United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2015
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _______________ to _______________
Commission
File Number: 333-114564
CHINA
CARBON GRAPHITE GROUP, INC.
(Exact
Name of Registrant as specified in its charter)
Nevada |
|
98-0550699 |
(State
or other jurisdiction of
incorporation
of organization) |
|
(I.R.S.
Employer
Identification
No.) |
20955
Pathfinder Road, Suite 200
Diamond
Bar, CA 91765
(Address
of principal executive offices, zip code)
(909)
843-6518
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
Non-accelerated
filer |
☐ |
Smaller reporting
company |
☒ |
(Do
not check if smaller reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable date: 33,670,518 shares of common stock are issued
and outstanding as of November 16, 2015.
CHINA
CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES
FORM
10-Q
September
30, 2015
TABLE
OF CONTENTS
|
|
Page
No. |
|
|
|
PART
I - FINANCIAL INFORMATION |
|
|
|
Item 1. |
Financial Statements: |
3 |
|
Consolidated Balance
Sheets at September 30, 2015 (unaudited) and December 31, 2014 |
4 |
|
Unaudited Consolidated
Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014 |
5 |
|
Unaudited Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 |
6 |
|
Notes to Unaudited
Consolidated Financial Statements |
8 |
Item 2. |
Management's Discussion
and Analysis of Financial Condition and Results of Operations |
31 |
Item 3. |
Quantitative and
Qualitative Disclosures About Market Risk |
48 |
Item 4. |
Controls and Procedures |
48 |
|
|
|
PART
II - OTHER INFORMATION |
|
|
|
Item 1. |
Legal Proceedings |
49 |
Item 1A. |
Risk Factors |
49 |
Item 2. |
Unregistered Sales
of Equity Securities and Use of Proceeds |
49 |
Item 3. |
Defaults Upon
Senior Securities |
49 |
Item 4. |
Mine Safety Disclosures |
49 |
Item 5. |
Other Information |
49 |
Item 6. |
Exhibits |
50 |
|
Signatures |
51 |
PART
1 - FINANCIAL INFORMATION
Item
1. |
Financial Statements. |
The
following unaudited interim financial statements of China Carbon Graphite Group, Inc. (referred to herein as the "Company,"
"we," "us" or "our") are included in this quarterly report on Form 10-Q:
|
|
Page |
|
|
|
Consolidated Balance
Sheets at September 30, 2015 (unaudited) and December 31, 2014 |
|
4 |
|
|
|
Unaudited Consolidated
Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014 |
|
5 |
|
|
|
Unaudited Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 |
|
6 |
|
|
|
Notes to Unaudited
Consolidated Financial Statements |
|
8 |
China Carbon Graphite Group, Inc. and subsidiaries
Consolidated Balance Sheets
|
|
September 30, 2015 |
|
|
December 31, 2014 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
ASSETS |
|
|
|
|
|
|
Current Assets |
Cash and cash equivalents |
|
$ |
25,433 |
|
|
$ |
30,863 |
|
Account Receivable |
|
|
42,295 |
|
|
|
- |
|
Advance to suppliers |
|
|
- |
|
|
|
16,897 |
|
Inventories |
|
|
2,431 |
|
|
|
1,136 |
|
Prepaid expenses |
|
|
834 |
|
|
|
7,716 |
|
Other receivables, net |
|
|
33,976 |
|
|
|
25,084 |
|
Due from related parties |
|
|
1,573,416 |
|
|
|
1,611,707 |
|
Total current assets |
|
|
1,678,385 |
|
|
|
1,693,403 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
|
|
494,540 |
|
|
|
|
|
|
|
|
|
|
Property And Equipment, Net |
|
|
32,900 |
|
|
|
39,388 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,711,285 |
|
|
$ |
2,227,331 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
608,713 |
|
|
$ |
452,428 |
|
Advance from customers |
|
|
- |
|
|
|
6,614 |
|
Other payables |
|
|
892,246 |
|
|
|
865,314 |
|
Due to related parties |
|
|
248,250 |
|
|
|
229,632 |
|
Dividends payable |
|
|
55,015 |
|
|
|
55,015 |
|
Total current liabilities |
|
|
1,804,224 |
|
|
|
1,609,003 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,804,224 |
|
|
|
1,609,003 |
|
|
|
|
|
|
|
|
|
|
Redeemable convertible series B preferred stock, $0.001 par value; 300,000 shares authorized; 0 and 300,000 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively. |
|
|
- |
|
|
|
270,000 |
|
Stockholders' Equity (Deficit) |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized 33,670,518 and 33,670,518 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively |
|
|
33,670 |
|
|
|
33,670 |
|
Additional paid-in capital |
|
|
48,391,103 |
|
|
|
48,391,103 |
|
Accumulated other comprehensive income |
|
|
103,074 |
|
|
|
137,085 |
|
(Accumulated deficit) Retained earnings |
|
|
(48,620,786 |
) |
|
|
(47,943,530 |
) |
Total stockholders' equity (deficit) |
|
|
(92,939 |
) |
|
|
618,328 |
|
Total Liabilities and Stockholders' Equity (Deficit) |
|
$ |
1,711,285 |
|
|
$ |
2,497,331 |
|
The accompanying notes
are an integral part of these unaudited consolidated financial statements.
China Carbon Graphite Group, Inc and subsidiaries
Consolidated Statements of Operations and Comprehensive
Loss
For the Nine Months Ended September, 2015 and
2014
(Unaudited)
| |
Three months ended September 30, | | |
Nine Months ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Sales | |
$ | 117,572 | | |
$ | 99,171 | | |
$ | 146,408 | | |
$ | 164,742 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of Goods Sold | |
| 70,149 | | |
| 14,977 | | |
| 80,626 | | |
| 54,727 | |
| |
| | | |
| | | |
| | | |
| | |
Gross Profit | |
| 47,423 | | |
| 84,194 | | |
| 65,782 | | |
| 110,015 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 9,130 | | |
| 12,319 | | |
| 19,590 | | |
| 26,176 | |
General and administrative | |
| 584,106 | | |
| 20,617 | | |
| 781,527 | | |
| 814,905 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 593,236 | | |
| 32,936 | | |
| 801,117 | | |
| 841,081 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before other income (expense) and income taxes | |
| (545,814 | ) | |
| 51,258 | | |
| (735,336 | ) | |
| (731,066 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (731 | ) | |
| (519 | ) | |
| (1,707 | ) | |
| (1,994 | ) |
Interest income | |
| - | | |
| - | | |
| - | | |
| 95 | |
Other income (expense), net | |
| 21,355 | | |
| (547 | ) | |
| 59,787 | | |
| (236 | ) |
Change in fair value of warrants | |
| - | | |
| 181 | | |
| - | | |
| 13,379 | |
| |
| | | |
| | | |
| | | |
| | |
Total other expense (income), net | |
| 20,624 | | |
| (885 | ) | |
| 58,080 | | |
| 11,244 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before income taxes | |
| (525,190 | ) | |
| 50,373 | | |
| (677,256 | ) | |
| (719,822 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income Tax Expense | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss from continuing operations | |
| (525,190 | ) | |
| 50,373 | | |
| (677,256 | ) | |
| (719,822 | ) |
Discontinued operations, net of income taxes | |
| - | | |
| - | | |
| - | | |
| (5,311,304 | ) |
Net loss | |
| (525,190 | ) | |
| 50,373 | | |
| (677,256 | ) | |
| (6,031,126 | ) |
| |
| | | |
| | | |
| | | |
| | |
Preferred Stock Dividends | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss Available To Common Shareholders | |
| (525,190 | ) | |
| 50,373 | | |
| (677,256 | ) | |
| (6,031,126 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Comprehensive Income | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation gain | |
| (34,912 | ) | |
| 14,905 | | |
| (34,011 | ) | |
| 350,296 | |
| |
| | | |
| | | |
| | | |
| | |
Total Comprehensive Loss | |
$ | (560,102 | ) | |
$ | 65,278 | | |
$ | (711,267 | ) | |
$ | (5,680,830 | ) |
| |
| | | |
| | | |
| | | |
| | |
Share Data | |
| | | |
| | | |
| | | |
| | |
Basic and diluted loss per share | |
| | | |
| | | |
| | | |
| | |
Continued operations | |
| (0.02 | ) | |
| 0.00 | | |
| (0.02 | ) | |
| (0.02 | ) |
Discontinued operations | |
| 0.00 | | |
| 0.00 | | |
| 0.00 | | |
| (0.16 | ) |
Net loss attributable to Common Shareholders | |
| (0.02 | ) | |
| 0.00 | | |
| (0.02 | ) | |
| (0.19 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding, basic | |
| 33,670,518 | | |
| 31,518,518 | | |
| 33,670,518 | | |
| 32,216,452 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding, diluted | |
| 33,670,518 | | |
| 31,518,518 | | |
| 33,670,518 | | |
| 32,216,452 | |
The accompanying notes
are an integral part of these unaudited consolidated financial statements.
