ion batteries, super capacitors, rubber and plastic additives,
conductive ink, special coating, transparent conductive thin films and chips.
Graphite
bipolar plates are primarily used in solar power storage.
Our
Customers
Our
customers include mainly international customers.
We
generally do not enter into long-term contracts with our customers. Our customers generally purchase our products pursuant to
purchase orders.
Our
Sales and Marketing Efforts
We
have not spent a significant amount of capital on advertising.
Competition
and Competitive Advantages
We
compete with a large number of domestic and international companies that manufacture graphene and grapheme related products. Because
of the nature of the products that we sell, we believe that the reputation of the manufacturer and the quality of the product
may be as important as price.
Government
Regulations
Statutory
Reserve
On
December 31, 2013, the Company acquired new operations carried through BVI Co., and its subsidiaries Royal HK and Royal Shanghai.
All of the cash generated by our operations has been held by our China entities. In order to transfer such cash to our parent
entity, China Carbon Graphite Group, Inc., which is a Nevada Corporation, we would need to rely on dividends, loans or advances
made by our PRC subsidiaries or VIE entity. Such transfers may be subject to certain regulations or risks. To date, our parent
entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent
entity is unable to raise needed funds from private investors, Royal Shanghai would have to transfer funds to our parent entity
through our wholly-owned subsidiaries, Royal HK and BVI Co.
PRC
regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate
structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by
the following rules:
1. |
10%
of after tax income to be allocated to a statutory surplus reserve until the reserve
amounts to 50% of the company’s registered capital.
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If
the accumulate balance of statutory surplus reserve is not enough to make up the Company’s
cumulative prior years’ losses, the current year’s after tax income should
be first used to make up the losses before the statutory surplus reverse is drawn.
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Allocation
can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners. |
Therefore,
the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The
maximum amount of the shareholders has not been reached. The company has never distributed earnings to shareholders and has consistently
stated in the Company’s filings it has no intentions to do so.
The
RMB cannot be freely exchanged into Dollars. The State Administration of Foreign Exchange (“SAFE”) administers
foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment
Enterprises, such as Royal Shanghai, may purchase foreign currency from designated financial institutions in connection with
current account transactions, including profit repatriation.
These
factors will limit the amount of funds that we can transfer from Royal Shanghai to our parent entity and may delay any such transfer.
In addition, upon repatriation of earnings of Royal Shanghai to the United States, those earnings may become subject to United
States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings
of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly,
taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.
Environmental
Regulations
We
believe that we are in compliance in all material respects with all applicable environmental protection laws and regulations.
Circular
106 Compliance and Approval
The
State Administration of Foreign Exchange (“SAFE”) issued an 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
to facilitate foreign financing or subsequent acquisitions in China. We believe that our wholly-owned subsidiaries
Talent and BVI. Co. were not required to obtain SAFE’s approval to establish its offshore companies Yongle and Royal HK
as “special purpose vehicle” for capital raising activities on behalf of Royal Shanghai because of offshore structure.
Restrictions
on Exports of Natural Resources
In
2010, the Chinese government decided to implement a number of new restrictions on natural resource industry sectors. As a result,
domestic Chinese companies in certain natural resource industries face export restrictions. Such restrictions may limit
our ability to export our products in the future, or may increase the expense of our exports, which may impact our business.
Employees
As
of December 31, 2014 and 2013, we had 7 full-time employees.
From
time to time, information provided by us, including but not limited to statements in this report, or other statements made by
or on our behalf, may contain “forward-looking” information. Such statements involve a number of risks, uncertainties,
and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ
materially from those anticipated. Set forth below are important factors that could cause our results, performance, or achievements
to differ materially from those in any forward-looking statements made by us or on our behalf.
Going
Concern
The
Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States
of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As of and for the period ended December 31, 2014, the Company has incurred significant operating
losses and negative net cash flows from operating activities. The Company’s sales revenue declined
significantly for the period ended December 31, 2014 as compared to the same period prior year, and the demand for the Company’s
products remains highly uncertain.
The
ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
We
have incurred significant net losses in each of 2013 and 2014. We have funded our operations through equity financings and loans.
We anticipate that our revenue will not significantly increase from current level in the near future, thereby leading to continued
losses until we further develop our business.
The
limited operating history of our newly acquired subsidiaries Royal HK and Royal Shanghai makes it difficult to evaluate its current
business and future prospects and its inability to execute on its current business plan may adversely affect its results of operations
and prospects.
Our
newly acquired subsidiary, Royal Shanghai, is a development stage company that has generated limited revenues to date. Therefore,
Royal Shanghai not only has a very limited operating history, but also a limited track record in executing its business model
which includes, among other things, manufacturing and operating a website. Royal Shanghai’s limited operating history
makes it difficult to evaluate its current business model and future prospects.
In
light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development
with limited operating history, there is a significant risk that Royal Shanghai will not be able to:
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implement
or execute its current business plan, or demonstrate that its business plan is sound; and/or |
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raise
sufficient funds in the capital markets or otherwise to effectuate its long-term business plan. |
Royal
Shanghai’s inability to execute any one of the foregoing or similar matters may adversely affect our results of operations
and prospects.
Risks
Related to Our Business
If
the downturn of the steel industry in China continues, we may have difficulties increasing our sales, which may impair our
ability to continue operating our business.
Steel
consumption is highly cyclical and follows general economic and industrial conditions both worldwide and in regional markets.
The steel industry has historically been characterized by significant decreases of demand during periods of economic weakness.
In 2014, the Chinese steel industry experienced a significant decrease in demand, which in turn led to a significant decrease
in demand for our products, which serve as raw materials for the steel industry.
We
will require additional financing to implement our expansion plans, 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.
Some
of our expansion plans, including the promotion of our on line portal and the potential acquisition and merger plan, would likely
require us to obtain additional funds from equity or debt markets, or to borrow additional funds from local banks. We
currently have no commitments from any financing sources. 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.
Risks
Related to Doing Business in the PRC
Our
business operations take place primarily in the PRC. Because Chinese laws, regulations and policies are constantly 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 introduced in China in recent years are regarded by China’s national government as a way to introduce
economic market forces into China. Given the overriding desire of the national 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 may adversely affect investments in Chinese businesses.
Changes
in policy could result in the 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, may 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 nations. 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 likely 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 businesses will likely remain subordinate
to state-owned companies, which are the mainstay of the Chinese economy. However, we cannot assure investors that, under some
circumstances, the government’s pursuit of economic reforms will not be restrained or curtailed. Actions by the national
government of China may have a significant adverse effect on economic conditions in the country as a whole and on the economic
prospects of 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 acquisition 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 to facilitate foreign financing
or subsequent acquisitions in China.
If
we decide to acquire a company organized under the laws of the PRC, we cannot assure investors that we or the owners of such company,
as the case may be, will be able to obtain 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.
Fluctuation
in the value of the RMB may have a material adverse effect on the value of our stock.
Fluctuations
in the value of the RMB against the U.S. dollar and other currencies may be 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 range against a pool of certain foreign currencies. This change in policy has resulted in the appreciation of the
RMB against the 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 further and more significant appreciation of the RMB against the U.S. dollar. Because approximately 90% of
our costs and expenses are 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 subsidiary, 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.
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 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.
Because
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 is subject
to foreign exchange rules governing 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 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 Chinese operating company is 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 reserves 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 may affect our
ability to continue to operate.
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 may 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 to operate.
If
we are unable 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 that 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 may 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 People’s 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 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 adjudicating
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 may have a material adverse effect on our business and prospects.
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 investors to enforce your rights based on U.S. federal securities laws against
us and our officers and directors in the United States or to enforce judgments of U.S. courts against us or them in the PRC.
Under
the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification may
result in unfavorable tax consequences to us and our non-PRC shareholders.
China
passed a New Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. Under the New EIT Law,
an enterprise established outside of China with de facto management bodies within China is considered a resident enterprise, meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules
of the New EIT Law define de facto management as “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise. In addition, a circular issued by the State Administration
of Taxation on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to
be PRC source income and subject to PRC withholding tax. This recent circular also subjects such resident enterprises to various
reporting requirements with the PRC tax authorities.
Although
substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would
require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our
company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a resident enterprise for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences may follow. First, we may be subject to the enterprise
income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. This would
also mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income
tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the
PRC authorities responsible for enforcing the withholding tax have not yet issued guidance with respect to the processing of outbound
remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, dividends paid
to stockholders with respect to their shares of our common stock or any gains realized from transfer of such shares may generally
be subject to PRC withholding taxes on such dividends or gains at a rate of 10% if the shareholders are deemed to be a non-resident
enterprise or at a rate of 20% if the shareholders are deemed to be a non-resident individual.
It
may be difficult for our stockholders to effect service of process against our subsidiaries and our officers and directors.
Our
operating subsidiaries and substantially all of our assets are located outside of the United States. Investors may find it difficult
to enforce their legal rights based on the civil liability provisions of U.S. federal securities laws against us in the courts
of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such
judgments in the courts of the PRC. In addition, it is unclear whether extradition treaties in effect between the United States
and the PRC would permit effective enforcement of criminal penalties under U.S. federal securities laws or otherwise against us
or those of our officers and directors that reside outside of the United States.
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 ineffective, we are unable to assure investors that:
● |
we
will be able to capitalize on economic reforms; |
● |
the
Chinese government will continue its pursuit of economic reform policies; |
● |
the
economic policies, even if pursued, will be successful; |
● |
economic
policies will not be significantly altered from time to time; and |
● |
business
operations in China will not become subject to the risk of nationalization. |
Since
1979, the Chinese government has reformed its economic system. 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, may lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our
operations.
Price
inflation in China could affect our results of operation if we are unable to pass along raw material price increases to our customers.
Inflation
in China has continued to rise over the last few years. Because we purchase raw materials from suppliers in China, price inflation
has caused an increase in the cost of our raw materials. Price inflation may affect the results of our operations if
we are unable to pass along the price increases to our customers. Similarly, the cost of constructing our new facility
and the installation of equipment may increase as a result of these recent inflationary trends, which are expected to continue
in the near future. In addition, if inflation continues to rise in China, China could lose its competitive advantage
as a low-cost manufacturing venue, which may in turn lessen the competitive advantages of our being based in China. Accordingly,
inflation in China may weaken our competitiveness domestically and in international markets.
Failure
to comply with the U.S. Foreign Corrupt Practices Act may subject us to penalties and other adverse consequences.
We
are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. 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
and our business, financial condition and results of operations.
Risks
Related to our Common Stock
The
controlling stockholders of Sincere, our majority stockholder, may have significant influence over the outcome of matters submitted
to our stockholders for approval, which may prevent the Company from engaging in certain transactions.
As
of December 31, 2014, Sincere owned 27.88% of our outstanding common stock. Family members of Mr. Denyong Jin, General
Manager of our China operations, have control of Sincere. As a result, they exercise significant influence over all matters requiring
stockholder approval, including the appointment of our directors and the approval of significant corporate transactions. Their
ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation,
takeover or other business combination that may be in the best interests of the Company.
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 internal controls over financial reporting.
During
our assessment of the effectiveness of internal control over financial reporting as of December 31, 2014, we identified significant
deficiencies related to: (i) lack of entity level controls establishing a “tone at the top”, including but not limited
to, communication between committee members and senior management regarding corporate decisions and planning; (ii) insufficient
knowledge of accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines;
(iii) an inadequate amount of review by management of the financial statement reporting process, including understanding and reporting
all required disclosures necessary, by those in charge of corporate governance; (iv) lack of corporate governance policies in
place, such as an internal audit function, fraud and risk assessment policies and a whistleblower policy; and (v) inadequate segregation
of duties over certain information system access controls. We cannot assure investors that, if our independent auditors are required
to attest to our internal controls, 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 and operational and financial resources
and systems. 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 may result in the loss of investor confidence in the reliability of our financial statements, which in
turn may 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 holders of our common stock to sell their stock.
Our
common stock trades on the OTC Markets under the symbol CHGI. 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 of
our common stock may 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 holders of our common stock may be unable to sell their shares at or above the price at
which they were acquired.
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:
● |
quarterly
variations in our revenues and operating expenses; |
● |
developments
in the financial markets and worldwide economies; |
● |
announcements
of innovations or new products or services by us or our competitors; |
● |
announcements
by the PRC government relating to regulations that govern our industry; |
● |
significant
sales of our common stock or other securities in the open market; |
● |
variations
in interest rates; |
● |
changes
in the market valuations of other comparable companies; and |
● |
changes
in accounting principles. |
In
addition, the market for Chinese companies that went public in the U.S. through reverse mergers, such as ours, is currently
extremely volatile primarily due to recent allegations and, in some instances, findings of fraud among some of these
companies. If a stockholder were to file a 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 responding to such litigation, which may harm our business and reputation.
We
have not paid dividends in the past and do not expect to pay dividends to holders of our common stock 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. To the extent that we do not pay dividends, our stock may be less valuable because
a return on investment will occur only if, and to the extent that, our stock price appreciates, which may never occur. In addition,
holders of our common stock must rely on sales of their common stock after price appreciation as the only way to realize a return
on their investment, and if the price of our stock does not appreciate, then there will be no return on their investment.
If
we become subject to the recent scrutiny and negative publicity involving U.S.-listed Chinese companies, our business operations,
stock price and reputation could be harmed.
Recently,
U.S. public companies that have substantially all of their operations in China, and in particular companies that have completed
reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity resulting from financial
and accounting irregularities, a lack of effective internal control over financial reporting, inadequate corporate governance
policies or a lack of adherence thereto and allegations of fraud. As a result, the publicly traded stock of many U.S.-listed Chinese
companies has sharply declined in value. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions
and are conducting internal and external investigations into the allegations. It is unclear what effect this may have on our Company,
our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven
to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company,
which may impact our business operations and the value of our stock.
The
rights of the holders of our 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 may adversely affect the voting
power and equity interest of the holders of our common stock. Although we have no present intention to issue any additional shares
of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.
Transactions
engaged in by our majority stockholder may have an adverse effect on the price of our stock.
We
do not know what plans, if any, Sincere, our majority stockholder, has with respect to its ownership of our stock. In the event
that it sells a substantial number of its shares of our common stock, such sale may lower the price of our stock.
Item
1B. |
Unresolved
Staff Comments. |
Not
required for smaller reporting companies.
There
is no private ownership of land in China and all urban land ownership is held by the government, its agencies and collectives.
Land use rights can be obtained from the government for a period of up to 50 years for industrial usage, 40 years for commercial
usage and 70 years for residential usage, and are typically renewable. Land use rights can be transferred upon approval by the
State Land Administration Bureau and payment of the required land transfer fee. The Company leases office to conduct business
and does not own any land use right.
Our principal executive office is located at 20955 Pathfinder Road, Suite 200, Diamond Bar, CA 91765, and our telephone number
is (909) 843-6518. As of March 31, 2015, the Company leased its corporate mailing address for an annual fee of $1,440.00
Item
3. |
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
proceedings or pending litigation. There are no proceedings in which any of our current directors, officers or affiliates, or
any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.
Item
4. |
Mine
Safety Disclosures. |
Not
required.
PART
II
Item
5. |
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common
stock is quoted on the OTC Markets, or OTC, under the symbol “CHGI”. As of March 31, 2015, the closing
price for our common stock was $0.05 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.
|
|
High |
|
|
Low |
|
Fiscal Year Ended December 31, 2015 |
|
|
|
|
|
|
First Quarter |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
Second Quarter |
|
$ |
N/A |
|
|
$ |
N/A |
|
Third Quarter |
|
$ |
N/A |
|
|
$ |
N/A |
|
Four Quarter |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2014 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
Second Quarter |
|
$ |
0.14 |
|
|
$ |
0.05 |
|
Third Quarter |
|
$ |
0.08 |
|
|
$ |
0.04 |
|
Fourth Quarter |
|
$ |
0.09 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2013 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
0.68 |
|
|
$ |
0.40 |
|
Second Quarter |
|
$ |
0.42 |
|
|
$ |
0.24 |
|
Third Quarter |
|
$ |
0.28 |
|
|
$ |
0.11 |
|
Fourth Quarter |
|
$ |
0.18 |
|
|
$ |
0.09 |
|
Approximate
Number of Holders of Our Common Stock
On March
31, 2015, there were approximately 45 stockholders of record of our common stock.
Transfer
Agent
The
transfer agent for the common stock is Empire Stock Transfer Inc. The transfer agent’s address is 2470 Saint Rose Parkway,
Suite 304, Henderson, NV, and its telephone number is (702) 974-1444.
Dividend
Policy
While
we are required to pay dividends on the shares of our 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. In addition, any dividend payment that the Company
makes is subject to foreign exchange rules governing repatriation. Current regulations in China 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. The inability of our operating company to pay dividends or make other payments to us may limit our ability to
pay dividends to holders of our Series B Preferred Stock.
As
of December 31, 2014, there were no shares of our Series A Preferred Stock outstanding and 300,000 shares of our Series B 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.
Redemption
of Series B Preferred Stock
On
December 22, 2011, all outstanding shares of Series B Preferred Stock became redeemable. The redeemable preferred stock
was recorded as temporary equity as of December 31, 2013 and December 31, 2014. The redemption price for the outstanding shares
of Series B Preferred Stock is $320,000. In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”)
filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series
B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection
with the mandatory redemption of their Series B Preferred shares and the parties settled out of court for $320,000 plus $40,000
that were already paid. The Company paid $90,000in 2013 and$270,000 in 2014. The preferred stock will be canceled after all payments
are made. The Company plans to cancel the stocks in May 2015.
As
a result of China’s foreign currency control, the Company has applied to SAFE to obtain approval to make the foreign currency
payment of the redemption price to holders of the outstanding shares of Series B Preferred Stock.
Recent Sales of Unregistered Securities
During
the year ended December 31, 2012, we issued an aggregate of 126,110 shares of common stock to holders of Series B Preferred Stock
upon conversion of an aggregate of 126,110 shares of Series B Preferred Stock. The issuance of these shares was exempt
from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made
by the stockholders.
During
the year ended December 31, 2012, we issued an aggregate of 310,000 shares of common stock to four different parties in exchange
for consulting and investor relations services. The issuance of these shares was exempt from registration pursuant to Section
4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.
During
the year ended December 31, 2012, we issued an aggregate of 160,000 shares of common stock to our directors and one employee as
compensation. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule
506 of Regulation D, based upon representations made by the stockholders.
During
the year ended December 31, 2012, we issued an aggregate of 1,500,000 shares of common stock at prices between $0.50 and
$0.56 per share to unrelated parties to raise money for our operations. The issuance of these shares was exempt from registration
pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.
During
the year ended December 31, 2013, we issued an aggregate of 240,000 shares of common stock to four different parties in exchange
for consulting and investor relation services. The issuance of these shares was exempt from registration pursuant to Section 4(2)
of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.
During
the year ended December 31, 2013, we issued an aggregate of 25,000 shares of common stock to one director and 1,000,000 shares
of common stock to one employee for compensation. The issuance of these shares was exempt from registration pursuant to Section
4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.
On
December 11, 2014, the Company issued 1,800,000 shares for cash at $0.10 per share to unrelated parties.
On
January 14, 2014, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services
provided in 2013. The issuance of these shares was recorded at fair market value.
On
January 14, 2014, the Company issued 76,000 shares of common stock to two employees for services provided in 2013. The issuance
of these shares was recorded at fair market value.
On
January 16, 2014, the Company issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former
shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The issuance of these shares was
recorded at fair market value.
On
December 11, 2014, the Company issued an aggregate of 200,000 shares of common stock to four directors as compensation for services
provided in 2014.
On
December 11, 2014, the Company issued 152,000 shares of common stock to two employees for services provided in 2014. The issuance
of these shares was recorded at fair market value, or $6,080.
Item
6. |
Selected
Financial Data. |
Not
required.
Item
7. |
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 report. 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.
In
some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “would” and similar expressions intended to
identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are
based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on
these forward-looking statements.
Also,
forward-looking statements represent our estimates and assumptions only as of the date of this report. This Annual Report should
be read in its entirety and with the understanding that our actual future results may be materially different from what we expect.
Except
as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available
in the future.
Overview
We
are engaged in the manufacturing of graphene, graphene oxide and graphite bipolar plates products in the PRC. We also operate
a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can
sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website
by paying a fee for each transaction conducted through the website.
On
June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and
its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively
“Purchasers”). Pursuant to the Agreement, the Purchasers will, following the satisfaction or waiver of
applicable conditions to closing, purchase all of the rights and obligations of Yongle under the Contractual Arrangements. The
Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement
is $1,611,707 (RMB 10 million), including $601,167 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment
obligations of $1,010,541 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong
became effective on June 30, 2014 after approved by majority of shareholders at a special meeting of shareholders held on such
date.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented. See “Note 15 — Discontinued Operations” for additional information.
As
of and for the period ended December 31, 2014, the Company has incurred operating losses. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes
profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue
as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to
obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its
products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However,
management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company
plans to look for opportunities to merger with other graphite companies.
PRC
regulations grant broad powers to the government to adjust the price of raw materials and manufactured products. Although
the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be
implemented in the future, thereby affecting our results of operations and financial condition.
Results
of Operations
The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage
of net sales:
| |
Years ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
| | |
|
Sales | |
$ | 281,620 | | |
100.00% | |
$ | - | | |
0% |
| |
| | | |
| |
| | | |
|
Cost of Goods Sold | |
| 163,309 | | |
57.99% | |
| - | | |
0% |
Gross Profit | |
| 118,311 | | |
42.01% | |
| - | | |
0% |
| |
| | | |
| |
| | | |
|
Operating Expenses | |
| | | |
| |
| | | |
|
Selling expenses | |
| 43,154 | | |
15.32% | |
| - | | |
0% |
General and administrative | |
| 891,808 | | |
316.67% | |
| 1,072,694 | | |
0% |
Total operating expenses | |
| 934,963 | | |
331.99% | |
| 1,072,694 | | |
0% |
| |
| | | |
| |
| | | |
|
Loss from continuing operations before other income (expense) and income taxes | |
| (816,652 | ) | |
-289.98% | |
| (1,072,694 | ) | |
0% |
| |
| | | |
| |
| | | |
|
Other Income (Expense) | |
| | | |
| |
| | | |
|
Interest expense | |
| (2,426 | ) | |
-0.86% | |
| 836 | | |
0% |
Interest income | |
| 95 | | |
0.03% | |
| 149 | | |
0% |
Other expense | |
| - | | |
| |
| - | | |
0% |
Other income (expense), net | |
| 594 | | |
0.21% | |
| (1,038 | ) | |
0% |
Loss from disposal of Xingyong | |
| - | | |
| |
| - | | |
0% |
Change in fair value of warrants | |
| 13,467 | | |
4.78% | |
| 210,895 | | |
0% |
Total other expense (income), net | |
| 11,730 | | |
4.17% | |
| 210,842 | | |
0% |
| |
| | | |
| |
| | | |
|
Loss from continuing operations before income taxes | |
| (804,922 | ) | |
-285.82% | |
| (861,852 | ) | |
0% |
| |
| | | |
| |
| | | |
|
Income Tax Expense | |
| - | | |
0.00% | |
| - | | |
0% |
| |
| | | |
| |
| | | |
|
Net loss from continuing operations | |
| (804,922 | ) | |
-285.82% | |
| (861,852 | ) | |
0% |
Discontinued operations, net of income taxes | |
| (5,311,304 | ) | |
-1885.98% | |
| (61,017,028 | ) | |
0% |
Net loss | |
| (6,116,226 | ) | |
-2171.80% | |
| (61,878,880 | ) | |
0% |
| |
| | | |
| |
| | | |
|
Preferred Stock Dividends | |
| - | | |
0.00% | |
| (8,199 | ) | |
0% |
| |
| | | |
| |
| | | |
|
Net Loss Available To Common Shareholders | |
| (6,116,226 | ) | |
-2171.80% | |
| (61,887,079 | ) | |
0% |
Fiscal
Years Ended December 31, 2014 and 2013
Sales.
During
the year ended December 31, 2014, we had sales of $281,620, compared to sales of $nil for the year ended December 31, 2013,
an increase of $281,620, or approximately 100.0%. Sales increase was mainly because in December 2013, we acquired Royal
Shanghai that generated sales in 2014.
Sales
from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $2,981,403 and $9,526,709, respectively
and were included in net loss from discontinued operations.
Cost
of goods sold.
Our
cost of goods sold consists of the cost of purchased products. During the year ended December 31, 2014, our cost of goods sold
was $163,309, compared to $nil for the cost of goods sold for the year ended December 31, 2013, an increase of $163,309 or approximately
100.0%. The increase in the cost of sales was mainly due to increase in sales volume.
Cost
of goods sold from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $4,248,552 and
$32,689,538, respectively and were included in net loss from discontinued operations.
Gross
margin.
Our
gross margin increased from 0 for the year ended December 31, 2013 to 118,311 for the year ended December 31, 2014. The increase
of the gross margin is because in December 2013, we acquired Royal Shanghai that generated sales and gross profit in 2014.
Gross
margin from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were losses of $1,267,149
and $23,162,829, respectively, and were included in net loss from discontinued operations.
Operating
expenses.
Operating
expenses totaled $934,963 for the year ended December 31, 2014, compared to $1,072,694 for the year ended December 31, 2013, a
decrease of $137,731, or approximately 12.8%. The decrease is mainly because of decreased penalty fee to settle preferred stock.
Operating
expenses from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $2,153,231 and $34,305,045,
respectively and were included in net loss from discontinued operations.
Selling,
general and administrative expenses.
Selling
expenses increased from $nil for the year ended December 31, 2013 to $43,154 for the year ended December 31, 2014, an increase of
$43,154, or 100.0%. The increase is mainly because of increased selling expenses from Royal Shanghai that was acquired in December
2013.
Selling
expenses from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $50,184 and $59,626, respectively
and were included in net loss from discontinued operations.
Our
general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public
company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General
and administrative expenses were $891,808 for the year ended December 31, 2014, compared to $1,072,694 for the year ended
December 31, 2013, a decrease of $180,886 or 16.9 %. The decrease is mainly because of decreased penalty fee
to settle preferred stock.
General
and administrative expenses from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $1,965,970
and $33,609,332, respectively and were included in net loss from discontinued operations.
Loss
from operations.
As
a result of the factors described above, operating loss was $816,652 for the year ended December 31, 2014, compared to operating
loss of $1,072,694 for the year ended December 31, 2013, a decrease of operating loss approximately $256,042, or 23.9%.
Operating
loss from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $3,420,380 and $57,467,874,
respectively and were included in net loss from discontinued operations.
Other
income and expenses.
Our
interest expense was $2,426 for the year ended December 31, 2014, compared to interest income of $836 for the year ended
December 31, 2013, reflecting increased interest expenses on loans from banks. Expenses from changes in the fair value of our
warrants as a result of adopting ASC 820-10 was $13,467 for the year ended December 31, 2014, compared to $210,895 for the
year ended December 31, 2013.
Other
expenses from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $1,890,924 and $3,549,154,
respectively and were included in net loss from discontinued operations.
Income
tax.
During
the years ended December 31, 2014 and 2013, we had not incurred any income tax expenses.
Net
loss from continuing operations.
As
a result of the factors described above, our net loss from continuing operations for the year ended December 31, 2014 was $804,922,
compared to net loss of $861,852 for the year ended December 31, 2013, a decrease in loss of $56,930, or 6.6%.
Net
loss from discontinued operations.
Net
loss from Xingyong (our discontinued business) for the years ended December 31, 2014 and 2013 were $5,311,304 and $61,017,028,
respectively and were included in net loss from discontinued operations.
Net
loss.
Our net loss for the year ended December 31, 2014 was $6,116,226, compared to net loss of $61,878,880 for
the year ended December 31, 2013, a decrease of net loss of $55,770,853, or 90.1%. The decrease is mainly due to decreased loss
from discontinued operations.
Foreign currency translation.
Our
consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB.
Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated
at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments
resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining
comprehensive income. Our foreign currency translation gain for the year ended December 31, 2014 was $334,365, compared to $445,224
for the year ended December 31, 2013, a decrease of $110,859, or 24.9%.
Net
income (loss) available to common stockholders.
Net
loss available to our common stockholders was $6,116,226, or loss of $0.19 per share (basic and diluted), for the year
ended December 31, 2014, compared to net loss of $61,887,079, or loss of $2.39 per share (basic and diluted), for the year
ended December 31, 2013.
Liquidity
and Capital Resources
All
of our business operations are carried out by Royal Shanghai, and all of the cash generated by our operations has been held by
that entity. In order to transfer such cash to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada corporation,
we would need to rely on dividends, loans or advances made by our PRC subsidiaries. Such transfers may be subject to certain regulations
or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future,
in the event that our parent entity is unable to raise needed funds from private investors, Royal Shanghai would have to transfer
funds to our parent entity through our wholly-owned subsidiaries, Royal Hongkong and BVI. Co,.
PRC
regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate
structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by
the following rules:
|
1. |
10%
of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s
registered capital. |
|
|
|
|
2. |
If
the accumulate balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’
losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus
reverse is drawn. |
|
|
|
|
3. |
Allocation
can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners. |
Therefore,
the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The
maximum amount of the shareholders has not been reached. The company has never distributed earnings to shareholders and has consistently
stated in the Company’s filings it has no intentions to do so.
The
RMB cannot be freely exchanged into Dollars. The State Administration of Foreign Exchange
(“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial
institutions. Foreign Investment Enterprises, such as Royal Shanghai, may purchase foreign currency from designated financial
institutions in connection with current account transactions, including profit repatriation.
These
factors will limit the amount of funds that we can transfer from Royal Shanghai to our parent entity and may delay any such transfer.
In addition, upon repatriation of earnings of Royal Shanghai to the United States, those earnings may become subject to United
States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings
of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly,
taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.