China Carbon Graphite Group, Inc and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| |
Nine Months ended September 30, | |
| |
2015 | | |
2014 | |
Cash Flows from Operating Activities |
Net Loss | |
$ | (677,256 | ) | |
$ | (6,031,126 | ) |
Net loss from discontinued operations | |
| - | | |
| 5,311,304 | |
Adjustments to reconcile net cash provided by (used in) operating activities | |
| | | |
| | |
Depreciation and Amortization | |
| 6,715 | | |
| 6,640 | |
Goodwill impairment | |
| 494,540 | | |
| - | |
Change in fair value of warrants | |
| - | | |
| (13,379 | ) |
Changes in operating assets and liabilities | |
| | | |
| | |
Accounts receivable | |
| (43,026 | ) | |
| (21,919 | ) |
Other receivables | |
| (9,515 | ) | |
| 289,042 | |
Advance to suppliers | |
| 16,780 | | |
| (51,838 | ) |
Inventory | |
| (1,345 | ) | |
| (9,581 | ) |
Prepaid expenses | |
| - | | |
| (53,212 | ) |
Accounts payable and accrued liabilities | |
| 157,264 | | |
| 16,682 | |
Advance from customers | |
| (6,568 | ) | |
| 40,035 | |
Taxes payable | |
| 6,814 | | |
| (535 | ) |
Other payables | |
| 27,334 | | |
| 654,858 | |
Net cash provided by (used in) operating activities – continuing operations | |
| (28,263 | ) | |
| 136,971 | |
Net cash provided by (used in) operating activities – discontinued operations | |
| - | | |
| 3,333,981 | |
Net cash provided by (used in) operating activities | |
| (28,263 | ) | |
| 3,470,952 | |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Acquisition of property, plant and equipment | |
| (1,067 | ) | |
| (443 | ) |
Net cash used in investing activities – continuing operations | |
| (1,067 | ) | |
| (443 | ) |
Net cash used in investing activities – discontinued operations | |
| - | | |
| (892,143 | ) |
Net cash used in investing activities | |
| (1,067 | ) | |
| (892,586 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Proceeds from loan from related parties | |
| 24,489 | | |
| (135,400 | ) |
Net cash used in financing activities – continuing operations | |
| 24,489 | | |
| (135,400 | ) |
Net cash used in financing activities – discontinued operations | |
| - | | |
| (2,440,413 | ) |
Net cash provided by (used in) financing activities | |
| 24,489 | | |
| (2,575,813 | ) |
| |
| | | |
| | |
Effect of exchange rate fluctuation | |
| (589 | ) | |
| (1,586 | ) |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (5,430 | ) | |
| 967 | |
| |
| | | |
| | |
Cash and cash equivalents at beginning of period | |
| 30,863 | | |
| 31,848 | |
| |
| | | |
| | |
Cash and cash equivalents at ending of period | |
$ | 25,433 | | |
$ | 32,815 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information | |
| | | |
| | |
| |
| | | |
| | |
Interest paid | |
$ | 1,707 | | |
$ | - | |
Income taxes paid | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Non-cash activities: | |
| | | |
| | |
| |
| | | |
| | |
Issuance of common stock for compensation | |
$ | - | | |
$ | 22,880 | |
| |
| | | |
| | |
Issuance of common stock for acquisition | |
$ | - | | |
$ | 600,000 | |
The accompanying notes
are an integral part of these unaudited consolidated financial statements.
China
Carbon Graphite Group, Inc. and subsidiaries
Notes
to Consolidated Financial Statements
September 30, 2015
(Unaudited)
(1)
Organization and Business
China
Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture and sales of
graphene and graphene oxide and graphite bipolar plates in the People’s Republic of China (“China” or the “PRC”).
We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products.
Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through
the website by paying a fee for each transaction conducted through the website.
The
Company was incorporated on February 13, 2003 in Nevada under the name Achievers Magazine Inc. In connection with the reverse
merger transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January
30, 2008.
On
December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement with Sincere Investment (PTC),
Ltd. (“Sincere”), a British Virgin Islands corporation. Sincere was the sole stockholder of Talent International Investment
Limited (“Talent”), a British Virgin Islands corporation, which is the sole stockholder of XingheYongle Carbon Co.,
Ltd. (“Yongle”), a company organized under the laws of the PRC. Pursuant to the share exchange agreement, the Company
issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding on stock of Talent, and Talent became
a wholly-owned subsidiary of the Company. Upon completion of the reverse merger, the Company’s business became the business
of Talent, its subsidiaries and its affiliated variable interest entities.
Talent owns 100% of the stock of Yongle, which
is a wholly foreign-owned enterprise organized under the laws of the PRC. Yongle was a party to a series of contractual agreements
with XingheXingyong Carbon Co., Ltd. (“Xingyong”), a corporation organized under the laws of the PRC. These agreements
allowed the Company to operate its business in the PRC and to control the management of Xingyong and receive economic remuneration
from Xingyong’s business. Xingyong’s principal stockholder is Mr. Denyong Jin, the General Manager of Xingyong. As
a result, Xingyong was a variable interest entity and the operations of Xingyong were consolidated with those of the Company for
financial reporting purposes before Xingyong was sold on June 30, 2014.
Accounting Standard Codification (“ASC”)
810-10-45-25 calls for balance sheet disclosure of (a) assets of a consolidated variable interest entity (VIE) that can be used
only to settle obligations of the consolidated VIE, and (b) liabilities of a consolidated VIE for which creditors (or beneficial
interest owners) do not have recourse to the general credit of the primary beneficiary. The majority operating business of the
Company was conducted by Xingyong and the consolidated balance sheet of the Company reflected Xingyong’s balance sheet before
Xingyong was disposed on June 30, 2014. There are no such assets or liabilities on the balance sheet of Xingyong. The Operating
Agreement dated December 7, 2007 provides that Yongle is a full-recourse guarantor of all obligations of Xingyong, and Xingyong
has pledged all of its assets to Yongle. The Consulting Agreement of that date includes an assignment of all of the revenues of
Xingyong to Yongle. Yongle was 100% owned by Talent and Talent is 100% owned by the Company. Accordingly, there are no assets
or liabilities of Xingyong that in which the Company did not own before Xingyong was disposed on June 30, 2014.
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 Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement
is $1,612,903 (RMB 10 million), including $601,613 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment
obligations of $1,011,290 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became
effective on June 30, 2014 after approved by majority of shareholders at a special meeting of shareholders held on such date.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented.
The consolidated financial statements presented
herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries.
Acquisition
in December 2013
On
December 23, 2013, the Company acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”). Pursuant
to the terms of the acquisition, we issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the
former shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The shares were issued on
January 16, 2014. BVI Co. then became a wholly owned subsidiary of the Company.
BVI
Co. currently has two business operations as follows (collectively the “Business”):
|
● |
Manufacture
of Graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium
ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin
films and chips. Graphite bipolar plates are primarily used in solar power storage. |
|
|
|
|
● |
A
business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors
can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through
the website by paying a fee for each transaction conducted through the website. |
The
Business and the facilities related thereto are all located in the People’s Republic of China (“China”). The
Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a
wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited, a Hong
Kong company, (“Royal HK”), which is wholly owned by BVI Co. The Business currently generates minimal sales.
Royal
Shanghai was set up in Shanghai on June 9, 2010. Royal HK was set up in Hong Kong on January 8, 2010.
Liquidity
and Working Capital Deficit
As
of September 30, 2015 and as of December 31, 2014, the Company managed to operate its business with a negative working capital.
The
Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following
rules:
1. |
10%
of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s
registered capital. |
|
|
2. |
If
the cumulative balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’
losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus
reverse is drawn. |
|
|
3. |
Allocation
can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners. |
Therefore,
the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The
maximum amount of the shareholders has not been reached. The Company has never distributed earnings to shareholders and has no
intentions to do so.
(2)
Going Concern
The
Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States
of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As of and for the period ended September 30, 2015, the Company has incurred operating losses and working
capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital
to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced
to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
Management’s
Plan to Continue as a Going Concern
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s
plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales
of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However,
management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans
to look for opportunities to merge with other companies in the graphite industry.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
(3)
Basis for Preparation of the Financial Statements
Management
acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect
all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated
financial position and the results of its operations for the interim period presented. These consolidated financial statements
should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements
included in the Company’s Form 10-K annual report for the year ended December 31, 2014. The consolidated balance sheet as
of December 31, 2014 has been derived from the audited financial statements. The results of the nine months ended September 30, 2015
are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2015.
The
accompanying unaudited consolidated financial statements for China Carbon Graphite Group, Inc. and its subsidiaries and variable
interest entity, have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X.
The
Company maintains its books and accounting records in Renminbi (“RMB”), but its reporting currency is U.S. dollars.
The financial statements have been prepared in
order to present the financial position and results of operations of the Company and its subsidiaries whose financial condition
consolidated with the Company pursuant to ASC Topic 810-10, Consolidation, in accordance with U.S. GAAP. All significant intercompany
accounts and transactions have been eliminated.
(4)
Summary of Significant Accounting Policies
The
accompanying consolidated financial statements reflect the application of certain significant accounting policies as described
in this note and elsewhere in the accompanying consolidated financial statements and notes.
The
Company uses the acquisition method of accounting for business combinations which requires that the assets acquired and liabilities
assumed be recorded at the date of the acquisition at their respective fair values. Assets acquired and liabilities assumed in
a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If
the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined,
the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability
is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values
of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as
incurred. The operating results of acquired business are reflected in the acquirer’s consolidated financial statements and
results of operations after the date of the acquisition.
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 nine months ended September 30, 2015 and 2014,
the Company has not made provision for inventory in regards to slow moving or obsolete items.
Goodwill
The Company periodically
reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment
may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment
using fair value measurement techniques. These events could include a significant change in the business climate, legal factors,
a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors.
Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used
to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill.
The Company recorded an impairment expense of $494,540 for the nine months ended September 30, 2015.
Property and equipment
Property and equipment is stated at the historical cost,
less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated
useful lives of the assets for both financial and income tax reporting purposes as follows:
Machinery
and equipment | |
| 5
years | |
Motor
vehicle | |
| 5
years | |
Expenditures
for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations
in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in
an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized
as an additional cost of the asset.
Upon
sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed
from their respective accounts and any gain or loss is recorded in the statements of income.
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends and prospects, the manner in which the property
is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment
expenses for property, plant, and equipment was recorded in operating expenses during the nine months ended September 30, 2015 and 2014.
Stock-based
compensation
Stock-based
compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB
ASC 718, Compensation–Stock Compensation” and (ii) common stock awards granted to consultants which are accounted
for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.
All
grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on
their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all
common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding
charge to additional paid-in capital.
Common
stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued
are recorded in common stock to be issued.
Common
stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The
measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and
vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for
such service.
The
Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s
common stock on the date of grant.
Foreign
currency translation
The reporting currency of the Company is U.S.
dollars. The Company uses RMB as its functional currency. The results of operations and cash flows are translated at average exchange
rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and
equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the
statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation
adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’
equity. Translation adjustments for the three months ended September 30, 2015 and 2014 were $(34,912) and $14,905, respectively.
Translation adjustments for the nine months ended September 30, 2015 and 2014 were $(34,011) and $350,296, respectively. The cumulative
translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2015 and 2014 were
$(589) and $(1,586), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred.
Assets and liabilities were translated at 6.36
RMB and 6.20 RMB to $1.00 at September 30, 2015 and December 31, 2014, respectively. The equity accounts were stated at their
historical rates. The average translation rates applied to income statements for the nine months ended September 30, 2015 and
2014 were 6.25 RMB and 6.17 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period;
therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
Revenue
recognition
We
recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the
following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling
price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced
value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.
In
accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title
has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The
Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues
net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on
the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne
by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
The
Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does
not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company
once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will
not manufacture the products until the purchase order is received. The Company allows its customers to return products only if
its products are later determined by the Company to be defective. Based on the Company’s historical experience, product
returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances
for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are
presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns
for the nine months ended September 30, 2015 and 2014.
Cost
of goods sold
Cost
of goods sold consists primarily of the costs of products.
Shipping
and handling costs
The Company follows ASC 605-45, Handling Costs,
and Shipping Costs, formerly known as Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees and Costs.
The Company classifies shipping and handling costs paid on behalf of its customers in selling expenses. For the three months ended
September 30, 2015 and 2014, shipping and handling costs were $4,827 and $3,107, respectively. For the nine months ended September
30, 2015 and 2014, shipping and handling costs were $11,118 and $12,103, respectively.
Segment
reporting
ASC
280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this
model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal
structure, management structure or any other manner in which management disaggregates a company.
Because
the Company sells only carbon graphite products to Chinese distributors and end users, it has only one business segment.
Taxation
Taxation
on profits earned in the PRC has been calculated based on the estimated assessable profits for the year at the rates of taxation
prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed
in the county of operations.
The
Company does not accrue U.S. income tax since it has no operations in the United States. Its operating subsidiaries are organized
and located in the PRC and do not conduct any business in the United States.
In
2006, the Financial Accounting Standards Board (“FASB”) issued ASC, 740 Income Tax, formerly known as FIN 48, which
clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of
the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement,
recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition.
In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.
The
Company recognizes that virtually all tax positions in the PRC are not free from some degree of uncertainty due to tax law and
policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued
by current government officials.
Based
on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits
as of September 30, 2015 is not material to its results of operations, financial condition or cash flows. The Company also believes
that the total amount of unrecognized tax benefits as of September 30, 2015, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on
current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve
months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial
condition or cash flows.
Enterprise
income tax
The
enterprise income tax is calculated on the basis of the statutory profit as defined in the PRC tax laws. This statutory profit
is computed differently than the Company’s net income under U.S. GAAP.
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and
credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities from
a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents
the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Value
added tax
The
Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1,
1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax,
value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement
services provided within the PRC.
VAT payable in the PRC is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in
the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect
of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value
added tax already paid by the taxpayer on purchases of goods and services in the same financial year. VAT payable is included
in prepaid expenses of $834 and is included in prepaid expenses of $7,716 as of September 30, 2015 and December 31, 2014, respectively.
Contingent
liabilities and contingent assets
A
contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence
or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present
obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability
or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in
the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company
will incur such liability or obligation.
A
contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded
but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit.
When the benefit is virtually certain, the asset is recognized.
Retirement
benefit costs
According
to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal
government in the province in which the Company is registered and all qualified employees are eligible to participate in the program.
Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees
contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for
the payment of retirement benefits beyond the annual contributions under this program.