Our
primary capital needs have been meeting our working capital requirements. Our primary sources of financing will be cash
generated from loans from banks, equity investment from investors, and borrowings from unrelated parties.
The
Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States
of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As of and for the period ended December 31, 2014, the Company has incurred significant operating
losses. The Company’s sales revenue is not sufficient to cover the
company’s expenses for the year ended December 31, 2014.
The
ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
Our
long-term goal is to develop our Royal Shanghai business. During the interim, we expect that anticipated cash flows from
future operations, loans and equity investment from unrelated or related parties will be sufficient to fund our operations through
at least the next twelve months, provided that:
|
● |
we
generate sufficient business so that we are able to generate substantial profits, which cannot be assured; |
|
|
|
|
● |
we
receive cash from disposal of Xingyong; and |
|
|
|
|
● |
we
are able to generate savings by improving the efficiency of our operations. |
We
may require additional equity, debt or bank funding to finance acquisitions or to allow us to develop our Royal Shanghai business,
which is one of our primary growth strategies. We can provide no assurances that we will be able to enter into any
additional financing agreements on terms favorable to us, if at all, especially considering the current global instability of
the capital markets.
At
December 31, 2014, cash and cash equivalents were $30,863, compared to $31,848 at December 31, 2013, a decrease of $985. Our working
capital increased by $47,768,854 to $84,400 at December 31, 2014 from a deficit of $47,684,454 at December 31, 2013.
Accounts receivable, net of allowance, were
$nil at December 31,2014 and 2013. The increase was mainly due to increased sales during the year ended December 31, 2014. Accounts
receivable are recorded at the invoiced amount and do not bear interest. Our management reviews the adequacy of our allowance for
doubtful accounts on an ongoing basis, using historical collection trends and the aging of receivables. Management also periodically
evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments
in the allowance when it is considered necessary.
As
of December 31, 2014, inventories were $1,136, compared to $450 at December 31, 2013, an increase of $686, or 152.44%. As of December
31, 2014 and December 31, 2013, the Company has not made provision for inventory in regards to slow moving or obsolete items.
As
of December 31, 2014, prepaid expenses were $7,716, compared to $203,908 at December 31, 2013, a decrease of $196,192, or 96.22%.
The decrease in prepaid expenses is attributable to amortization of prepaid services.
Advances
to suppliers increased from $10,995 at December 31, 2013 to $16,897 at December 31, 2014, an increase of $5,902. The increase
of advances to suppliers is mainly due to increase advanced to suppliers during the year ended December 31, 2014. None allowance
for doubtful accounts for the balance of advances to suppliers were reserved as of December 31, 2014 and December 31, 2013, respectively.
Fiscal
Year ended December 31, 2014 Compared to Fiscal Year ended December 31, 2013
The
following table sets forth information about our net cash flow for the years indicated:
Cash
Flows Data:
| |
For Year ended December 31 | |
| |
2014 | | |
2013 | |
Net cash flows provided by (used in) operating activities | |
$ | 3,060,715 | | |
$ | (2,740,948 | ) |
Net cash flows used in investing activities | |
$ | (892,381 | ) | |
$ | (29,284,155 | ) |
Net cash flows provided by (used in) financing activities | |
$ | (2,166,642 | ) | |
$ | 31,923,981 | |
Net cash flow provided by operating
activities was 3,060,715 for the year ended December 31, 2014, compared to $2,740,948 used in operating activities for the year
ended December 31, 2013, an increase of $5,801,663, or 211.7%. The increase in net cash flow provided by operating activities
was mainly due to decreased net loss from discontinued operations and more cash provided
by discontinued operations during the year ended December 31, 2014 compared to the same period last year.
Net cash flow used in investing activities
was $892,381 for the year ended December 31, 2014, compared to $29,284,155 for the year ended December 31, 2013, a decrease of
$28,391,774, or 97.0%. The decrease is mainly due to less cash used in discontinued operations
during the year ended December 31, 2014 compared to the same period last year.
Net cash flow used in financing activities
was 2,166,642 for the year ended December 31, 2014, compared to $31,923,981 provided by financing activities for the year ended
December 31, 2013, a decrease of $34,090,623 or 106.8%. The decrease in net cash flow provided by financing activities was
mainly due to less cash provided by discontinued operations during the year ended December
31, 2013 compared to the same period last year.
Concentration
of Business and Credit Risk
Most
of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to
that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s
bank account in the United States is covered by FDIC insurance.
Because
the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations
in and the volatility of foreign exchange rates between U.S. dollars and RMB.
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables
and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China.
Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s
customers who are located in different regions of China. The Company does not require collateral or other security to support
financial instruments subject to credit risk.
Off-Balance
Sheet Arrangements
We
have not entered into any off-balance sheet arrangements.
Significant
Accounting Estimates and Policies
The
discussion and analysis of our financial condition and results of operations is based upon our financial statements that have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an ongoing
basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products,
income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be
reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue
Recognition
We
recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the
following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling
price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced
value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.
In
accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title
has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The
Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues
net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on
the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne
by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
The
Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company
does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the
Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company
will not manufacture the products until the purchase order is received. The Company allows its customers to return products only
if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product
returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances
for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are
presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns
for the years ended December 31, 2014 and 2013.
Comprehensive
Income
We
have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes
standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial
statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.
Income
Taxes
We
account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes,
which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for
the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective
January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except
for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income
tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation
of this law gradually become subject to the new tax rate within five years after the implementation of this law.
Accounts
Receivable and Allowance For Doubtful Accounts
Accounts receivables are recognized
and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful
accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable
are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts
on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual
customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance
when it is considered necessary. No allowance for doubtful accounts was accrued as of December 31, 2014. Management believes that
this allowance is sufficient based on a review of customer credit history, historic payment records, aging, the market and other
factors.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished
goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated
selling price, in the ordinary course of business, less estimated costs to complete and dispose. The cost of inventories comprises
all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage
of completion. For the years ended December 31, 2014 and 2013, the Company has not made provision for inventory in regards to
slow moving or obsolete items.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs
and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over
the estimated useful life of the assets after taking into account the estimated residual value. The Company reviews the carrying
value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In
cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to
an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects
of obsolescence, demand, competition, and other economic factors. Based on this assessment, no impairment expenses for property,
plant, and equipment was recorded in operating expenses during the years ended December 31, 2014 and 2013.
Research
and Development
Research
and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily
consist of the cost of material used and salaries paid for the development of our products and fees paid to third parties. Our
research and development expense for the years ended December 31, 2014 and 2013 were not significant.
Value
Added Tax
Pursuant
to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”).
The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice
of the PRC, the Company paid VAT and business tax based on tax invoices issued.
The
tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between
the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities
dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which
can range from zero to five times the amount of the taxes that are determined to be late or deficient. In the event that a tax
penalty is assessed on late or deficient payments, the penalty will be expensed as a period expense if and when a determination
has been made by the taxing authorities that a penalty is due.
Fair
Value of Financial Instruments
On
January 1, 2008, the Company began recording financial assets and liabilities subject to recurring fair value measurement at the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
On January 1, 2009, the Company began recording non-recurring financial as well as all non-financial assets and liabilities subject
to fair value measurement under the same principles. These fair value principles prioritize valuation inputs across three broad
levels. The three levels are defined as follows:
|
● |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
● |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial
instruments. |
|
|
|
|
● |
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The
carrying amounts of financial assets and liabilities, including cash and cash equivalents, accounts receivable, notes receivable,
advances to suppliers, other receivables, short-term bank loans, notes payable, accounts payable, advances from customers and
other payables, approximate their fair values because of the short maturity period for these instruments.
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was used to calculate fair value on a recurring basis as of December 31, 2014:
| |
Carrying
Value at
December 31, | |
Fair
Value Measurement at
December 31, 2014 | |
| |
2014 | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Warrant
liability | |
$ | - | | |
| - | | |
| - | | |
$ | - | |
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was used to calculate fair value on a recurring basis as of December 31, 2013:
| |
Carrying
Value at
December 31, | | |
Fair
Value Measurement at
December 31, 2013 | |
| |
2013 | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Warrant liability | |
$ | 13,467 | | |
| - | | |
| - | | |
$ | 13,467 | |
Please
see Note 3 contained in the Notes to the Consolidated Financial Statements for a description of our warrant liability for the
years ended December 31, 2014 and 2013.
The
Company did not identify any other non-recurring assets and liabilities that are required to be presented on the balance sheet
at fair value.
Stock-based
Compensation
Stock-based
compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB
ASC 718, Compensation–Stock Compensation, and (ii) common stock awards granted to consultants which are accounted for under
FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.
All
grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on
their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all
common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding
charge to additional paid-in capital.
Common
stock awards are granted to directors for services provided.
Common
stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The
measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and
vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for
such service. The Company did not make significant grants to consultants for any of the periods presented.
The
Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s
common stock on the date of grant.
Stock
compensation expenses of $nil and $112,664 of were amortized and recognized as general and administrative expenses for the years
ended December 31, 2014 and 2013, respectively.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption
of any such pronouncements will have a material impact on its financial condition or the results of its operations.
In
April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments
in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses
sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations.
In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement
users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in
the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted.
The Company does not expect the adoption to have a significant impact on its consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity
that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial
assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific
guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged
for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption
on its consolidated financial statements.
In
August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”).
In
connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or
within one year after the date that the financial statements are available to be issued when applicable). Management’s
evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial
statements are issued (or at the date that the financial statements are available to be issued when
applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions
and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as
they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is
used consistently with its use in Topic 450, Contingencies.
When
management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going
concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate
the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is
probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions
or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt
is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating
that there is substantial doubt about the entity’s ability to continue as a going concern within one year
after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose
information that enables users of the financial statements to understand all of the following:
|
a. |
Principal
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern |
|
b. |
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations |
|
c. |
Management’s
plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability
to continue as a going concern. |
The
amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying financial statements.
Item
7A. |
Quantitative
and Qualitative Disclosures about Market Risk. |
Not
applicable to smaller reporting companies.
Item
8. |
Financial
Statements and Supplementary Data. |
China
Carbon Graphite Group, Inc.
Index
to Consolidated Financial Statements
|
Page |
|
|
Fiscal Years Ended December 31, 2014 and 2013 |
|
Report
of Independent Registered Public Accounting Firms |
F2 |
Consolidated
Financial Statements |
|
Consolidated
Balance Sheets |
F-3 |
Consolidated
Statements of Operations and Comprehensive Income |
F-4 |
Consolidated
Statements of Cash Flows |
F-5 |
Consolidated
Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity |
F-6 |
Notes
to Consolidated Financial Statements |
F-7
– F-33 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of:
China
Carbon Graphite Group, Inc.
We
have audited the accompanying consolidated balance sheets of China Carbon Graphite Group, Inc. and Subsidiaries (the “Company”)
as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive income, changes in redeemable
convertible preferred stock and stockholders’ equity, and cash flows for the years then ended. The Company’s
management is responsible for these consolidated financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
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 audits 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 accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of China Carbon Graphite Group, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the consolidated
results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
described in Note 2 of the consolidated financial statements, the Company has incurred negative
cash flows from operative activities, and continuing net losses. The Company’s viability is dependent upon its
ability to obtain future financing and the success of its future operations. These matters raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also
described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
KCCW Accountancy Corp.
Diamond
Bar, California
March
31, 2015
KCCW
Accountancy Corp.
22632
Golden Springs Dr. #230, Diamond Bar, CA 91765, USA
Tel:
+1 909 348 7228 • Fax: +1 626 529 1580 • info@kccwcpa.com |
China Carbon Graphite Group, Inc.and subsidiaries |
Consolidated Balance Sheets |
| |
| | |
| |
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
ASSETS |
| |
| | |
| |
Current Assets | |
| | |
| |
Cash and cash equivalents | |
$ | 30,863 | | |
$ | 31,848 | |
Accounts receivable, net | |
| - | | |
| - | |
Advance to suppliers | |
| 16,897 | | |
| 10,995 | |
Inventories | |
| 1,136 | | |
| 450 | |
Prepaid expenses | |
| 7,716 | | |
| 203,908 | |
Shares to be canceled | |
| - | | |
| 230,000 | |
Other receivables, net | |
| 25,084 | | |
| 158,470 | |
Due from related parties | |
| 1,611,707 | | |
| - | |
Current assets of discontinued operations | |
| - | | |
| 69,014,897 | |
Total current assets | |
| 1,693,403 | | |
| 69,650,568 | |
| |
| | | |
| | |
Goodwill | |
| 494,540 | | |
| 494,540 | |
| |
| | | |
| | |
Property and equipment, net | |
| 39,388 | | |
| 48,949 | |
| |
| | | |
| | |
Noncurrent assets of discontinued operations | |
| - | | |
| 61,358,446 | |
Total Assets | |
$ | 2,227,331 | | |
$ | 131,552,503 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 452,428 | | |
$ | 459,485 | |
Advance from customers | |
| 6,614 | | |
| - | |
Shares to be issued | |
| - | | |
| 600,000 | |
Other payables | |
| 865,314 | | |
| 637,850
| |
Due to related parties | |
| 229,632 | | |
| 137,932 | |
Dividends payable | |
| 55,015 | | |
| 55,015 | |
Current liabilities of discontinued operations | |
| - | | |
| 115,444,740 | |
Total current liabilities | |
| 1,609,003 | | |
| 117,335,022 | |
| |
| | | |
| | |
Amount due to related parties | |
| - | | |
| 137,932 | |
Warrant Liabilities | |
| - | | |
| 13,467 | |
Noncurrent liabilities of discontinued operations | |
| - | | |
| 27,616,930 | |
Total Liabilities | |
| 1,609,003 | | |
| 145,103,351 | |
| |
| | | |
| | |
Redeemable convertible series B preferred stock, $0.001 par value; | |
| | | |
| | |
300,000 shares authorized; 300,000 and 300,000 shares issued | |
| | | |
| | |
and outstanding at December 31, 2014 and December 31, 2013, respectively. | |
| - | | |
| 270,000 | |
Stockholders' Equity | |
| | | |
| | |
Common stock, $0.001 par value; 100,000,000 shares authorized | |
| | | |
| | |
33,670,518 and 26,342,518 shares issued and outstanding at | |
| | | |
| | |
December 31, 2014 and December 31, 2013, respectively | |
| 33,670 | | |
| 26,342 | |
Additional paid-in capital | |
| 48,391,103 | | |
| 18,551,966 | |
Accumulated other comprehensive income | |
| 137,085 | | |
| 9,428,149 | |
(Accumulated loss) Retained earnings | |
| (47,943,530 | ) | |
| (41,827,304 | ) |
Total stockholders' equity | |
| 618,328 | | |
| (13,820,847 | ) |
Total Liabilities and Stockholders' Equity | |
$ | 2,227,331 | | |
$ | 131,552,503 | |
The
accompanying notes are an integral part of these consolidated financial statements.