Fair
value of financial instruments
The
Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source
of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable
inputs, which may be used to measure fair value and include the following:
|
● |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
|
|
|
● |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial
instruments. |
|
|
|
|
● |
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The fair value of the 2009 Warrants to purchase
200,000 shares of common stock were both $nil at September 30, 2015 and December 31, 2014, respectively. The Company recognized
a gain of $nil from the change in fair value of these warrants for the three months ended March 31, 2015 and a gain of $nil from
the change in fair value of these warrants for the three months ended June 30, 2015and a gain of $nil from the change in fair
value of these warrants for the three months ended September 30, 2015. These shares expired on October 15, 2014.
The fair value of the 2009 Series B Warrants
to purchase 804,200 shares of common stock were both $nil at September 30, 2015, and December 31, 2014, respectively. The Company
recognized a gain of $nil from the change in fair value of these warrants for the three months ended March 31, 2015 and a gain
of $nil from the change in fair value of these warrants for the three months ended June 30, 2015and a gain of $nil from the change
in fair value of these warrants for the three months ended September 30, 2015. These shares expired on December 22, 2014.
The fair value of 2010 Series B warrants to purchase
100,000 shares of common stock were both $nil at September 30, 2015 and December 31, 2014, respectively. The Company recognized
a gain of $nil from the change in fair value of these warrants for the three months ended March 31, 2015 and a gain of $nil from
the change in fair value of these warrants for the three months ended June 30, 2015and a gain of $nil from the change in fair
value of these warrants for the three months ended September 30, 2015. These warrants will expire on January 13, 2015.
In
summary, the Company recorded a total amount of $ nil of changes in fair value of warrants in the Consolidate statement of
income and comprehensive income for the three and nine months ended September 30, 2015. Each reporting period, the change in fair value
is recorded into other income (expense).
The
carrying amount of restricted cash, other receivables, advance to vendors, advances from customers, other payables, accrued liabilities
and short-term loans are reasonable estimates of their fair value because of the short-term nature of these items.
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was accounted for at fair value on a recurring basis or for purposes of disclosures as of September 30, 2015:
| |
| Carrying
Value at
September 30, | |
| Fair
Value Measurement at September 30, 2015 | |
| |
| 2015 | |
| Level
1 | | |
| Level
2 | | |
| Level
3 | |
Warrant
liability | |
$ | - | |
| - | | |
| - | | |
$ | - | |
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was used to calculate fair value on a recurring basis as of December 31, 2014:
| |
| Carrying
Value at December 31, | | |
| Fair
Value Measurement at December 31, 2014 | |
| |
| 2014 | | |
| Level
1 | | |
| Level
2 | | |
| Level
3 | |
Warrant
liability | |
$ | - | | |
| - | | |
| - | | |
$ | - | |
The
Company uses the black-scholes valuation method approach when determining fair values of its Level 3 recurring fair value measurements.
Certain unobservable units for these assets are offered quotes, lack of marketability and volatility. For Level 3 measurements,
significant increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair
value measurement. In general, a significant change in the calculated volatility of the Company’s stock price could negatively
affect the fair value of the warrant liability.
Summary
of warrants outstanding:
| |
Warrants | | |
Weighted
Average Exercise Price | |
Outstanding
as of December 31, 2014 | |
| 100,000 | | |
$ | 1.51 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Expired | |
| (100,000 | ) | |
| - | |
Outstanding
as of September 30, 2015 | |
| - | | |
$ | - | |
Earnings
(loss) per share
Basic
earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities
outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion
of convertible debt, preferred stock and warrants. The Company uses if-converted method to calculate the dilutive preferred stock
and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.
The
following table sets forth the computation of the number of net income per share for the nine months ended September 30, 2015 and 2014:
| |
September 30, 2015 | | |
September 30, 2014 | |
Weighted average shares of common stock outstanding (basic) | |
| 33,670,518 | | |
| 31,216,452 | |
Shares issuable upon conversion of Series B Preferred Stock | |
| - | | |
| - | |
Weighted average shares of common stock outstanding (diluted) | |
| 33,670,518 | | |
| 31,216,452 | |
Net (loss) available to common shareholders | |
$ | (677,256 | ) | |
$ | (6,031,126 | ) |
Net (loss) per shares of common stock (basic) | |
$ | (0.02 | ) | |
$ | (0.19 | ) |
Net (loss) per shares of common stock (diluted) | |
$ | (0.02 | ) | |
$ | (0.19 | ) |
For
the nine months ended September 30, 2015, the Company excluded 300,000 shares of common stock issuable upon conversion of
preferred stock, because such issuance would be anti-dilutive.
The
following table sets forth the computation of the number of net income per share for the three months ended September 30, 2015 and
2014:
| |
September 30, 2015 | | |
September 30, 2014 | |
Weighted average shares of common stock outstanding (basic) | |
| 33,670,518 | | |
| 31,518,518 | |
Shares issuable upon conversion of Series B Preferred Stock | |
| - | | |
| - | |
Weighted average shares of common stock outstanding (diluted) | |
| 33,670,518 | | |
| 31,518,518 | |
Net (loss) available to common shareholders | |
$ | (525,190 | ) | |
$ | 50,373 | |
Net (loss) per shares of common stock (basic) | |
$ | (0.02 | ) | |
$ | 0.00 | |
Net (loss) per shares of common stock (diluted) | |
$ | (0.02 | ) | |
$ | 0.00 | |
For
the three months ended September 30, 2015, the Company excluded 300,000 shares of common stock issuable upon conversion of
preferred stock, because such issuance would be anti-dilutive.
Accumulated
other comprehensive income
The
Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the
elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the
Company, comprehensive income for the nine months ended September 30, 2015 and 2014 included net income and foreign currency translation
adjustments.
Related
parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions
with related parties are disclosed in the financial statements.
Recent
accounting pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption
of any such pronouncements will have a material impact on its financial condition or the results of its operations.
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, 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)
Advances to Suppliers
As
of September 30, 2015 and December 31, 2014, advances to suppliers are advances for raw materials and amounted to $0 and $16,897,
respectively.
Advances
to suppliers represent interest-free cash paid in advance to suppliers for purchases of raw materials.
(7)
Inventories
As
of September 30, 2015 and December 31, 2014, inventories consisted of the following:
| |
September 30,
2015 | | |
December 31,
2014 | |
Finished goods | |
$ | 2,431 | | |
$ | 1,136 | |
Reserve for slow moving and obsolete inventory | |
| - | | |
| - | |
| |
$ | 2,431 | | |
$ | 1,136 | |
For
the nine months ended September 30, 2015 and 2014, the Company has not made provision for inventory in regards to slow moving
or obsolete items. As of September 30, 2015 and December 31, 2014, the Company did not record any provision for inventory
in regards to slow moving or obsolete items.
(8)
Property, plant and Equipment, net
As
of September 30, 2015 and December 31, 2014, property, plant and equipment consisted of the following:
| |
September 30, 2015 | | |
December 31, 2014 | |
Machinery and equipment | |
$ | 5,062 | | |
$ | 4,110 | |
Motor vehicles | |
| 43,954 | | |
| 45,024 | |
Total | |
| 49,016 | | |
| 49,134 | |
Less: accumulated depreciation | |
| (16,116 | ) | |
| (9,746 | ) |
Property, plant and Equipment, net | |
$ | 32,900 | | |
$ | 39,388 | |
For the three months ended September 30, 2015
and 2014, depreciation expenses amounted to $2,223 and $2,225, respectively. For the nine months ended September 30, 2015 and
2014, depreciation expenses amounted to $6,715 and $6,640, respectively.
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends and prospects, the manner in which the property
is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment
expenses for property, plant, and equipment was recorded in operating expenses during the nine months ended September 30, 2015 and 2014.
(9)
Stockholders’ equity
Restated
Articles of Incorporation
On
January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000
shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value
$0.001 per share. The restated articles of incorporation authorizes the board of directors of the Company to issue one or more
series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such preferred
stock. The board of directors has authorized the issuance of two series of preferred stock, Series A Convertible Preferred Stock
(“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”).
Issuance
of Common Stock
(a) Conversion
of Series B Preferred Stock
During
the nine months ended September 30, 2015, the Company issued an aggregate of 0 shares of common stock to holders of Series B Preferred
Stock upon the conversion of an aggregate of 0 shares of Series B Preferred Stock. 300,000 shares of Series B Preferred Stock
are redeemable by the holder as of December 31, 2012. The Company has reclassified these shares into Temporary Equity since December
31, 2012.
In July 2013, CNH Diversified Opportunities Master
Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of
the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately
$400,000 in connection with the mandatory redemption of their Series B Preferred shares and the parties settled out of court for
$320,000 plus $40,000 that were already paid. The Company paid $90,000 in 2013 and $270,000 in 2014,
respectively, and has fully paid off the settlement as the date of this Quarterly Report. Subsequently, CNH returned
the stock certificates representing the Series B Preferred Stock and all of the issued and outstanding Series B Preferred Stock
have been cancelled as of September 30, 2015.
(b) Stock
Issuances For Compensation
On
January 14, 2014, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services
provided in 2013. The issuance of these shares was recorded at fair market value.
On
January 14, 2014, the Company issued 76,000 shares of common stock to two employees for services provided in 2013. The issuance
of these shares was recorded at fair market value.
On
December 11, 2014, the Company issued an aggregate of 200,000 shares of common stock to four directors as compensation for services
provided in 2014.
On
December 11, 2014, the Company issued 152,000 shares of common stock to two employees for services provided in 2014. The issuance
of these shares was recorded at fair market value, or $6,080.
(c) Stock
Issuances For Acquisition
On
January 16, 2014, the Company issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former
shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The issuance of these shares was
recorded at fair market value.
(d) Shares
Held in Escrow
In
a private placement that closed on December 22, 2009 and January 13, 2010, the Company sold an aggregate of 2,480,500 shares of
Series B Preferred Stock and five-year warrants to purchase 992,000 shares of common stock at an exercise price of $1.30 per share,
for an aggregate purchase price of $2,976,600. The Company also paid the private placement agent an aggregate of $298,000 and
issued five-year warrants to purchase 124,025 shares of common stock at an exercise price of $1.32 per share. In connection with
the private placement and pursuant to the transaction agreements, the Company deposited into escrow an aggregate of 1,240,250
shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending
on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and 2011.
The
Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction
of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount
by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor
exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number
of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which
is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year
2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company
for cancellation. As of September 30, 2015, no Escrow shares have been transferred to investors or returned to the Company.
(10)
Related Parties
As of September 30, 2015 and December 31, 2014,
due from related parties amounted to $1,573,416 and $1,611,707, respectively. $1,573,416 is receivable from Mr. Jin for disposal
of Xingyong. (see Note 13).
As of September 30, 2015 and December 31, 2014,
$248,250 and $229,632 are due to Mr. Donghai Yu, who is CEO of the Company. These amounts are advances made to the Company by unrelated
parties through Mr. Donghai Yu for business operating purposes. The advances are interest free.
(11) Other Payable
Other payable amounted $892,246 and $865,314 as
of September 30, 2015 and December 31, 2014, respectively. Other payable are money borrowed from unrelated parties for operating
purpose. These payable are without collateral, interest free, and due on demand.
(12) Discontinued Operations
On June 10, 2014, the Company entered into an
asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together
with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant
to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable conditions to closing, purchase all
of the rights and obligations of Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding
equity interests of Xingyong. The purchase price under the Agreement is $1,573,416 (RMB 10 million), including $586,884 (RMB 3.73
million) in cash and the cancellation of the registrant’s repayment obligations of $986,532 (RMB 6.27 million) previously
advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on September 30, 2014 after approved by majority
of shareholders at a special meeting of shareholders held on such date.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented.
Balances
for Xingyong as of September 30, 2015 and December 31, 2014 are as follows:
| |
September 30, 2015 | | |
December
31,
2014 | |
Total
current assets | |
$ | - | | |
$ | 57,863,291 | |
| |
| | | |
| | |
Total
noncurrent assets | |
| - | | |
| 59,753,754 | |
| |
| | | |
| | |
Total
Assets | |
$ | - | | |
$ | 117,617,045 | |
| |
| | | |
| | |
Total
current liabilities | |
$ | - | | |
$ | 118,967,814 | |
| |
| | | |
| | |
Total
Non current liabilities | |
| - | | |
| 18,056,644 | |
| |
| | | |
| | |
Total
Liabilities | |
$ | - | | |
$ | 137,024,458 | |
The
operating results of Xingyong for the three and nine months ended September 30, 2015 and 2014 classified as discontinued operations
are summarized below:
| |
Three Months Ended
September 30 | | |
Nine
Months Ended
September 30 | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Sales | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 2,981,403 | |
Cost of Goods Sold | |
| - | | |
| - | | |
| - | | |
| 4,248,552 | |
Gross Profit | |
| - | | |
| - | | |
| - | | |
| (1,267,149 | ) |
Operating Expenses | |
| - | | |
| - | | |
| - | | |
| 2,153,231 | |
Other Income (Expense) | |
| - | | |
| - | | |
| - | | |
| 1,890,924 | |
Income Tax Expense | |
| - | | |
| - | | |
| - | | |
| - | |
Net loss | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (5,311,304 | ) |
● |
Data
for nine months ended September 30, 2015 only includes data before Xingyong was disposed. |
On July 3, 2014, the Company entered into an
installment payment agreement (the “Installment Agreement”) with Purchasers. The Installment Agreement is entered
in connection with the Purchase Agreement. Pursuant to the Installment Agreement, the Purchasers agreed to pay the purchase price
under the Purchase Agreement of $1,573,416 (RMB 10 million) in installments as follows: (1) an initial installment of $94,405
(RMB 0.6 million) in cash plus the cancellation of the registrant’s repayment obligation of $986,532 (RMB 6.27 million)
to Dengyong Jin, and (2) one or more installments of the remaining $586,884 (RMB 3.73 million) in cash on or before July 25, 2014.
Additionally, the closing of the transactions contemplated under the Purchase Agreement shall close concurrently with the final
installment. In connection with the foregoing initial installment, the Company and Dengyong Jin entered into an indebtedness cancellation
agreement (the “Cancellation Agreement”) concurrently with the Installment Agreement, pursuant to which Mr. Jin discharged
the Company of its obligation to repay him $986,532 (RMB 6.27 million), and surrendered all right to collect such amount from
the Company.
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
This
Quarterly Report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or achievements to be materially different from any future results,
performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but
are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K
for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”).
In
some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “would” and similar expressions intended to
identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are
based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on
these forward-looking statements.
Also,
forward-looking statements represent our estimates and assumptions only as of the date of this report. This Quarterly Report should
be read in its entirety and with the understanding that our actual future results may be materially different from what we expect.
Except
as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available
in the future.
Overview
We
are engaged in the manufacturing of graphene, graphene oxide and graphite bipolar plates products in the PRC. We also operate
a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can
sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website
by paying a fee for each transaction conducted through the website.
On June 10, 2014, the Company entered into an
asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together
with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant
to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable conditions to closing, purchase all
of the rights and obligations of Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of
the outstanding equity interests of Xingyong. The purchase price under the Agreement is $1,573,416 (RMB 10 million),
including $586,884 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $986,532
(RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on
September 30, 2014 after approved by a special meeting of shareholders.
The
Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective
basis for all periods presented. See Note 13 — Discontinued Operations for additional information.
As of and for the three months ended September 30,
2015, the Company has incurred operating losses and working capital deficit from operating activities. The ability of the Company
to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes
profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue
as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to
obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products,
and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot
provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities
to merger with other graphite companies.
PRC
regulations grant broad powers to the government to adjust the price of raw materials and manufactured products. Although
the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be
implemented in the future, thereby affecting our results of operations and financial condition.
Results
of Operations
Three months ended September 30, 2015 and 2014
Sales.