China Carbon Graphite Group, Inc and subsidiaries |
Consolidated Statements of Operations and Comprehensive Loss |
For the Years Ended December 31, 2014 and 2013 |
|
| |
Years ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | | |
| | |
Sales | |
$ | 281,620 | | |
$ | - | |
| |
| | | |
| | |
Cost of Goods Sold | |
| 163,309 | | |
| - | |
| |
| | | |
| | |
Gross Profit | |
| 118,311 | | |
| - | |
| |
| | | |
| | |
Operating Expenses | |
| | | |
| | |
Selling expenses | |
| 43,154 | | |
| - | |
General and administrative | |
| 891,808 | | |
| 1,072,694 | |
| |
| | | |
| | |
Total operating expenses | |
| 934,963 | | |
| 1,072,694 | |
| |
| | | |
| | |
Loss from continuing operations before other income (expense) and income taxes | |
| (816,652 | ) | |
| (1,072,694 | ) |
| |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | |
Interest expense | |
| (2,426 | ) | |
| 836 | |
Interest income | |
| 95 | | |
| 149 | |
Other income (expense), net | |
| 594 | | |
| (1,038 | ) |
Change in fair value of warrants | |
| 13,467 | | |
| 210,895 | |
| |
| | | |
| | |
Total other expense (income), net | |
| 11,730 | | |
| 210,842 | |
| |
| | | |
| | |
Loss from continuing operations before income taxes | |
| (804,922 | ) | |
| (861,852 | ) |
| |
| | | |
| | |
Income Tax Expense | |
| - | | |
| - | |
| |
| | | |
| | |
Net loss from continuing operations | |
| (804,922 | ) | |
| (861,852 | ) |
Discontinued operations, net of income taxes | |
| (5,311,304 | ) | |
| (61,017,028 | ) |
Net loss | |
| (6,116,226 | ) | |
| (61,878,880 | ) |
| |
| | | |
| | |
Preferred Stock Dividends | |
| - | | |
| (8,199 | ) |
| |
| | | |
| | |
Net Loss Available To Common Shareholders | |
| (6,116,226 | ) | |
| (61,887,079 | ) |
| |
| | | |
| | |
Other Comprehensive Income | |
| | | |
| | |
Foreign currency translation gain | |
| 334,365 | | |
| 445,224 | |
| |
| | | |
| | |
Total Comprehensive Loss | |
$ | (5,781,861 | ) | |
$ | (61,433,656 | ) |
| |
| | | |
| | |
Share Data | |
| | | |
| | |
Basic and diluted loss per share | |
| | | |
| | |
Continued operations | |
| (0.03 | ) | |
| (0.03 | ) |
Discontinued operations | |
| (0.16 | ) | |
| (2.36 | ) |
Net loss attributable to Common Shareholders | |
| (0.19 | ) | |
| (2.39 | ) |
| |
| | | |
| | |
Weighted average common shares outstanding, basic | |
| 31,410,507 | | |
| 25,903,011 | |
| |
| | | |
| | |
Weighted average common shares outstanding, diluted | |
| 31,410,507 | | |
| 25,903,011 | |
The
accompanying notes are an integral part of these consolidated financial statements.
China
Carbon Graphite Group, Inc and subsidiaries
Consolidated
Statements of Cash Flows
| |
Years ended
December 31, | |
| |
2014 | | |
2013 | |
Cash Flows from Operating Activities | |
| | |
| |
Net Loss available to common shareholders | |
$ | (6,116,226 | ) | |
$ | (61,878,880 | ) |
Net loss from discontinued operations | |
| 5,311,304 | | |
| 61,017,028 | |
Adjustments to reconcile net cash provided by (used in) operating activities | |
| | | |
| | |
Depreciation and Amortization | |
| 8,872 | | |
| - | |
Stock compensation | |
| 14,080 | | |
| 222,650 | |
Issuance of common stock for service | |
| 180,000 | | |
| - | |
Change in fair value of warrants | |
| (13,467 | ) | |
| (210,895 | ) |
Changes in operating assets and liabilities | |
| | | |
| | |
Accounts receivable | |
| - | | |
| - | |
Other receivables | |
| 130,385 | | |
| 9,600 | |
Advance to suppliers | |
| (6,211 | ) | |
| (1,631 | ) |
Inventory | |
| (702 | ) | |
| - | |
Prepaid expenses | |
| 176,788 | | |
| (125,791 | ) |
Accounts payable and accrued liabilities | |
| (7,052 | ) | |
| 74,166 | |
Advance from customers | |
| 6,660 | | |
| - | |
Taxes payable | |
| 1,995 | | |
| - | |
Other payables | |
| 217,656 | | |
| 911,564 | |
Net cash provided by (used in) operating activities – continuing operations | |
| (275,917 | ) | |
| 17,811 | |
Net cash provided by (used in) operating activities – discontinued operations | |
| 3,336,632 | | |
| (2,758,759 | ) |
Net cash provided by (used in) operating activities | |
| 3,060,715 | | |
| (2,740,948 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Acquisition of property, plant and equipment | |
| (444 | ) | |
| - | |
Cash received in acquisition of business | |
| - | | |
| (86,881 | ) |
Net cash used in investing activities – continuing operations | |
| (444 | ) | |
| (86,881 | ) |
Net cash used in investing activities – discontinued operations | |
| (891,937 | ) | |
| (29,197,274 | ) |
Net cash used in investing activities | |
| (892,381 | ) | |
| (29,284,155 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Stock issuance for cash | |
| 180,000 | | |
| - | |
Proceeds from loan from related parties | |
| 95,712 | | |
| - | |
Net cash used in financing activities – continuing operations | |
| 275,712 | | |
| - | |
Net cash used in financing activities – discontinued operations | |
| (2,442,354 | ) | |
| 31,923,981 | |
Net cash provided by (used in) financing activities | |
| (2,166,642 | ) | |
| 31,923,981 | |
| |
| | | |
| | |
Effect of exchange rate fluctuation | |
| (2,677 | ) | |
| 3,224 | |
| |
| | | |
| | |
Net increase in cash | |
| (985 | ) | |
| (97,898 | ) |
| |
| | | |
| | |
Cash and cash equivalents at beginning of period | |
| 31,848 | | |
| 129,746 | |
| |
| | | |
| | |
Cash and cash equivalents at ending of period | |
$ | 30,863 | | |
$ | 31,848 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information | |
| | | |
| | |
| |
| | | |
| | |
Interest paid | |
$ | 64 | | |
$ | 5,835,427 | |
Income taxes paid | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Non-cash activities: | |
| | | |
| | |
| |
| | | |
| | |
Issuance of common stock for compensation previously accrued | |
$ | 22,800 | | |
$ | 329,450 | |
| |
| | | |
| | |
Issuance of common stock for acquisition | |
$ | 600,000 | | |
$ | - | |
Increase in additional paid-in capital
and decrease in other comprehensive income for gain on disposal of Xingyong to a related party | |
$ | 19,414,076 | | |
$ | - | |
| |
| | | |
| | |
Cancellation of convertible series B preferred stock | |
$ | 230,000 | | |
$ | - | |
The
accompanying notes are an integral part of these consolidated financial statements.
China
Carbon Graphite Group, Inc and subsidiaries
Condensed
Consolidated Statements of Changes in Stockholders' Equity
| |
Convertible
series B | | |
Common | | |
Convertible
series A | | |
Additional | | |
| | |
Other | | |
Total | | |
| |
| |
preferred
Stock | | |
Stock | | |
preferred
Stock | | |
Paid-In | | |
Retained | | |
Comprehensive | | |
Stockholders' | | |
Comprehensive | |
| |
Number | | |
Amount | | |
Number | | |
Amount | | |
Number | | |
Amount | | |
Capital | | |
Earnings | | |
Income | | |
Equity | | |
Income | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance
at December 31, 2012 | |
| 300,000 | | |
$ | 360,000 | | |
| 25,077,518 | | |
$ | 25,077 | | |
| - | | |
$ | - | | |
$ | 18,223,781 | | |
$ | 20,059,775 | | |
$ | 8,982,925 | | |
$ | 47,291,558 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Return
of series B stock Principal | |
| - | | |
| (90,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance
of common stock for directors and an employee | |
| - | | |
| - | | |
| 1,025,000 | | |
| 1,025 | | |
| - | | |
| - | | |
| 255,225 | | |
| - | | |
| - | | |
| 256,250 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance
of common stock for consulting service | |
| - | | |
| - | | |
| 240,000 | | |
| 240 | | |
| - | | |
| - | | |
| 72,960 | | |
| - | | |
| - | | |
| 73,200 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance
of common stock for cash | |
| - | | |
| - | | |
| | | |
| - | | |
| | | |
| | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (61,887,079 | ) | |
| - | | |
| (61,887,079 | ) | |
| (61,887,079 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign
currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 445,224 | | |
| 445,224 | | |
| 445,224 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
$ | (61,441,854 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
at December 31, 2013 | |
| 300,000 | | |
| 270,000 | | |
| 26,342,518 | | |
| 26,342 | | |
| - | | |
| - | | |
| 18,551,966 | | |
| (41,827,304 | ) | |
| 9,428,149 | | |
| (13,820,846 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Return
of series B stock Principal | |
| - | | |
| (270,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (10,000 | ) | |
| - | | |
| - | | |
| (10,000 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance
of common stock for directors and employees | |
| - | | |
| - | | |
| 528,000 | | |
| 528 | | |
| - | | |
| - | | |
| 36,432 | | |
| - | | |
| - | | |
| 36,960 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance
of common stock for acquisition | |
| - | | |
| - | | |
| 5,000,000 | | |
| 5,000 | | |
| - | | |
| - | | |
| 595,000 | | |
| - | | |
| - | | |
| 600,000 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance
of common stock for cash | |
| - | | |
| - | | |
| 1,800,000 | | |
| 1,800 | | |
| - | | |
| - | | |
| 178,200 | | |
| - | | |
| - | | |
| 180,000 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,116,226 | ) | |
| - | | |
| (6,116,226 | ) | |
| (6,116,226 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign
currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 334,365 | | |
| 334,365 | | |
| 334,365 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
$ | (5,781,861 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Disposal of Xingyong | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 29,039,505 | | |
| - | | |
| (9,625,429 | ) | |
| 19,414,076 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
at December 31, 2014 | |
| 300,000 | | |
$ | 0 | | |
| 33,670,518 | | |
$ | 33,670 | | |
| 0 | | |
$ | 0 | | |
$ | 48,391,103 | | |
$ | (47,943,530 | ) | |
$ | 137,085 | | |
$ | 618,328 | | |
| | |
The
accompanying notes are an integral part of these consolidated financial statements.
China
Carbon Graphite Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2014 and 2013
(1) Organization
and Business
China
Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture and sales of
graphene and graphene oxide and graphite bipolar plates in the People’s Republic of China (“China” or the “PRC”).
We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products.
Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through
the website by paying a fee for each transaction conducted through the website.
The
Company was incorporated on February 13, 2003 in Nevada under the name Achievers Magazine Inc. In connection with the reverse
merger transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January
30, 2008.
On
December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement with Sincere Investment (PTC),
Ltd. (“Sincere”), a British Virgin Islands corporation. Sincere was the sole stockholder of Talent International Investment
Limited (“Talent”), a British Virgin Islands corporation, which is the sole stockholder of XingheYongle Carbon Co.,
Ltd. (“Yongle”), a company organized under the laws of the PRC. Pursuant to the share exchange agreement, the Company
issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding on stock of Talent, and Talent became
a wholly-owned subsidiary of the Company. Upon completion of the reverse merger, the Company’s business became the business
of Talent, its subsidiaries and its affiliated variable interest entities.
Talent
owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise organized under the laws of the PRC. Yongle was a
party to a series of contractual agreements with XingheXingyong Carbon Co., Ltd. (“Xingyong”), a corporation organized
under the laws of the PRC. These agreements allowed the Company to operate its business in the PRC and to control the management
of Xingyong and receive economic remuneration from Xingyong’s business. Xingyong’s principal stockholder is Mr. Denyong
Jin, the General Manager of Xingyong. As a result, Xingyong was a variable interest entity and the operations of Xingyong were
consolidated with those of the Company for financial reporting purposes before Xingyong was sold on June 30, 2014.
Accounting
Standard Codification (“ASC”) 810-10-45-25 calls for balance sheet disclosure of (a) assets of a consolidated variable
interest entity (VIE) that can be used only to settle obligations of the consolidated VIE, and (b) liabilities of a consolidated
VIE for which creditors (or beneficial interest owners) do not have recourse to the general credit of the primary beneficiary.
The majority operating business of the Company was conducted by Xingyong and the consolidated balance sheet of the Company reflected
Xingyong’s balance sheet before Xingyong was disposed on June 30, 2014.
There are no such assets or liabilities on the balance sheet of Xingyong. The Operating Agreement dated December 7, 2007 provides
that Yongle is a full-recourse guarantor of all obligations of Xingyong, and Xingyong has pledged all of its assets to Yongle.
The Consulting Agreement of that date includes an assignment of all of the revenues of Xingyong to Yongle. Yongle was 100% owned
by Talent and Talent is 100% owned by the Company. Accordingly, there are no assets or liabilities of Xingyong that in which the
Company did not own before Xingyong was disposed on June 30, 2014.
Talent
was party to four agreements dated December 7, 2007 with the owners of the registered equity of Xingyong. The agreements
transfer to Talent benefits and all of the risk arising from the operations of Xingyong, as well as complete managerial authority
over the operations of Xingyong.
The
following paragraphs briefly describe the key provisions
of each contractual agreement that prescribes the Company’s relationship with Xingyong :
Exclusive
Technical Consulting and Services Agreement . Technical consulting and services agreement entered into on December 7,
2007 between Yongle and Xingyong, pursuant to which Yongle has agreed to provide technical and consulting services related to
the business operations of Xingyong. As consideration for such services, Xingyong has agreed to pay to Yongle a service fee equal
to 80% to 100% of the profits of Xingyong. The exact fee is calculated and paid on a quarterly basis, and is determined based
on a number of factors, including but not limited to the complexity of the services provided and the commercial value of the services
provided. The exclusive technical consulting and services agreement has a 10 year term. Yongle may extend the term of such agreement.
The parties may terminate the agreement, prior to its expiration, upon the mutual consent of Yongle and Xingyong.
Business
Operations Agreement . Pursuant to the business operations agreement entered into on December 7, 2007 between Yongle,
Xingyong, and the shareholders of Xingyong, Xingyong has agreed not to conduct any material transaction or corporate action without
obtaining the prior written consent of Yongle. Furthermore, Xingyong and its shareholders have agreed to implement proposals made
by Yongle with respect to the operations of Xingyong’s business and the appointment of directors and officers of Xingyong.
Yongle may terminate the business operations agreement at any time. The term of the business operations agreement is indefinite.
Option
Agreement .Yongle entered into an option agreement on December 7, 2007 with Xingyong and each of the shareholders of
Xingyong, pursuant to which Yongle has an exclusive option to purchase, or to designate another qualified person to purchase,
to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Xingyong owned by the
shareholders of Xingyong. To the extent permitted by the PRC laws, the purchase price for the entire equity interest shall equal
the actual price designated by Yongle to the extent permitted by relevant laws and regulations. The option agreement has a 10
year term. Upon the request of Yongle, the parties shall extend the term of the option agreement.
Equity Pledge Agreement. Pursuant
to an equity pledge agreement, dated December 7, 2007, each of the shareholders of Xingyong pledged his equity interest in Xingyong
to Yongle to secure Xingyong’s obligations under the VIE agreements described above. In addition, the shareholders of Xingyong
agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in Xingyong that would affect
Yongle’s interests. The equity pledge agreement will expire when Xingyong fully performs its obligations under the various
VIE agreements described above.
On
June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and
its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively
“Purchasers”). Pursuant to the Agreement, the Purchasers purchased all of the rights and obligations of
Yongle under the Contractual Arrangements. The purchase price under the Agreement is $1,611,707 (RMB 10 million), including
$601,167 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $1,010,541 (RMB 6.27
million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on June 30,
2014 after approved by majority of shareholders at a special meeting of shareholders held on such date.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented. See Note 15 — Discontinued Operations for additional information.
The
consolidated financial statements presented herein consolidate the financial statements of China Carbon Graphite, Inc. with the
financial statements of its subsidiaries, Talent and Yongle.
Acquisition
in December 2013
On
December 23, 2013, the Company acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”). Pursuant
to the terms of the acquisition, we issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the
former shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The shares were issued on
January 16, 2014. BVI Co. then became a wholly owned subsidiary of the Company.
BVI
Co. currently has two business operations as follows (collectively the “Business”):
|
● |
Manufacture
of Graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium
ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin
films and chips. Graphite bipolar plates are primarily used in solar power storage. |
|
● |
A
business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors
can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through
the website by paying a fee for each transaction conducted through the website. |
The
Business and the facilities related thereto are all located in the People’s Republic of China (“China”). The
Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a
wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited, a Hong
Kong company, (“Royal HK”), which is wholly owned by BVI Co.
Royal
Shanghai was set up in Shanghai on June 9, 2010. Royal HK was set up in Hong Kong on January 8, 2010.
Organizational
Structure Chart
The
following chart sets forth our organizational structure:
Liquidity
and Working Capital Deficit
As
of December 31, 2014 and as of December 31, 2013, the Company managed to operate its business with a negative or small working
capital.
The
Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following
rules:
1. |
10%
of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s
registered capital. |
2. |
If
the cumulative balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’
losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus
reverse is drawn. |
3. |
Allocation
can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners. |
Therefore,
the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The
maximum amount of the shareholders has not been reached. The Company has never distributed earnings to shareholders and has no
intentions to do so.
(2)
Going Concern
The
Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States
of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As of and for the year ended December 31, 2014, the Company has incurred significant operating
losses, and negative net cash flows from operating activities .
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
Management’s
Plan to Continue as a Going Concern
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s
plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales
of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However,
management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans
to look for opportunities to merge with other companies in the graphite industry.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
(3) Basis
for Preparation of the Financial Statements
The
Company maintains its books and accounting records in Renminbi (“RMB”), but its reporting currency is U.S. dollars.
The
consolidated financial statements have been prepared in order to present the financial position and results of operations of the
Company, its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
(4) Summary
of Significant Accounting Policies
The
accompanying consolidated financial statements reflect the application of certain significant accounting policies as described
in this note and elsewhere in the accompanying consolidated financial statements and notes.
Business
Combinations
The
Company uses the acquisition method of accounting for business combinations which requires that the assets acquired and liabilities
assumed be recorded at the date of the acquisition at their respective fair values. Assets acquired and liabilities assumed in
a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If
the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined,
the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability
is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values
of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as
incurred. The operating results of acquired business are reflected in the acquirer’s consolidated financial statements and
results of operations after the date of the acquisition.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact
on net earnings and financial position.
Use
of estimates
The
preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of net sales and expenses during the reporting period. Some of the
significant estimates include values and lives assigned to acquired property, equipment and intangible assets, reserves for customer
returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and stock warrant valuation.
Actual results may differ from these estimates.
Cash
and cash equivalents
The
Company considers all highly liquid debt instruments purchased with maturity periods of six months or less to be cash equivalents.
The carrying amounts reported in the accompanying balance sheet for cash and cash equivalents approximate their fair value. Substantially
all of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar
insurance. The Company’s bank account in the United States is protected by FDIC insurance.
Accounts
receivable
Trade
receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance
for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.
Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance
for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically
evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments
in the allowance when it is considered necessary.
Inventory
Inventory
is stated at the lower of cost or market. The cost of inventories comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include
fixed and variable production overhead, taking into account the stage of completion. Cost is determined using the weighted average
method. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary
to complete the sale. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially
obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer demand. Impairment of inventories is recorded in cost
of goods sold.
For
the years ended December 31, 2014 and 2013, the Company has not made provision for inventory in regards to slow moving or obsolete
items.
Property
and equipment
Property
and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided
using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes
as follows:
Machinery and equipment | |
5 years |
Motor vehicle | |
5 years |
Expenditures
for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations
in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in
an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized
as an additional cost of the asset.
Upon
sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed
from their respective accounts and any gain or loss is recorded in the statements of income.
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends and prospects, the manner in which the property
is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment
expenses for property, plant, and equipment was recorded in operating expenses during the years ended December 31, 2014 and 2013.
Stock-based
compensation
Stock-based
compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB
ASC 718, Compensation–Stock Compensation” and (ii) common stock awards granted to consultants which are accounted
for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.
All
grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on
their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all
common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding
charge to additional paid-in capital.
Common
stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued
are recorded in common stock to be issued.
Common
stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The
measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and
vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for
such service.
The
Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s
common stock on the date of grant.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollars. The Company uses RMB as its functional currency. The results of operations
and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified
exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related
to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding
accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive
income in the statements of stockholders’ equity. Translation adjustments for the years ended December 31, 2014 and 2013were
$334,365 and $445,224, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the
years ended December 31, 2014 and 2013 were $(2,677) and $3,224, respectively. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of
operations as incurred.
Assets
and liabilities were translated at 6.20 RMB and 6.05 RMB to $1.00 at December 31, 2014 and December 31, 2013, respectively. The
equity accounts were stated at their historical rates. The average translation rates applied to income statements for the years
ended December 31, 2014 and 2013 were 6.16 RMB and 6.15 RMB to $1.00, respectively. Cash flows are also translated at average
translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Revenue
recognition
We
recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the
following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling
price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced
value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.
In
accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title
has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The
Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues
net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on
the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne
by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
The
Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does
not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company
once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will
not manufacture the products until the purchase order is received. The Company allows its customers to return products only if
its products are later determined by the Company to be defective. Based on the Company’s historical experience, product
returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances
for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are
presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns
for the years ended December 31, 2014 and 2013.
Cost
of goods sold
Cost
of goods sold consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery,
warehousing and overhead associated with the manufacturing process and commission expenses. Cost of goods sold also includes impairment
charge of inventories.
Shipping
and handling costs
The
Company follows ASC 605-45, Handling Costs, and Shipping Costs, formerly known as Emerging Issues Task Force No. 00-10, Accounting
for Shipping and Handling Fees and Costs. The Company classifies shipping and handling costs paid on behalf of its customers in
selling expenses. For the years ended December 31, 2014 and 2013, shipping and handling costs were $26,435 and $nil, respectively.
Segment
reporting
ASC
280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this
model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal
structure, management structure or any other manner in which management disaggregates a company.
Because
the Company sells only carbon graphite products to Chinese distributors and end users, it has only one business segment.
Taxation
Taxation
on profits earned in the PRC has been calculated based on the estimated assessable profits for the year at the rates of taxation
prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed
in the county of operations.
The
Company does not accrue U.S. income tax since it has no operations in the United States. Its operating subsidiaries are organized
and located in the PRC and do not conduct any business in the United States.
In
2006, the Financial Accounting Standards Board (“FASB”) issued ASC, 740 Income Tax, formerly known as FIN
48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any
part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement,
recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition.
In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.
The
Company recognizes that virtually all tax positions in the PRC are not free from some degree of uncertainty due to tax law and
policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued
by current government officials.
Based
on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits
as of December 31, 2014 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, 2014, if recognized, would not have a material effect on
its effective tax rate. The Company further believes that there are no tax positions, including the Enterprise Income Tax holiday
from Xing He District Local Tax Authority, for which it is reasonably possible, based on current Chinese tax law and policy, that
the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in
the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.
Enterprise
income tax
The
enterprise income tax is calculated on the basis of the statutory profit as defined in the PRC tax laws. This statutory profit
is computed differently than the Company’s net income under U.S. GAAP.
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and
credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities from
a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents
the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Value
added tax
The
Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1,
1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax,
value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement
services provided within the PRC.
VAT
payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the
full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the
taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in
the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services
in the same financial year. VAT payable is included in prepaid expenses of $9,674 and is included in other payable of $11,780
as of December 31, 2014 and December 31, 2013, respectively.
Contingent
liabilities and contingent assets
A
contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence
or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present
obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability
or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in
the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company
will incur it.
A
contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded
but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit.
When the benefit is virtually certain, the asset is recognized.
Retirement
benefit costs
According
to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal
government in the province in which the Company is registered and all qualified employees are eligible to participate in the program.
Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees
contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for
the payment of retirement benefits beyond the annual contributions under this program.
Fair
value of financial instruments
The
Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source
of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable
inputs, which may be used to measure fair value and include the following:
|
● |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
● |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial
instruments. |
|
● |
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The fair value of the 2009 Warrants
to purchase 200,000 shares of common stock was $nil and $808 at December 31, 2014 and December 31, 2013, respectively. The Company
recognized a gain of $418 from the change in fair value of these warrants for the three months ended March 31, 2014 and a gain
of $390 from the change in fair value of these warrants for the three months ended June 30, 2014and a gain of $nil from the change
in fair value of these warrants for the three months ended September 30, 2014and a gain of $nil from the change in fair value of
these warrants for the three months ended December 31, 2014.These shares expired on October 15, 2014.
The fair value of the 2009 Series B Warrants to purchase
804,200 shares of common stock was $nil and $11,106 at December 31, 2014 and December 31, 2013, respectively. The Company recognized
a gain of $1,879 from the change in fair value of these warrants for the three months ended March 31, 2014 and a gain of $9,005
from the change in fair value of these warrants for the three months ended June 30, 2014 and a gain of $160 from the change in
fair value of these warrants for the three months ended September 30, 2014and a gain of $62 from the change in fair value of these
warrants for the three months ended December 31, 2014.These shares expired on December 22, 2014.
The
fair value of 2010 Series B warrants to purchase 100,000 shares of common stock was $nil and $1,553 at December 31, 2014 and December
31, 2013, respectively. The Company recognized a gain of $198 from the change in fair value of these warrants for the three months
ended March 31, 2014 and a gain of $1,308 from the change in fair value of these warrants for the three months ended June 30,
2014 and a gain of $20 from the change in fair value of these warrants for the three months ended September 30, 2014and a gain
of $26 from the change in fair value of these warrants for the three months ended December 31, 2014. These warrants will expire
on January 13, 2015.
In summary, the Company recorded a total amount
of $13,467 and $210,895 of changes in fair value of warrants in the consolidate statement of income and comprehensive income for
the year ended December 31, 2014 and 2013. Each reporting period, the change in fair value is recorded into other income (expense).
Warrants
referred to in the preceding paragraphs do not trade in an active securities market, and as such, the Company estimates the fair
value of these warrants using the Black-Scholes option pricing model using the following assumptions:
| |
December 31,
2014 | | |
December 31,
2013 | |
2007 Warrants | |
| | |
| |
Annual dividend yield | |
| - | | |
| - | |
Expected life (years) | |
| - | | |
| - | |
Risk-free interest rate | |
| 0.18 | % | |
| 0.18 | % |
Expected volatility | |
| 211 | % | |
| 152 | % |
| |
December 31,
2014 | | |
December 31,
2013 | |
2009 Warrants | |
| | |
| |
Annual dividend yield | |
| - | | |
| - | |
Expected life (years) | |
| - | | |
| 0.71 | |
Risk-free interest rate | |
| 0.18 | % | |
| 0.18 | % |
Expected volatility | |
| 211 | % | |
| 152 | % |
| |
December 31,
2014 | | |
December 31,
2013 | |
2009 Series B Warrants | |
| | |
| |
Annual dividend yield | |
| - | | |
| - | |
Expected life (years) | |
| - | | |
| 0.98 | |
Risk-free interest rate | |
| 0.18 | % | |
| 0.18 | % |
Expected volatility | |
| 211 | % | |
| 152 | % |
| |
December 31,
2014 | | |
December 31,
2013 | |
2010 Series B Warrants | |
| | |
| |
Annual dividend yield | |
| - | | |
| - | |
Expected life (years) | |
| 0.03 | | |
| 1.03 | |
Risk-free interest rate | |
| 0.18 | % | |
| 0.18 | % |
Expected volatility | |
| 211 | % | |
| 152 | % |
The
carrying amount of restricted cash, other receivables, advance to vendors, advances from customers, other payables, accrued liabilities
and short-term loans are reasonable estimates of their fair value because of the short term nature of these items.
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was accounted for at fair value on a recurring basis or for purposes of disclosures as of December 31, 2014:
| |
| Carrying
Value at
December 31, | | |
| Fair
Value Measurement at
December 31, 2014 | |
| |
| 2014 | | |
| Level
1 | | |
| Level
2 | | |
| Level
3 | |
Warrant liability | |
$ | - | | |
| - | | |
| - | | |
$ | - | |
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was used to calculate fair value on a recurring basis as of December 31, 2013:
| |
Carrying
Value at
December 31, | | |
Fair
Value Measurement at
December 31, 2013 | |
| |
2013 | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Warrant liability | |
$ | 13,467 | | |
| - | | |
| - | | |
$ | 13,467 | |
The
Company uses the black-scholes valuation method approach when determining fair values of its Level 3 recurring fair value measurements.
Certain unobservable units for these assets are offered quotes, lack of marketability and volatility. For Level 3 measurements,
significant increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair
value measurement. In general, a significant change in the calculated volatility of the Company’s stock price could negatively
affect the fair value of the warrant liability.
Summary
of warrants outstanding:
| |
Warrants | | |
Weighted
Average
Exercise Price | |
Outstanding as of December
31, 2013 | |
| 1,229,200 | | |
$ | 1.51 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | |
Outstanding as of
December 31, 2014 | |
| 1,229,200 | | |
$ | 1.51 | |
Earnings
(loss) per share
Basic
earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities
outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion
of convertible debt, preferred stock and warrants. The Company has outstanding warrants to purchase 1,229,200 shares of common
stock at an exercise price in the range of $1.30 - $2.00 per share. The Company uses if-converted method to calculate the dilutive
preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.