During the three months ended September 30, 2015,
we had sales of $117,572, compared to sales of $99,171 for the three months ended September 30, 2014, an increase of $18,401,
or approximately 18.55%. Sales increase was mainly attributable to the increase in demand for products among consumers in the
market.
Sales from Xingyong (our discontinued business)
for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued
operations.
Cost
of goods sold.
Our cost of goods sold consists of the cost of
raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the three months ended September
30, 2015, our cost of goods sold was $70,149, compared to $14,977 for the cost of goods sold for the three months ended September
30, 2014, an increase of $55,172 or approximately 368.38%. The increase in the cost of sales was primarily attributable to
the increase in sales volume.
Cost of goods sold from Xingyong (our discontinued
business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss
from discontinued operations.
Gross profit.
Our gross profit decreased from $84,194 for the
three months ended September 30, 2014 to $47,423 for the three months ended September 30, 2015. The decrease of the gross profit
is mainly attributed to the increase in cost of goods sold.
Gross profit from Xingyong (our discontinued
business) for the three months ended September 30, 2015 and 2014 were nil and a loss of $0, respectively and were included
in net loss from discontinued operations.
Operating expenses.
Operating expenses totaled $593,236 for the three months
ended September 30, 2015, compared to $32,936 for the three months ended September 30, 2015, an increase of $560,300, or approximately
1,701.18%. The increase is mainly attributed to the write off of goodwill in expense.
Operating expenses from Xingyong (our discontinued business) for
the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued
operations.
Selling, general and administrative expenses.
Selling expenses decreased from $12,319 for the three months
ended September 30, 2014 to $9,130 for the three months ended September 30, 2015, a decrease of $3,189, or 25.88%. The decrease
is mainly attributed to decreased professional expenses.
Selling expenses from Xingyong (our discontinued business) for
the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued
operations.
Our general and administrative expenses consist of salaries,
office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting
expenses and investor relations expenses) and stock compensation. General and administrative expenses were $584,106 for the three
months ended September 30, 2015, compared to $20,617 for the three months ended September 30, 2014, an increase of $563,489,
or 2,733.13%. The increase is mainly attributed to write off goodwill to expense.
General and administrative expenses from Xingyong (our discontinued
business) for the three months ended September 30, 2015 and 2014 were $0 and $0 respectively and were included in net loss
from discontinued operations.
Loss from operations.
As a result of the factors described above, operating loss
was $545,814 for the three months ended September 30, 2015, compared to operating income of $51,258 for the three months ended
September 30, 2014, a decrease of approximately $597,072, or 1,164.84%.
Loss from operations from Xingyong (our discontinued business) for
the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued
operations.
Other income and expenses.
Our
interest expense was $731 for the three months ended September 30, 2015, compared to $519 for the three months ended September
30, 2014. Expenses from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $0 for the three months
ended September 30, 2015, compared to $181 for the three months ended September 30, 2014.
Rental income of $59,787 and $21,355 were recorded as other
income for the three months ended September 30, 2015 and 2014, respectively.
Other expense from Xingyong (our discontinued
business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss
from discontinued operations.
Income tax.
During the three months ended September 30, 2015
and 2014, we did not incur any income tax due for these periods.
Net loss from continuing operations.
As a result of the factors described above, our
net loss from continuing operations for the three months ended September 30, 2015 was $525,190, compared to net income of $50,373
for the three months ended September 30, 2014, a decrease of $575,563, or 1,142.60%.
Net loss from discontinued operations.
Net loss from Xingyong (our discontinued business) for
the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued
operations.
Net
loss.
Our net loss for the three months ended September
30, 2015 was $525,190, compared to net income of $50,373 for the three months ended September 30, 2014, a decrease of $575,563,
or 1,142.60%. The decrease is mainly due to increased cost of goods sold.
Foreign currency translation.
Our consolidated financial statements are expressed
in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated
at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of
the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating
the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency
translation gain for the three months ended September 30, 2015 was $(34,912), compared to $14,905 for the three months ended September
30, 2014, a decrease of $49,817 or 334.23%.
Net loss available to common stockholders.
Net loss available to our common stockholders
was $525,190, or $0.02 per share (basic and diluted), for the three months ended September 30, 2015, compared to net loss of $50,373,
or net loss of $0.00 per share (basic and diluted), for the three months ended September 30, 2014.
Nine months ended September 30, 2015 and 2014
Sales.
During the nine months ended September 30, 2015,
we had sales of $146,408, compared to sales of $164,742 for the nine months ended September 30, 2014, a decrease of $18,334, or
approximately 11.13%. Sales decrease was mainly attributable to the decrease in demand for products among consumers in the market.
Sales from Xingyong (our discontinued business)
for the nine months ended September 30, 2015 and 2014 were $0 and $2,981,403, respectively and were included in net loss from
discontinued operations.
Cost of goods sold.
Our cost of goods sold consists of the cost of
raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the nine months ended September
30, 2015, our cost of goods sold was $80,626, compared to $54,727 for the cost of goods sold for the nine months ended September
30, 2014, an increase of $25,899 or approximately 47.32%. The increase in the cost of sales was primarily attributable to
the decrease in sales volume.
Cost of goods sold from Xingyong (our discontinued
business) for the nine months ended September 30, 2015 and 2014 were $0 and $4,248,552, respectively and were included in
net loss from discontinued operations.
Gross profit.
Our gross profit decreased from $110,015 for
the nine months ended September 30, 2014 to $65,782 for the nine months ended September 30, 2015. The decrease of the gross profit
is mainly attributed to the increase of costs of goods sold.
Gross profit from Xingyong (our discontinued
business) for the nine months ended September 30, 2015 and 2014 were nil and a loss of $1,267,149, respectively and were
included in net loss from discontinued operations.
Operating expenses.
Operating expenses totaled $801,117 for the nine
months ended September 30, 2015, compared to $841,081 for the nine months ended September 30, 2014, a decrease of $39,964, or
approximately 4.75%. The decrease is mainly attributed to the decrease in compensation expenses, legal expenses and other professional
expenses.
Operating expenses from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014
were $0 and $2,153,231, respectively and were included in net loss from discontinued operations.
Selling, general and administrative expenses .
Selling expenses decreased from $26,176 for the
nine months ended September 30, 2014 to $19,590 for the nine months ended September 30, 2015, a decrease of $6,586, or 25.16%.
The decrease is mainly attributed to the decrease in professional expenses.
Selling expenses from Xingyong (our discontinued
business) for the nine months ended September 30, 2015 and 2014 were $0 and $50,184, respectively and were included in net
loss from discontinued operations.
Our general and administrative expenses consist
of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses,
accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $781,527
for the nine months ended September 30, 2015, compared to $814,905 for the nine months ended September 30, 2014, a decrease of $33,378,
or 4.10%. The decrease is mainly attributed to the decrease in compensation expenses, legal expense, and other professional
fees.
General and administrative expenses from Xingyong
(our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $2,103,047, respectively and
were included in net loss from discontinued operations.
Loss from operations.
As a result of the factors described above, operating
loss was $735,336 for the nine months ended September 30, 2015, compared to operating loss of $731,066 for the nine months ended
September 30, 2014, an increase of approximately $4,270, or 0.58%.
Loss from operations from Xingyong (our discontinued
business) for the nine months ended September 30, 2015 and 2014 were $0 and $3,420,380, respectively and were included in
net loss from discontinued operations.
Other income and expenses.
Our interest expense was $1,707 for the nine
months ended September 30, 2015, compared to $1,994 for the nine months ended September 30, 2014. Expenses from changes in the
fair value of our warrants as a result of adopting ASC 820-10 was $0 for the nine months ended September 30, 2015, compared to
$13,379 for the nine months ended September 30, 2014.
Other expense from Xingyong (our discontinued
business) for the nine months ended September 30, 2015 and 2014 were $0 and $1,890,924, respectively and were included in
net loss from discontinued operations.
Rental income of $0 and $0 were recorded as other income
for the three months ended September 30, 2015 and 2014, respectively.
Income tax.
During the nine months ended September 30, 2015
and 2014, we did not incur any income tax due for these periods.
Net loss from continuing operations.
As a result of the factors described above, our
net loss from continuing operations for the nine months ended September 30, 2015 was $677,256, compared to net loss of $719,822
for the nine months ended September 30, 2014, a decrease of $42,566, or 5.91%.
Net loss from discontinued operations.
Net loss from Xingyong (our discontinued business) for
the nine months ended September 30, 2015 and 2014 were $0 and $5,311,304, respectively and were included in net loss from discontinued
operations.
Net
loss.
Our net loss for the nine months
ended September 30, 2015 was $677,256, compared to net loss of $6,031,126 for the nine months ended September 30, 2014, a decrease
of $5,353,870, or 88.77%. The decrease is mainly due to decreased loss from discontinued operations.
Foreign currency translation.
Our consolidated financial statements are expressed
in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated
at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of
the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating
the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency
translation gain for the nine months ended September 30, 2015 was $(34,011), compared to $350,296 for the nine months ended September
30, 2014, a decrease of $384,307 or 109.71%.
Net loss available to common stockholders.
Net loss available to our common stockholders
was $677,256, or $0.02 per share (basic and diluted), for the nine months ended September 30, 2015, compared to net loss of $6,031,126
or net loss of $0.19 per share (basic and diluted), for the nine months ended September 30, 2014.
Liquidity
and Capital Resources
All of our business operations are carried out
by Royal Shanghai, and all of the cash generated by our operations has been held by that entity. In order to transfer such cash
to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada corporation, we would need to rely on dividends, loans
or advances made by our PRC subsidiaries. Such transfers may be subject to certain regulations or risks. To date, our parent entity
has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity
is unable to raise needed funds from private investors, Royal Shanghai would have to transfer funds to our parent entity through
our wholly-owned subsidiaries, Royal Hongkong and BVI. Co,
PRC
regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate
structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by
the following rules:
|
1. |
10%
of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s
registered capital. |
|
|
|
|
2. |
If
the accumulate balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’
losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus
reverse is drawn. |
|
|
|
|
3. |
Allocation
can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners. |
Therefore,
the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The
maximum amount of the shareholders has not been reached. The company has never distributed earnings to shareholders and has consistently
stated in the Company’s filings it has no intentions to do so.
The
RMB cannot be freely exchanged into the Dollars. The State Administration of Foreign Exchange (“SAFE”) administers
foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment Enterprises,
such as Royal Shanghai, may purchase foreign currency from designated financial institutions in connection with current account
transactions, including profit repatriation.
These
factors will limit the amount of funds that we can transfer from Royal Shanghai to our parent entity and may delay any such transfer.
In addition, upon repatriation of earnings of Royal Shanghai to the United States, those earnings may become subject to United
States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings
of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly,
taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.
Our
primary capital needs have been to fund our working capital requirements. Our primary sources of financing will be cash generated
from loans from banks, equity investment from investors, and borrowings from unrelated parties.
The Company’s consolidated financial statements
are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the
period ended June, 2015, the Company has incurred operating losses and working capital deficit from operating activities. The
Company’s sales revenue is not sufficient to cover the company’s expenses for the nine months ended September 30,
2015.
The
ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
At this point, there can be no assurance that the Company is able to obtain such funding.
Our
long-term goal is to develop our Royal Shanghai business. During the interim, we expect that anticipated cash flows from
future operations, loans and equity investment from unrelated or related parties, and cash from disposal of Xingyong will be sufficient
to fund our operations through at least the next twelve months, provided that:
|
● |
we
generate sufficient business so that we are able to generate substantial profits, which cannot be assured; |
|
|
|
|
● |
we
receive cash from disposal of Xingyong; and |
|
|
|
|
● |
we
are able to generate savings by improving the efficiency of our operations. |
We
may require additional equity, debt or bank funding to finance acquisitions or to allow us to develop our Royal Shanghai business,
which is one of our primary growth strategies. We can provide no assurances that we will be able to enter into any
additional financing agreements on terms favorable to us, if at all, especially considering the current global instability of
the capital markets.
At September 30, 2015, cash and cash equivalents
were $25,433, compared to $30,863 at December 31, 2014, a decrease of $5,430. Our working capital deficit decreased by $210,240
to a deficit of $125,840 at September 30, 2015 from $84,400 at December 31, 2014.
As of September 30, 2015, inventories were $2,431,
compared to $1,136 at December 31, 2014, an increase of $1,295, or 114.00%. As of September 30, 2015 and December 31, 2014, the
Company has not made provision for inventory in regards to slow moving or obsolete items.
As of September 30, 2015, prepaid expenses were
$834, compared to $7,716 at December 31, 2014, a decrease of $6,882, or 89.20%. The decrease in prepaid expenses is attributed
to amortization of prepaid services.
Advances to suppliers decreased from $16,897
at December 31, 2014 to $0 at September 30, 2015, a decrease of $16,897. The decrease of advances to suppliers is mainly because
the Company made less advanced payments to suppliers during the nine months ended September 30, 2015. No allowance for doubtful
accounts for the balance of advances to suppliers was reserved as of September 30, 2015 and December 31, 2014, respectively.
Nine Months Ended September 30, 2015 Compared
to Nine Months Ended September 30, 2014
The following table sets forth information about
our net cash flow for the nine months indicated:
Cash
Flows Data:
| |
For
Nine Months Ended
September 30 | |
| |
2015 | | |
2014 | |
Net cash flows provided by operating activities | |
$ | (28,263 | ) | |
$ | 3,470,952 | |
Net cash flows used in investing activities | |
$ | (1,067 | ) | |
$ | (892,586 | ) |
Net cash flows provided by financing activities | |
$ | 24,489 | | |
$ | (2,575,813 | ) |
Net cash flow used in operating activities was
$28,263 for the nine months ended September 30, 2015, compared to $3,470,952 provided by operating activities for the nine months
ended September 30, 2014, a decrease of $3,499,215, or 100.81%. The decrease in net cash flow used in operating activities was
mainly due to decreased net loss from discontinued operations and less cash provided by discontinued operations during the nine
months ended September 30, 2015 compared to that of the same period last year.
Net cash flow used in investing activities was
$1,067 for the nine months ended September 30, 2015, compared to $892,586 for the nine months ended September 30, 2014, a decrease
of $891,519, or 99.88%. The decrease is mainly due to less cash used in discontinued operations during the nine months ended
September 30, 2015 compared to that of the same period last year.
Net cash flow provided by financing activities
was $24,489 for the nine months ended September 30, 2015, compared to $2,575,813 used in financing activities for the nine months
ended September 30, 2014, an increase of $2,600,302 or 100.95%. The increase in net cash flow provided by financing activities
was mainly due to more cash provided by operations during the nine months ended September 30, 2015 compared to that of the
same period last year.
Concentration of Business and Credit Risk
Most of the Company’s bank accounts are
in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance
Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered
by FDIC insurance.
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 three and nine months ended September 30, 2015 and 2014.
Comprehensive
Income
We
have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes
standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial
statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.
Income
Taxes
We
account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes,
which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for
the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective
January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except
for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income
tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation
of this law gradually become subject to the new tax rate within five years after the implementation of this law.
Accounts
Receivable and Allowance For Doubtful Accounts
Accounts
receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate
for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off
as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy
of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management
also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions
to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted to $nil as
of September 30, 2015.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished
goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated
selling price, in the ordinary course of business, less estimated costs to complete and dispose. The cost of inventories comprises
all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage
of completion. For the three and nine months ended September 30, 2015 and 2014, the Company has not made provision for inventory in
regards to slow moving or obsolete items.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs
and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over
the estimated useful life of the assets after taking into account the estimated residual value. The Company reviews the carrying
value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In
cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to
an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects
of obsolescence, demand, competition, and other economic factors. Based on this assessment, no impairment expenses for property,
plant, and equipment was recorded in operating expenses during the three and nine months ended September 30, 2015 and 2014.