The
following table sets forth the computation of the number of net income per share for the years ended December 31, 2014 and 2013:
| |
December
31, 2014 | | |
December
31, 2013 | |
Weighted
average shares of common stock outstanding (basic) | |
| 31,410,507 | | |
| 25,903,011 | |
Shares
issuable upon conversion of Series B Preferred Stock | |
| - | | |
| - | |
Weighted
average shares of common stock outstanding (diluted) | |
| 31,410,507 | | |
| 25,903,011 | |
Net
(loss) available to common shareholders | |
$ | (6,116,226 | ) | |
$ | (61,887,079 | ) |
Net
(loss) per shares of common stock (basic) | |
$ | (0.19 | ) | |
$ | (2.39 | ) |
Net
(loss) per shares of common stock (diluted) | |
$ | (0.19 | ) | |
$ | (2.39 | ) |
For
the year ended December 31, 2014, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock,
because such issuance would be anti-dilutive.
For
the year ended December 31, 2014, the Company excluded 1,229,200 shares of common stock issuable upon exercise of warrants, because
such issuance would be anti-dilutive.
Accumulated
other comprehensive income
The
Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the
elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the
Company, comprehensive income for the years ended December 31, 2014 and 2013 included net income and foreign currency translation
adjustments.
Related
parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions
with related parties are disclosed in the financial statements.
Recent
accounting pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption
of any such pronouncements will have a material impact on its financial condition or the results of its operations.
In
April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments
in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses
sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations.
In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement
users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in
the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted.
The Company does not expect the adoption to have a significant impact on its consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity
that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial
assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific
guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged
for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption
on its consolidated financial statements.
In
August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”).
In
connection with preparing financial statements for each annual and interim reporting period, an entity’s management
should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the financial statements
are issued (or within one year after the date that the financial statements are available to be
issued when applicable). Management’s evaluation should be based on relevant conditions and events that are
known and reasonably knowable at the date that thefinancial statements are issued (or at the date that the financial
statements are available to be issued when applicable). Substantial doubt about an entity’s ability to
continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is
probable that the entity will be unable to meet its obligations as they become due within one year after the date that the
financial statements are issued (or available to be issued). The term probable is used consistently with its
use in Topic 450, Contingencies.
When
management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going
concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate
the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is
probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions
or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial
doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables
users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the
footnotes):
|
a. |
Principal
conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before
consideration of management’s plans) |
|
b. |
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations |
|
c. |
Management’s
plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt
is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating
that there is substantial doubt about the entity’s ability to continue as a going concern within one year
after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose
information that enables users of the financial statements to understand all of the following:
|
a. |
Principal
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern |
|
b. |
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations |
|
c. |
Management’s
plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability
to continue as a going concern. |
The
amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying financial statements.
(5)
Concentration of Business and Credit Risk
Most
of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to
that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s
bank account in the United States is covered by FDIC insurance.
Because
the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations
in and the volatility of foreign exchange rates between U.S. dollars and RMB.
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables
and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China.
Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s
customers who are located in different regions of China. The Company does not require collateral or other security to support
financial instruments subject to credit risk.
(6) Income
Taxes
Under
the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC,
which took effect on January 1, 2008, domestic and foreign companies pay a unified corporate income tax of 25%, except for a 15%
corporate income tax rate for qualified high technology and science enterprises.
The
Company has been granted a 100% tax holiday from enterprise income tax from the Xing He District Local Tax Authority for 10 years
from 2008 through 2017.
A
reconciliation of the provision for income taxes with amounts determined by the PRC statutory income tax rate to income before
income taxes is as follows:
| |
| Year
ended
December
31,
| |
| |
| 2014 | | |
| 2013 | |
Computed tax at the PRC statutory
rate of 25% | |
$ | - | | |
$ | - | |
Benefit of tax
holiday | |
| - | | |
| - | |
Income tax expenses
per books | |
$ | - | | |
$ | - | |
(7) Accounts
Receivable, net
The
Company establishes an individualized credit and collection policy based on each individual customer’s credit history. The
Company does not have a uniform policy that applies equally to all customers. The collection period usually ranges
from three months to twelve months. The Company grants extended payment terms only when the Company believes that the payment
will be collectible at the end of the term. The Company grants extended payment terms to customers if based on the following factors:
(a) whether or not the Company views a real need, from the customer’s perspective, for the extension and (b) how critical
the Company’s relationship with the customer and is the customer the Company’s long-term business. The Company grants
extended payment terms only when the Company believes that the payment will be collectible at the end of the term. This meets
the criteria of revenue recognition under U.S. GAAP, which requires that collection of the resulting receivable be reasonably
assured.
As
of December 31, 2014 and 2013, accounts receivable consisted of the following:
| |
| December 31,
2014 | | |
| December 31,
2013 | |
Amount outstanding | |
$ | - | | |
$ | - | |
Less: Allowance
for doubtful accounts, net | |
| - | | |
| - | |
Net amount | |
$ | - | | |
$ | - | |
(8) Advances
to Suppliers
As
of December 31, 2014 and December 31, 2013, advances to suppliers are advances for finished goods and amounted to $16,897and $10,995,
respectively.
Advances
to suppliers represent interest-free cash paid in advance to suppliers for purchases of raw materials.
(9)
Inventories
As
of December 31, 2014 and 2013, inventories consisted of the following:
| |
December 31,
2014 | | |
December 31,
2013 | |
Finished goods | |
$ | 1136 | | |
$ | 450 | |
Reserve for slow
moving and obsolete inventory | |
| - | | |
| - | |
| |
$ | 1,136 | | |
$ | 450 | |
For
the years ended December 31, 2014 and 2013, the Company has not made provision for inventory in regards to slow moving or obsolete
items. As of December 31, 2014 and December 31, 2013, the Company did not record any provision for inventory in regards to slow
moving or obsolete items.
(10)
Property and Equipment, net
As
of December 31, 2014 and 2013, property and equipment consisted of the following:
| |
December 31,
2014 | | |
December 31,
2013 | |
Machinery and equipment | |
$ | 4,110 | | |
$ | 3,761 | |
Motor vehicles | |
| 45,024 | | |
| 46,146 | |
Total | |
| 49,134 | | |
| 49,907 | |
Less: accumulated
depreciation | |
| (9,746 | ) | |
| (958 | ) |
| |
$ | 39,388 | | |
$ | 48,949 | |
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends and prospects, the manner in which the property
is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment
expenses for property, plant, and equipment was recorded in operating expenses during the years ended December 31, 2014 and 2013.
For
the year ended December 31, 2014 and 2013, depreciation expenses amounted to $8,872 and $nil, respectively.
(11) Stockholders’
equity
Restated
Articles of Incorporation
On
January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000
shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value
$0.001 per share. The restated articles of incorporation authorizes the board of directors of the Company to issue one or more
series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such preferred
stock. The board of directors has authorized the issuance of two series of preferred stock, Series A Convertible Preferred Stock
(“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”).
Issuance
of Common Stock
(a) Conversion
of Series A Preferred Stock
As
of December 31, 2014 and 2013, no shares of Series A Preferred Stock are issued or outstanding.
(b) Conversion
of Series B Preferred Stock
During
the years ended December 31, 2013 and 2014, the Company issued an aggregate of 0 shares of common stock to holders of Series B
Preferred Stock upon the conversion of an aggregate of 0 shares of Series B Preferred Stock. 300,000 shares of Series B Preferred
Stock are redeemable by the holder as of December 31, 2012. The Company has reclassified these shares into Temporary Equity since
December 31, 2012.
In
July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern
District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a
claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series
B Preferred shares and the parties settled out of court for $320,000 plus $40,000 that were already paid. The Company paid $90,000
in 2013 and$270,000 in 2014. The preferred stock will be canceled after all payments are made. The Company plans to cancel the
stocks in May 2015.
(c) Stock
Issuances for Cash
On
December 11, 2014, the Company issued 1,800,000 shares for cash at $0.10 per share to unrelated parties.
(d) Stock
Issuances to Consultants
In
April 2012, the Company issued an aggregate of 110,000 shares of common stock pursuant to a consulting agreement in exchange for
investor relations services. A fair value of $96,800 was recorded for the expenses and amortized over one year. The amount of
$nil and $32,267 was amortized and recognized as a general and administrative expense for the years ended December 31, 2014 and
2013, respectively. As of June 30, 2013, these consulting expenses were fully amortized.
In
December 2012, the Company issued an aggregate of 65,000 shares of common stock pursuant to a consulting agreement in exchange
for investor relations services. A fair value of $27,950 was recorded for the expenses and amortized over six months. The amount
of $nil and $26,397 was amortized and recognized as a general and administrative expense for the years December 31, 2014 and 2013,
respectively. As of June 30, 2013, these consulting expenses were fully amortized.
In January 2013, the Company issued
30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relation’s services. A fair value
of $20,400 was recorded for the expenses and amortized over six months. The amount of $nil and $20,400 was amortized and recognized
as a general and administrative expense for the years ended December 31, 2014 and 2013, respectively. As of June 30, 2013, these
consulting expenses were fully amortized.
On
March 28, 2013, the Company issued 30,000 shares of common stock to a consultant for services provided. The issuance of these
shares was recorded at fair market value, or $12,000 and fully amortized during the three months ended March 31, 2013.
In May 2013, the Company issued 120,000
shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $28,800
was recorded for the expenses and amortized over eight months. The amount of $nil and $28,800 was amortized and recognized as a
general and administrative expense for the years ended December 31, 2014 and 2013, respectively .As of December 31, 2013, these
consulting expenses were fully amortized.
In July 2013, the Company issued 60,000
shares of common stock pursuant to a consulting agreement in exchange for investor relation’s services. A fair value of $12,000
was recorded for the expenses and amortized over six months. The amount of $nil and $12,000 was amortized and recognized as a general
and administrative expense for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2013, these consulting
expenses were fully amortized.
(e) Other
Stock Issuances
On
December 13, 2012, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services
provided in 2012. On December 13, 2012, the Company issued 60,000 shares of common stock to an employee for services provided
in 2012. The issuance of these shares was recorded at fair market value, or $64,000.
On
May 8, 2013, the Company issued 1,000,000 shares of restricted common stock to an employee for services provided in 2013. On May
8, 2013, the Company issued 25,000 shares of common stock to a director as compensation for services provided in 2013. The issuance
of these shares was recorded at fair market value, or $256,250 and were recorded as general and administration expense.
On
January 14, 2014, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services
provided in 2013. The issuance of these shares was recorded at fair market value.
On
January 14, 2014, the Company issued 76,000 shares of common stock to two employees for services provided in 2013. The issuance
of these shares was recorded at fair market value.
On
December 11, 2014, the Company issued an aggregate of 200,000 shares of common stock to four directors as compensation for services
provided in 2014.
On
December 11, 2014, the Company issued 152,000 shares of common stock to two employees for services provided in 2014. The issuance
of these shares was recorded at fair market value, or $6,080.
(f) Stock
Issuances for acquisition
On
January 16, 2014, the Company issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former
shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The issuance of these shares was
recorded at fair market value.
(g) Shares
Held in Escrow
In
a private placement that closed on December 22, 2009 and January 13, 2010, the Company sold an aggregate of 2,480,500 shares of
Series B Preferred Stock and five-year warrants to purchase 992,000 shares of common stock at an exercise price of $1.30 per share,
for an aggregate purchase price of $2,976,600. The Company also paid the private placement agent an aggregate of $298,000 and
issued five-year warrants to purchase 124,025 shares of common stock at an exercise price of $1.32 per share. In connection with
the private placement and pursuant to the transaction agreements, the Company deposited into escrow an aggregate of 1,240,250
shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending
on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and 2011.
The
Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction
of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount
by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor
exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number
of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which
is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year
2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company
for cancellation. As of December 31, 2014, no Escrow shares have been transferred to investors or returned to the Company.
Dividend
Distribution for Series B Preferred Stock
Pursuant
to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers
a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010 until December 31, 2011.
For
the years ended December 31, 2014 and 2013, no payment was made for dividends declared.
(12)
Related Parties
As of December 31, 2014 and December
31, 2013, due from related parties amounted to $1,611,707 and $nil. $1,611,707 is receivable from Mr. Jin for disposal of Xingyong.
(see Note 15).
As
of December 31, 2014 and December 31, 2013, $229,632 and $137,932 are due to Mr. Donghai Yu, who is CEO
of the Company. These amounts are advances made to the Company by unrelated parties through Mr. Donghai Yu for business operating
purposes. The advances are interest free.
(13)
Other Payable
Other
payable amounted $865,314 and $499,918 as of December 31, 2014 and December 31, 2013, respectively.
(14)
Business Acquisition
On
December 23, 2013, the Company acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”) by entering
into an agreement. Per the agreement, the Company is obligated to issue 5,000,000 of common stock, par value $0.001 per share,
to shareholders of BVI Co. in the aggregate in exchange for 500 ordinary shares of BVI Co. held by them, representing 100% of
BVI Co.’s issued and outstanding share capital. BVI Co. then becomes a wholly owned subsidiary of the Company. The shares
were issued on January 16, 2014.
BVI
Co. currently has two business operations as follows (collectively the “Business”):
|
● |
Manufacture
of Graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium
ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin
films and chips. Graphite bipolar plates are primarily used in solar power storage. |
|
● |
A
business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors
can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through
the website by paying a fee for each transaction conducted through the website. |
The
Business and the facilities related thereto are all located in the People’s Republic of China (“China”). The
Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a
wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited,
a Hong Kong company, (“Royal HK”), which is wholly owned by BVI Co. The Business currently generates minimal
sales.
The
Company accounted for its acquisitions of BVI Co. using the acquisition method of accounting. Accordingly, the results of
operations for the year ended December 31, 2013, include the revenues and expenses of the acquired businesses since the effective
control date of acquisition on December 31, 2013, which is the date the Company assumed control of BVI Co. pursuant to the terms
of the share transfer agreement between the Company and the shareholders of BVI Co.
The
fair value of the purchase consideration issued to the sellers of BVI Co. was allocated to fair value of the net tangible assets
acquired, with the resulting excess allocated to and recorded as goodwill.
Goodwill
recognized from the transactions mainly represented the expected operational synergies upon acquisition of the subsidiary and
intangibles not qualifying for separate recognition. Goodwill is nondeductible for income tax purposes in the tax jurisdiction
of the acquired business.
The
purchase price was allocated as follows:
Stock to be issued to sellers | |
$ | 600,000 | |
Less cash acquired | |
| (12,816 | ) |
Net purchase consideration | |
| 587,184 | |
| |
| | |
Net tangible assets
acquired: | |
| | |
Advance to suppliers | |
| 9,338 | |
Other receivable | |
| 168,070 | |
Inventories | |
| 450 | |
Property, plant and equipment | |
| 48,949 | |
Advance to suppliers | |
| 9,938 | |
Accrued payable | |
| (318 | ) |
Other payable | |
| (920 | ) |
Due to a related party | |
| (137,932 | ) |
Exchange loss | |
| (4,931 | ) |
Net tangible assets
acquired | |
| 92,644 | |
| |
| | |
Purchase consideration
in excess of fair value of net tangible assets | |
| 494,540 | |
| |
| | |
Allocated to: | |
| | |
Customer relationships | |
| | |
Goodwill | |
| 494,540 | |
The
purchase price allocation was based, in part, on management’s knowledge of BVI Co. and its subsidiaries’ business. Amounts
presented above were translated into US dollars using the exchange rate in effect at the date of the acquisition, which was 6.0537.
BVI
Co’s results of operations are consolidated with the Company effective as December 23, 2012.
(15)
Discontinued Operations
On
June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and
its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively
“Purchasers”). Pursuant to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable
conditions to closing, purchase all of the rights and obligations of Yongle under the Contractual Arrangements. The
Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement
is $1,611,707 (RMB 10 million), including $601,167 (RMB 3.73 million) in cash and the cancellation of the registrant’s
repayment obligations of $1,010,541 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The
disposal of Xingyong became effective on June 30, 2014 after approved by a special meeting of shareholders.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented.
Balances
for Xingyong as of discontinuance date December 31, 2014 and 2013 are as follows:
| |
December 31,
2014 | | |
December 31,
2013 | |
Total current assets | |
$ | 57,863,291 | | |
$ | 69,014,897 | |
| |
| | | |
| | |
Total noncurrent
assets | |
| 59,753,754 | | |
| 61,358,446 | |
| |
| | | |
| | |
Total
Assets | |
$ | 117,617,045 | | |
$ | 130,373,343 | |
| |
| | | |
| | |
Total current liabilities | |
$ | 118,967,814 | | |
$ | 115,582,672 | |
| |
| | | |
| | |
Total noncurrent
liabilities | |
| 18,056,644 | | |
| 27,616,930 | |
| |
| | | |
| | |
Total
Liabilities | |
$ | 137,024,458 | | |
$ | 143,199,602 | |
The
operating results of Xingyong for the years ending December 31, 2014 and 2013 classified as discontinued operations are summarized
below:
| |
Year
Ended December 31, | |
| |
2014* | | |
2013 | |
Sales | |
$ | 2,981,403 | | |
$ | 9,526,709 | |
Cost
of Goods Sold | |
| 4,248,552 | | |
| 32,689,538 | |
Gross Profit | |
| (1,267,149 | ) | |
| (23,162,829 | ) |
Operating Expenses | |
| 2,153,231 | | |
| 34,305,045 | |
Other Income (Expense) | |
| 1,890,924 | | |
| 3,549,154 | |
Income
Tax Expense | |
| - | | |
| - | |
Net
loss | |
$ | (5,311,304 | ) | |
$ | (61,017,028 | ) |
|
☐ |
Data
for year ended December 31, 2014 only includes data before Xingyong was disposed. |
On
July 3, 2014, the Company entered into an installment payment agreement (the “Installment Agreement”) with Purchasers.
The Installment Agreement is entered in connection with the Purchase Agreement. Pursuant to the Installment Agreement, the Purchasers
agreed to pay the purchase price under the Purchase Agreement of $1,611,707 (RMB 10 million) in installments as follows: (1) an
initial installment of $96,702 (RMB 0.6 million) in cash plus the cancellation of the registrant’s repayment obligation of
$1,010,541 (RMB 6.27 million) to Dengyong Jin, and (2) one or more installments of the remaining $504,464 (RMB 3.13 million) in
cash on or before July 25, 2014. Any amount not paid by such
date will accrue interest at 10% annually until payment. Additionally, the closing of the transactions contemplated under the Purchase
Agreement shall close concurrently with the final installment. In connection with the foregoing initial installment, the Company
and Dengyong Jin entered into an indebtedness cancellation agreement (the “Cancellation Agreement”) concurrently with
the Installment Agreement, pursuant to which Mr. Jin discharged the Company of its obligation to repay him $1,010,541 (RMB 6.27
million), and surrendered all right to collect such amount from the Company.
(16) Subsequent
events
Management
has considered all events occurring through the date which the financial statements were available to be issued. All
subsequent events requiring recognition as of December 31, 2014 have been incorporated into the accompanying consolidated and
combined financial statements, and those requiring disclosure have been fully disclosed in accordance with FASB ASC Topic
855, “Subsequent Events”.
PART
III
Item 9. |
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure. |
On March 31, 2013, the
Company dismissed its independent registered public accounting firm, BDO China Dahua CPA Co., Ltd. (“ BDO China Dahua ”). |
|
The reports of BDO China Dahua on the
consolidated financial statements of the Company as of December 31, 2012 and 2011 and for the years then ended did not contain
an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting
principles. |
The decision to change
independent registered public accounting firm was approved by the Audit Committee of the Board of Directors of the Company. |
(a) During the process
of auditing of the Company’s consolidated statements for the year ended December 31, 2013, the Company and BDO China
Dahua disagreed with the amount of adequate audit evidence needed to support the Company’s year-end accounts to meet
the requirements of BDO China Dahua; (b) the Board of Directors of the Company discussed these disagreement with BDO China
Dahua; and (c) the Board of Directors of the Company has authorized BDO China Dahua to respond fully to inquiries of the successor
independent registered public accounting firm concerning this matter. |
The
disagreement between the Company and BDO were as follows: |
1
BDO and the Company do not agree on the amount of allowance for accounts receivable. BDO suggested a reserve of $3.25 million
bad debt allowance as of December 31, 2013. The Company believes that most of it is collectable. Due to lack of subsequent accounts
receivable collections, the Company was not able to provide supportable evidence of the accounts receivable balance.
2
BDO considered all the $4.76 million interest as expense because BDO believes that the Company’s loans are for working capital
purpose only. The Company was not able to provide agreements showing that the loans are used for construction. The Company believes
that the Company is entitled to capitalize part of the interest expenses regardless of the purpose of the loans.
3
BDO and the Company did not agree on the Company's ability to continue as a going concern. BDO believed there were negative financial
indicators showing that the Company has a going concern issue, the Company has enormous amount of liabilities, three consecutive
years with substantial negative operating cash flows, significant reliance on short-term debt and inventory notes payable. And
also, the Company has decreasing revenues, decreasing profits, which causing inability to make financing interest payments. The
Company's management did not agree with this assessment, but did not provide adequate evidence to support the next twelve months
of operations.
There were no “reportable
events” as described in Item 304(a)(1)(v) of Regulation S-K other than: At December 31, 2012, the Company reported a
material weakness in its internal control over financial reporting related to: (i) lack of entity level controls establishing
a “tone at the top”, including but not limited to, communication between committee members and senior management
regarding corporate decisions and planning; (ii) insufficient knowledge of accounting and financial reporting with respect
to the requirements and application of both U.S. GAAP and SEC guidelines; (iii) an inadequate amount of review by management
of the financial statement reporting process, including understanding and reporting all required disclosures necessary, by
those in charge of corporate governance; (iv) lack of corporate governance policies in place, such as an internal audit function,
fraud and risk assessment policies and a whistleblower policy; and (v) inadequate segregation of duties over certain information
system access controls. |
On
March 31, 2013, concurrent with the dismissal of BDO China Dahua CPA Co., Ltd., China Carbon Graphite Group, Inc. (the “ Company ”),
upon the approval of the Company’s audit committee, engaged KCCW Accountancy Corp. (“ KCCW”) as
its new independent registered public accounting firm to audit and review the Company’s consolidated financial statements
effective immediately. During the years ended December 31, 2012, and any subsequent period through the date hereof prior to the
engagement of KCCW, neither the Company, nor someone on its behalf, has consulted KCCW regarding:
(i) |
either: the application
of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might
be rendered on the Company’s consolidated financial statements, and either a written report was provided to the Company
or oral advice was provided that KCCW concluded was an important factor considered by the Company in reaching a decision as
to the accounting, auditing or financial reporting issue; or |
(ii) |
any matter that was either
the subject of a disagreement or a reportable event, each as defined in Item 304 of Regulation S-K. |
Item 9A. |
Controls and Procedures. |
Evaluation
of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of December 31, 2014.
Disclosure
controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in
the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information
is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible
controls and procedures.
Management
conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of
the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective
as of December 31, 2014.
Management’s
Report of Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act. Our management is also required to assess and report on the effectiveness of our
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on that evaluation, our management has concluded that during the periods
covered by this Annual Report, our internal control over financial reporting was not effective as of December 31, 2014. During
our assessment of the effectiveness of internal control over financial reporting, management identified significant deficiencies
related to: (i) lack of entity level controls establishing a “tone at the top”, including but not limited to, communication
between committee members and senior management regarding corporate decisions and planning; (ii) insufficient knowledge of accounting
and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines; (iii) an inadequate
amount of review by management of the financial statement reporting process, including understanding and reporting all required
disclosures necessary, by those in charge of corporate governance; (iv) lack of corporate governance policies in place, such as
an internal audit function, fraud and risk assessment policies and a whistleblower policy; and (v) inadequate segregation of duties
over certain information system access controls.
Based
on these facts, the Company determined that the aggregation of these significant deficiencies represents a material weakness.
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over
financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible
for oversight of the Company’s financial reporting.
Our
current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively
new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff
is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined
that they require additional training and assistance in U.S. GAAP methods. Management has determined that our internal
audit function is also significantly deficient due to insufficient resources to perform internal audit functions.
In
order to correct the foregoing deficiencies, we are seeking to engage an experienced accountant or firm to assist us in establishing
procedures that will enable us to have, on an ongoing basis, personnel who understand U.S. GAAP and the disclosure obligations
under the Exchange Act. We are committed to the establishment of effective internal audit functions; however, due to the scarcity
of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire
sufficient internal audit personnel in order to enable us to have such procedures and controls established by the end of December
31, 2014.
We
believe that the foregoing steps will remediate the deficiencies identified above, and we will continue to monitor the effectiveness
of these steps and make any changes that our management deems appropriate. However, as a result of these material weaknesses
and deficiencies in our disclosure controls and procedures, current and potential stockholders could lose confidence in our financial
reporting and disclosures made in our public filings, which would harm our business and the trading price of our stock.
Changes
in Internal Control over Financial Reporting
No
changes in the internal control over our financial reporting have come to management’s attention during our last fiscal
year that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Limitations
on Controls
Management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect
all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide
only reasonable assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company
have been detected.
Item 9B. |
Other Information. |
None.
Item 10. |
Directors, Executive Officers
and Corporate Governance. |
The
following table sets forth certain information with respect to our directors, executive officers and significant employees:
Name |
|
Age |
|
Position |
Donghai Yu |
|
49 |
|
Chief Executive Officer, President and
Director |
Zhenfang Yang |
|
50 |
|
Interim Chief Financial
Officer |
Philip Yizhao Zhang |
|
44 |
|
Director |
John Qiang Chen |
|
43 |
|
Director |
Hongbo Liu |
|
55 |
|
Director |
Dong Jin |
|
33 |
|
Director |
Grace King |
|
59 |
|
Senior Vice President of Finance |
Donghai
Yu. Mr. Donghai Yu has been our Chief Executive Officer since November 2008 and a director since
December 2007. Mr. Yu served as our Chief Financial Officer from December 2007 until November 2008. Since November 2007, he has
also been Chief Financial Officer of Xingyong. Prior to joining the Company, Mr. Yu was a financial consultant in personal and
business finance from 2002 to 2007. Mr. Yu received his Master of Business Administration from Oklahoma City University.
Zhenfang
Yang. Mr. Zhenfang Yang has been employed as our Interim Chief Financial Officer since November 2010. Since 2007,
he worked as a key manager of our operating company. Prior to joining the Company, Mr. Yang was a key manager at the Inner Mongolia
Forestry Department. Mr. Yang has over 30 years of experience in the finance and accounting field. He received his degree from
Inner Mongolia Finance and Economics College.
Philip
Yizhao Zhang. Mr. Yizhao Zhang has been a director of the Company since 2009. He is currently assisting
various Chinese companies in preparing to offer their securities overseas. He is also a director of Kaisa Group Holdings
Ltd. (HK: 1638) and China Green Agriculture Inc. (NYSE: CGA). Mr. Zhang has over 18 years of experience in accounting and
internal control, corporate finance, and portfolio management. Previously, Mr. Zhang held senior positions at China Education
Alliance, Inc., Universal Travel Group, Energroups Holdings Corporation, Shengtai Pharmaceutical Inc, Chinawe Asset Management
Corporation and China Natural Resources Incorporation. Mr. Zhang also held positions in portfolio management and asset trading
at 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). He also has the Chartered Global Management Accountant
(CGMA) designation. Mr. Zhang graduated with a bachelor’s degree in economics from Fudan University, Shanghai in 1992 and
received a Master of Business Administration with concentrations in financial analysis and accounting from the State University
of New York at Buffalo in 2003.
John
Qiang Chen. Mr. John Chen has been a director of the Company since November 2009. Mr. Chen has also
been a director of SGOCO Group, Ltd. (also known as SGOCO Technology, Ltd.) since November 2010 and General Steel Holdings,
Inc., since March 2005. He has served as chief financial officer of General Steel Holdings, Inc. since May 2004. From August
1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer and Torbet, LLP in Los Angeles,
California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun City, Jilin Province, China, in
1992. He obtained his Bachelor of Science in Business Administration with a concentration in accounting from California State
Polytechnic University in July 1997.
Hongbo
Liu. Dr. Hongbo Liu has been a director of the Company since November 2008. He is a professor at Hunan University
in Hunan Province, where he has been the chair of the Department 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.
Dong
Jin. In 2006, Mr. Jin graduated from Massey University in New Zealand majored in Business. In the same year, Mr.
Jin joined China Carbon Graphite as the production manager. In 2010, Mr. Jin started serving the company as the vice president
of sales, leading 26 sales representatives and distributing the company’s products to over 200 customers in 22 provinces
in China. Spending 6 years at China Carbon, Mr. Jin has been actively involved in each area of the Company’s daily operations,
such as accounting, manufacturing, sales, financing and business development. By taking such a crucial role at the company, Mr.
Jin has established significant leadership in the management team driving the company forward. He was appointed as our director
in 2013.
Grace
King. Ms. Grace King is a significant employee of the Company. She has been our Senior Vice President
of Finance since December 15, 2010. Ms. Grace has over 20 years of financial transaction experience with extensive
contacts and expertise in China. Prior to joining the Company, Ms. King acted as the managing partner of APEC Investment, Inc.,
where she provided investment banking and advisory services to small and mid-sized Chinese companies. Prior to that, Ms. King
was the managing director of China business development for Primary Capital, providing a full range of investment banking services
to Chinese clients. From 1999 to 2007, Ms. King was a senior investment advisor for Great Eastern Securities, Inc., responsible
for overseeing the development of the firm’s Asia business. From 1990 to 1998, Ms. King worked as a financial consultant
and fund manager for Transpacific Exchange Corp, a private equity fund with a principal focus on China. From 1985 to 1989, Ms.