Research
and Development
Research
and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily
consist of the cost of material used and salaries paid for the development of our products and fees paid to third parties. Our
research and development expense for the three and nine months ended September 30, 2015 and 2014 were not significant.
Value
Added Tax
Pursuant
to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”).
The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice
of the PRC, the Company paid VAT and business tax based on tax invoices issued.
The
tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between
the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities
dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which
can range from zero to five times the amount of the taxes that are determined to be late or deficient. In the event that a tax
penalty is assessed on late or deficient payments, the penalty will be expensed as a period expense if and when a determination
has been made by the taxing authorities that a penalty is due.
Fair
Value of Financial Instruments
On
January 1, 2008, the Company began recording financial assets and liabilities subject to recurring fair value measurement at the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
On January 1, 2009, the Company began recording non-recurring financial as well as all non-financial assets and liabilities subject
to fair value measurement under the same principles. These fair value principles prioritize valuation inputs across three broad
levels. The three levels are defined as follows:
|
● |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
● |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial
instruments. |
|
|
|
|
● |
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The
carrying amounts of financial assets and liabilities, including cash and cash equivalents, accounts receivable, notes receivable,
advances to suppliers, other receivables, short-term bank loans, notes payable, accounts payable, advances from customers and
other payables, approximate their fair values because of the short maturity period for these instruments.
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was used to calculate fair value on a recurring basis as of September 30, 2015:
|
|
|
Carrying
Value at
September 30, |
|
|
Fair
Value Measurement at
September 30, 2015 |
|
|
|
|
2015 |
|
|
Level
1 |
|
|
|
Level
2 |
|
|
|
Level
3 |
|
Warrant
liability |
|
$ |
- |
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
The
following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that
was used to calculate fair value on a recurring basis as of December 31, 2014:
|
|
|
Carrying
Value at
December 31, |
|
|
Fair
Value Measurement at
December 31, 2014 |
|
|
|
|
2014 |
|
|
Level
1 |
|
|
|
Level
2 |
|
|
|
Level
3 |
|
Warrant
liability |
|
$ |
- |
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
Please
see Note 3 contained in the Notes to the Consolidated Financial Statements for a description of our warrant liability for the
nine months ended September 30, 2015 and 2014.
The
Company did not identify any other non-recurring assets and liabilities that are required to be presented on the balance sheet
at fair value.
Stock-based
Compensation
Stock-based
compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB
ASC 718, Compensation–Stock Compensation, and (ii) common stock awards granted to consultants which are accounted for under
FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.
All
grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on
their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all
common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding
charge to additional paid-in capital.
Common
stock awards are granted to directors for services provided.
Common
stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The
measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and
vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for
such service. The Company did not make significant grants to consultants for any of the periods presented.
The
Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s
common stock on the date of grant.
No
stock compensation expenses was amortized and recognized as general and administrative expenses for the nine months ended
September 30, 2015 and 2014, respectively.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption
of any such pronouncements will have a material impact on its financial condition or the results of its operations.
In
April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments
in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses
sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations.
In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement
users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in
the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted.
The Company does not expect the adoption to have a significant impact on its consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity
that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial
assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific
guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged
for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption
on its consolidated financial statements.
In
August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”).
In
connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or
within one year after the date that the financial statements are available to be issued when applicable). Management’s
evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial
statements are issued (or at the date that the financial statements are available to be issued when
applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions
and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as
they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is
used consistently with its use in Topic 450, Contingencies.
When
management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going
concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate
the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is
probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions
or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial
doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables
users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the
footnotes):
|
a. |
Principal
conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before
consideration of management’s plans) |
|
b. |
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations |
|
c. |
Management’s
plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt
is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating
that there is substantial doubt about the entity’s ability to continue as a going concern within one year
after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose
information that enables users of the financial statements to understand all of the following:
|
a. |
Principal
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern |
|
b. |
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations |
|
c. |
Management’s
plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability
to continue as a going concern. |
The
amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying financial statements.
Item
3. |
Quantitative
and Qualitative Disclosures about Market Risk. |
Not
applicable to smaller reporting companies.
Item
4. |
Controls
and Procedures. |
Evaluation
of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of September 30, 2015.
Disclosure
controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in
the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information
is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible
controls and procedures.
Management
conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of
the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective
as of September 30, 2015.
Changes
in Internal Control over Financial Reporting
During
the nine months ended September 30, 2015, there has been no change in our internal controls over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and
make changes that our management deems necessary.
Limitations
on Controls
Management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect
all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide
only reasonable assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company
have been detected.
PART
II – OTHER INFORMATION
Item 1. |
Legal
Proceedings |
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business. We are currently not aware of any pending legal proceedings which involve us or any of our
properties or subsidiaries, except for the following:
In July 2013,
CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District
of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against
the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares
and the parties settled out of court for $320,000 plus $40,000 that were already paid. The Company paid $90,000 in 2013 and$270,000
in 2014, respectively, and has fully paid off the settlement as the date of this Quarterly Report. Subsequently, CNH returned
the stock certificates representing the Series B Preferred Stock and all of the issued and outstanding Series B Preferred Stock
have been cancelled as of September 30, 2015.
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
None.
Item 3. |
Defaults
Upon Senior Securities |
None.
Item
4. |
Mine
Safety Disclosures |
None.
Item 5. |
Other
Information |
None.
Exhibit
Number |
|
Description |
|
|
|
31.1 |
|
Certifications
of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2+ |
|
Certifications
of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
|
Certifications
of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.2+ |
|
Certifications
of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
XBRL
Instance Document |
101.SCH |
|
XBRL
Taxonomy Extension Schema Document |
101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase Document. |
101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase Document. |
101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase Document. |
101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase Document. |
+
In accordance with the SEC Release 33-8238, deemed being furnished and not filed.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
CHINA
CARBON GRAPHITE GROUP, INC. |
|
|
|
Date:
November 16, 2015 |
By: |
/s/
Donghai Yu |
|
|
Donghai
Yu |
|
|
Chief
Executive Officer |
|
|
|
Date:
November 16, 2015 |
By: |
/s/
ZhenfangYang |
|
|
Zhenfang
Yang |
|
|
Chief
Financial Officer |
51
EXHIBIT 31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Donghai Yu, certify that:
1. I have reviewed this
Quarterly Report on Form 10-Q of China Carbon Graphite Group, Inc.;
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)) 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 registrants’
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 controls
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. |
Date: November 16, 2015
|
|
/s/ Donghai Yu |
|
Donghai Yu
Chief Executive Officer
(Principal Executive Officer) |
|
EXHIBIT 31.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Zhenfang Yang, certify that:
1. I have reviewed this
Quarterly Report on Form 10-Q of China Carbon Graphite Group, Inc.;
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)) 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 registrants’
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 controls
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. |
Date: November 16, 2015
|
|
/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
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code),
the undersigned officer of China Carbon Graphite Group, Inc. (the “Company”), does hereby certify, to such officer’s
knowledge, that:
The Quarterly Report on Form
10-Q for the quarter ended September 30, 2015 (the “Form 10-Q”) of the Company fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information
contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of
the Company as of, and for, the periods presented in the Form 10-Q.
Date: November 16, 2015
|
|
/s/ Donghai Yu |
|
Donghai Yu
Chief Executive Officer
(Principal Executive Officer) |
|
The foregoing certification is being
furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed
as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated
by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
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
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code),
the undersigned officer of China Carbon Graphite Group, Inc. (the “Company”), does hereby certify, to such officer’s
knowledge, that:
The Quarterly Report on Form 10-Q
for the quarter ended September 30, 2015 (the “Form 10-Q”) of the Company fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the
periods presented in the Form 10-Q.
Date: November 16, 2015
|
|
/s/ Zhenfang Yang |
|
Zhenfang Yang
Chief Financial Officer
(Principal Financial Officer) |
|
The foregoing certification is being
furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed
as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated
by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
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