King was employed with Merrill Lynch, as a member of their international corporate group, where she completed transactions including
bond underwritings, private placements, privatizations, and mergers and acquisitions. She was one of two key investment bankers
who successfully launched Taiwan Fund, Inc. (NYSE:TWN), and served as a key banker on Gulf Canada’s global offering of over
$1 billion. Ms. King graduated with a Bachelor of Science and a Master of Business of Administration in Finance and International
Business in May 1984 from Columbia University.
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.
Director
Qualifications
We
seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations
of our businesses. We seek directors who possess qualities such as integrity and candor, who have strong analytical skills and
who are willing to engage management and each other in a constructive and collaborative fashion. We also seek directors who have
the ability and commitment to devote significant time and energy to service on our board and its committees. We believe that all
of our directors meet the foregoing qualifications.
Board
Committees
Effective
October 28, 2009, the Company created audit, compensation and corporate governance/nominating committees and adopted committee
charters. Mr. John Chen, Mr. Philip Zhang, and Mr. Hongbo Liu, all independent directors, serve as members of each of these 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. Mr. Zhang is our audit committee financial expert.
Director
Independence
Following
the appointment of Mr. Chen and Mr. Zhang as directors on October 28, 2009, the board determined that a majority of the Company’s
directors are independent under NASDAQ Marketplace Rules.
Code
of Ethics
On
October 28, 2009, our board 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.
Involvement
in Certain Legal Proceedings
None.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our executive officers and directors and persons who own more than ten percent of a registered
class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange
Commission. Executive officers, directors and ten-percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. Our executive officers and directors and persons who own more than ten percent of
our common stock failed to file a Form 3 upon becoming a Section 16 filer. In addition, in 2012, each of our directors failed
to file a Form 4 to reflect the grant of an equity award.
Item 11. |
Executive Compensation. |
The following summary compensation table
sets forth the compensation earned by our named executive officers during the years ended December 31, 2014 and 2013. None
of our executive officers received $100,000 or more compensation during these periods.
Summary
Compensation Table
Name
and principal position | |
Year | | |
Salary | | |
Stock
Awards (1) | | |
Total | |
Donghai
Yu | |
| 2014 | | |
$ | 80,000 | | |
$ | - | | |
$ | 80,000 | |
Chief
Executive Officer | |
| 2013 | | |
$ | 80,000 | | |
$ | - | | |
$ | 80,000 | |
| |
| | | |
| | | |
| | | |
| | |
Zhenfang
Yang | |
| 2014 | | |
$ | 24,000 | | |
$ | - | | |
$ | 24,000 | |
Interim
Chief Financial Officer | |
| 2013 | | |
$ | 24,000 | | |
$ | - | | |
$ | 24,000 | |
(1)
This column represents the fair value of the stock issuance on the grant date determined in accordance with the provisions of
ASC 718. These amounts represent grants of a stock awards to Mr. Yu in his capacity as a director of the Company.
Director
Compensation
In 2014 and 2013, we issued 75,000 and 0 shares of common stock, respectively, to each of Mr. Donghai Yu, Mr. Philip Yizaho
Zhang, Mr. John Chen and Mr. Hongbo Liu for their services as directors and committee members. In 2014 and 2013, we issued
0 and 25,000 shares of common stock, respectively to Mr. Dong Jin for his service as a director and committee member.
Director
Compensation Table
The
following table presents the compensation paid to our directors in respect of fiscal year 2014 for their services as directors:
Name | |
Stock
Awards (1) | | |
Total | |
Donghai
Yu | |
$ | 75,000 | | |
$ | 75,000 | |
Philip
Yizhao Zhang | |
$ | 75,000 | | |
$ | 75,000 | |
Dong
Jin | |
$ | - | | |
$ | - | |
John
Chen | |
$ | 75,000 | | |
$ | 75,000 | |
Hongbo
Liu | |
$ | 75,000 | | |
$ | 75,000 | |
(1)
This column represents the fair value of the stock issuance on the grant date determined in accordance with the provisions of
ASC 718.
Item 12. |
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters. |
The
following table provides information as to shares of common stock beneficially owned as of March 31, 2015, by:
● |
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.20955 Pathfinder Road, Suite 200, Diamond Bar, CA.
Name |
|
Amount and
Nature of
Beneficial Ownership |
|
|
Percent of
Class
(1) |
|
|
|
|
|
|
|
|
|
|
Sincere Investment (PTC), Ltd. (2) |
|
|
9,388,172 |
|
|
|
29.79 |
% |
Donghai Yu |
|
|
120,000 |
|
|
|
0.38 |
% |
Zhenfang Yang |
|
|
16,000 |
|
|
|
0.05 |
% |
Hongbo Liu |
|
|
125,000 |
|
|
|
0.4 |
% |
Philip Yizhao Zhang |
|
|
125,000 |
|
|
|
0.4 |
% |
Dong Jin |
|
|
25,000 |
|
|
|
0.08 |
% |
John Qiang Chen |
|
|
100,000 |
|
|
|
0.32 |
% |
All officers and directors as a group (5 persons) |
|
|
9,899,172 |
|
|
|
31.41 |
% |
5% shareholders: None |
|
|
|
|
|
|
|
|
(1)
Applicable percentages are based on 31,518,518 shares outstanding, adjusted as required by rules of the SEC. Beneficial ownership
is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares
of common stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible
within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding
for computing the percentage of any other person. Unless otherwise indicated in the footnotes to this table, Company believes
that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock
indicated as beneficially owned by them.
(2) Lizhong Gao, our former
president and a director of the Company, 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, General Manager of our 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.
Item 13. |
Certain Relationships and
Related Transactions, and Director Independence. |
Dengyong
Jin, General Manager of our China operations and our former chief executive officer, is the chief executive officer and principal
shareholder of Xingyong. Our principal stockholder, Sincere, is owned by LizhongGao, 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.
Messrs.
Liu, Zhang and Chen are independent as defined by NASDAQ Marketplace Rules.
Item 14. |
Principal Accounting Fees
and Services. |
The
following is a summary of the fees billed to us by KCCW Accountancy Corp. (“KCCW”) for the fiscal years ended December
31, 2014 and 2013.
| |
KCCW | |
Fee
Category | |
2014 | | |
2013 | |
Audit
fees | |
$ | 155,500 | | |
$ | 155,500 | |
Audit-related
fees | |
| - | | |
| - | |
Tax
fees | |
| - | | |
| - | |
Other
fees | |
| - | | |
| - | |
Total
Fees | |
$ | 155,500 | | |
$ | 155,500 | |
All
of the services provided and fees charged by our independent registered accounting firm were approved by the board of directors
and audit committee.
Services
rendered by KCCW
The
following is a summary of the fees for professional services rendered by KCCW for the years ended December 31, 2014 and 2013:
Audit
fees. Audit fees for KCCW in 2014 and 2013 represent fees for professional services performed by KCCW for the audit of
our 2014 and 2013 annual financial statements and review of each quarter for 2014 and 2013. Also included are services
that are normally provided in connection with statutory and regulatory filings or engagements, including the audit of the financial
statements of Talent, Yongle, Xingyong, BVI Co., Royal HK, and Royal Shanghai.
PART
IV
Item 15. |
Exhibits and Financial
Statement Schedules. |
(a)
1.
The financial statements listed in the “Index to Consolidated Financial Statements.”
2.
None.
3.
Exhibits:
Exhibit
Number |
|
Description |
2.1 |
|
Exchange Agreement, dated as of December
14, 2007, between the Registrant and Sincere Investment (PTC), Ltd. (incorporated by reference to the Form 8-K filed by the
Company on December 31, 2007). |
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 (incorporated by reference to the Form 8-K filed by the Company on January 28, 2008). |
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 (incorporated
by reference to the Form 8-K filed by the Company on December 28, 2009). |
3.3 |
|
Amended and Restated Bylaws of the
Company (incorporated by reference to the Form 8-K filed by the Company on November 3, 2009). |
4.1 |
|
Form of Warrant issued to the investors
(incorporated by reference to the Form 8-K filed by the Company on December 28, 2009). |
4.2 |
|
Warrant issued to Maxim Group LLC (incorporated
by reference to the Form 8-K filed by the Company on December 28, 2009). |
10.1 |
|
Business Operations Agreement, dated
December 7, 2007, between XingheXingyong Carbon Co., Ltd. and XingheYongle Carbon Co., Ltd. (English Translation) (incorporated
by reference to the Form 8-K filed by the Company on December 31, 2007). |
10.2 |
|
Exclusive Technical and Consulting
Services Agreement, dated December 7, 2007, between XingheXingyong Carbon Co., Ltd. and XingheYongle Carbon Co., Ltd. (English
Translation) (incorporated by reference to the Form 8-K filed by the Company on December 31, 2007). |
10.3 |
|
Option Agreement, dated December 7,
2007, between XingheXingyong Carbon Co., Ltd. and XingheYongle Carbon Co., Ltd. (English Translation) (incorporated by reference
to the Form 8-K filed by the Company on December 31, 2007). |
10.4 |
|
Equity Pledge Agreement, dated December
7, 2007, among XingheXingyong Carbon Co., Ltd., XingheYongle Carbon Co., Ltd. and Dengyong Jin (English Translation) (incorporated
by reference to the Form 8-K filed by the Company on December 31, 2007). |
10.5 |
|
Consulting Agreement, dated February
9, 2009, between the Company and Ventanta Capital Partners (incorporated by reference to the Form 8-K filed by the Company
on February 13, 2009). |
10.6 |
|
Amendment to Securities Purchase Agreement,
dated April 8, 2009, between the Company and XingGuang Investment Corporation, Limited (incorporated by reference to the Form
8-K filed by the Company on April 13, 2009). |
10.7 |
|
Form of Subscription Agreement, dated December 22, 2009, between the Registrant and the investors set forth therein (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009). |
10.8 |
|
Registration Rights Agreement, dated December 22, 2009, between the Company, Maxim Group LLC, and the investors set forth therein (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009). |
10.9 |
|
Securities Escrow Agreement, dated December 22, 2009, between the Company, Maxim Group LLC, and the investors set forth therein (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009). |
10.10 |
|
Loan Agreement, dated August 6, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010). |
10.11 |
|
Loan Agreement, dated August 23, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010). |
10.12 |
|
Loan Agreement, dated September 6, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010). |
10.13 |
|
Loan Agreement, dated September 16, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010). |
10.14 |
|
Asset Purchase Agreement by and among the Company, Yongle Carbon Dengyong Jin and Benhua Du, and dated as of June 10, 2014 (incorporated by reference to the Form 8-K filed by the Company on June 16, 2014). |
10.15 |
|
Installment Payment Agreement by and among the Company, Dengyong Jin and Benhua Du, dated as of July 3, 2014 (incorporated by reference to the Form 8-K filed by the Company on July 10, 2014). |
10.16 |
|
Indebtedness Cancellation Agreement by and between the Company and Dengyong Jin, dated as of July 3, 2014 (incorporated by reference to the Form 8-K filed by the Company on July 10, 2014). |
14 |
|
Code of Ethics (incorporated by reference to the Form 8-K filed by the Company on November 3, 2009). |
21 |
|
List of Subsidiaries.* |
31.1 |
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
31.2 |
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
32.1 |
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
32.2 |
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
101. INS |
|
XBRL Instance Document. |
101. SCH |
|
XBRL Taxonomy Extension Schema Document. |
101. CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
101. LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
101. PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
101. DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CHINA CARBON GRAPHITE GROUP,
INC. |
|
|
|
|
|
Date: April
1, 2015 |
By: |
/s/
Donghai Yu |
|
|
|
Donghai Yu |
|
|
|
Chief
Executive Officer
(Principal
Executive Officer) |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/
Donghai Yu |
|
Chief Executive
Officer and Director |
|
April
1, 2015 |
Donghai Yu |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/
Zhenfang Yang |
|
Chief Financial
Officer |
|
April
1, 2015 |
Zhenfang Yang |
|
(Principal Financial
Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/
Philip Yizhao Zhang |
|
Director |
|
April
1, 2015 |
Philip Yizhao Zhang |
|
|
|
|
|
|
|
|
|
/s/
John Qiang Chen |
|
Director |
|
April
1, 2015 |
John Qiang Chen |
|
|
|
|
|
|
|
|
|
/s/
Hongbo Liu |
|
Director |
|
April
1, 2015 |
Hongbo Liu |
|
|
|
|
|
|
|
|
|
/s/ Dong Jin |
|
Director |
|
April
1, 2015 |
Dong Jin |
|
|
|
|
49
Exhibit 21
List of Subsidiaries
of China Carbon Graphite Group, Inc.
NAME |
PLACE OF INCORPORATION |
Talent International Investment Limited |
BVI |
Golden Ivy Limited |
BVI |
Royal Elite International Limited |
Hong Kong |
Xinghe Yongle Carbon Co., Ltd. |
People’s Republic of China |
Royal Elite New Energy Science and Technology (Shanghai) Co. Ltd. |
People’s Republic of China |
Exhibit 31.1
CERTIFICATION
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED
PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY
ACT OF 2002
I, Donghai
Yu, certify that:
1. I have reviewed
this Annual Report on Form 10-K of China Carbon Graphite Group, Inc. (the “Registrant”):
2. Based on
my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on
my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this report;
4. The Registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13-a13a-15(f) and 15d-15(f)) for the Registrant and have:
a)
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures; and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such
evaluation; and
d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
and
5. The Registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing
the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s
internal control over financial reporting.
Dated: April 1,
2015 |
By: |
/s/ Donghai Yu |
|
|
Donghai Yu |
|
|
Chief Executive Officer
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED
PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY
ACT OF 2002
I, Zhenfang
Yang, certify that:
1. I have reviewed
this Annual Report on Form 10-K of China Carbon Graphite Group, Inc. (the “Registrant”):
2. Based on
my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on
my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this report;
4. The Registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13-a13a-15(f) and 15d-15(f)) for the Registrant and have:
a)
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures; and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such
evaluation; and
d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
and
5. The Registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing
the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s
internal control over financial reporting.
Dated: April 1, 2015 |
By: |
/s/ Zhenfang Yang |
|
|
Zhenfang Yang |
|
|
Chief Financial Officer
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18 U. S.
C. SECTION 1350,
AS ADOPTED
PURSUANT TO
SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report
of China Carbon Graphite Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2014 (the “Report”),
I, Donghai Yu, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with
the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in
the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 1,
2015 |
By: |
/s/ Donghai Yu |
|
|
Donghai Yu |
|
|
Chief Executive Officer
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION
PURSUANT TO
18 U. S.
C. SECTION 1350,
AS ADOPTED
PURSUANT TO
SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report
of China Carbon Graphite Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2014 (the “Report”),
I, Zhenfang Yang, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with
the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in
the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 1,
2015 |
By: |
/s/ Zhenfang Yang |
|
|
Zhenfang Yang |
|
|
Chief Financial Officer
(Principal Financial Officer) |
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