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, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
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: As of August 14, 2019
,
there were 27,502,346 shares of common stock issued and outstanding.
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements.
China Carbon Graphite Group, Inc. and
subsidiaries
Consolidated Balance Sheets
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,389
|
|
|
$
|
9,137
|
|
Account Receivable
|
|
|
1,647
|
|
|
|
5,587
|
|
Inventories
|
|
|
13,116
|
|
|
|
1,834
|
|
Advance to suppliers
|
|
|
8,082
|
|
|
|
7,517
|
|
Other receivables, net
|
|
|
52,615
|
|
|
|
29,954
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
96,849
|
|
|
|
54,029
|
|
|
|
|
|
|
|
|
|
|
Right-of-use asset - non current
|
|
|
30,834
|
|
|
|
27,696
|
|
Property And Equipment, Net
|
|
|
37,194
|
|
|
|
38,473
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
164,877
|
|
|
$
|
120,198
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
120,694
|
|
|
$
|
91,189
|
|
Accrued payroll - related party
|
|
|
683,938
|
|
|
|
626,662
|
|
Advance from customers
|
|
|
94,030
|
|
|
|
27,995
|
|
Other payables
|
|
|
1,611,586
|
|
|
|
1,539,606
|
|
Lease liability - current
|
|
|
21,952
|
|
|
|
27,696
|
|
Dividends payable
|
|
|
55,015
|
|
|
|
55,015
|
|
Total current liabilities
|
|
|
2,587,215
|
|
|
|
2,368,163
|
|
|
|
|
|
|
|
|
|
|
Lease liability - non current
|
|
|
8,882
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,596,097
|
|
|
|
2,368,163
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized 27,502,346 and 27,262,346 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
|
|
|
27,502
|
|
|
|
27,262
|
|
Additional paid-in capital
|
|
|
48,760,711
|
|
|
|
48,753,751
|
|
Accumulated other comprehensive income
|
|
|
93,894
|
|
|
|
93,271
|
|
Accumulated loss
|
|
|
(51,313,327
|
)
|
|
|
(51,122,249
|
)
|
Total stockholders’ deficit
|
|
|
(2,431,220
|
)
|
|
|
(2,247,965
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
164,877
|
|
|
$
|
120,198
|
|
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 Three And Six Months Ended June
30, 2019 and 2018
(Unaudited)
|
|
Three Months ended
June 30,
|
|
|
Six Months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
37,522
|
|
|
$
|
412,359
|
|
|
$
|
58,838
|
|
|
$
|
1,104,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
23,395
|
|
|
|
395,892
|
|
|
|
36,164
|
|
|
|
1,051,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
14,127
|
|
|
|
16,467
|
|
|
|
22,674
|
|
|
|
52,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
6,740
|
|
|
|
7,100
|
|
|
|
11,114
|
|
|
|
15,785
|
|
General and administrative
|
|
|
101,020
|
|
|
|
107,514
|
|
|
|
199,860
|
|
|
|
216,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
107,760
|
|
|
|
114,614
|
|
|
|
210,974
|
|
|
|
231,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income (expense) and income taxes
|
|
|
(93,633
|
)
|
|
|
(98,147
|
)
|
|
|
(188,300
|
)
|
|
|
(178,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,691
|
)
|
|
|
(3,776
|
)
|
|
|
(2,778
|
)
|
|
|
(3,384
|
)
|
Other income (expense), net
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income), net
|
|
|
(2,691
|
)
|
|
|
(3,759
|
)
|
|
|
(2,778
|
)
|
|
|
(3,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(96,324
|
)
|
|
|
(101,906
|
)
|
|
|
(191,078
|
)
|
|
|
(182,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(96,324
|
)
|
|
|
(101,906
|
)
|
|
|
(191,078
|
)
|
|
|
(182,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
9,147
|
|
|
|
15,605
|
|
|
|
623
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
$
|
(87,177
|
)
|
|
$
|
(86,301
|
)
|
|
$
|
(190,455
|
)
|
|
$
|
(176,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
27,502,346
|
|
|
|
27,262,346
|
|
|
|
27,436,048
|
|
|
|
27,201,086
|
|
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)
|
|
Six Months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net Loss available to common shareholders
|
|
$
|
(191,078
|
)
|
|
$
|
(182,363
|
)
|
Adjustments to reconcile net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,123
|
|
|
|
7,671
|
|
Stock compensation
|
|
|
7,200
|
|
|
|
15,120
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,995
|
|
|
|
(186
|
)
|
Other receivables
|
|
|
(22,895
|
)
|
|
|
(4,034
|
)
|
Advance to suppliers
|
|
|
(560
|
)
|
|
|
(120,054
|
)
|
Inventory
|
|
|
(11,414
|
)
|
|
|
(1,087
|
)
|
Right-of-use asset
|
|
|
(3,132
|
)
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
87,063
|
|
|
|
12,866
|
|
Advance from customers
|
|
|
66,784
|
|
|
|
134,138
|
|
Taxes payable
|
|
|
80
|
|
|
|
1,114
|
|
Other payables
|
|
|
71,865
|
|
|
|
141,277
|
|
Lease liability
|
|
|
3,132
|
|
|
|
-
|
|
Net cash provided by operating activities
|
|
|
15,163
|
|
|
|
4,462
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of plant and equipment
|
|
|
(2,769
|
)
|
|
|
(9,600
|
)
|
Net cash used in investing activities
|
|
|
(2,769
|
)
|
|
|
(9,600
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from loan from related parties
|
|
|
|
|
|
|
127
|
|
Payments to loan from related parties
|
|
|
-
|
|
|
|
(127
|
)
|
Net cash used in financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuation on cash and cash equivalents
|
|
|
(142
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
12,252
|
|
|
|
(5,172
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
9,137
|
|
|
|
8,106
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at ending of period
|
|
$
|
21,389
|
|
|
$
|
2,934
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
(656
|
)
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
China Carbon Graphite Group, Inc and
subsidiaries
Consolidated Statements of Changes in
Stockholders’ Deficit
For the Quarter Ended June 30, 2019 and
2018
(Unaudited)
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
|
27,502,346
|
|
|
$
|
27,502
|
|
|
$
|
48,760,711
|
|
|
$
|
(51,217,003
|
)
|
|
$
|
84,747
|
|
|
$
|
(2,344,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(96,324
|
)
|
|
|
-
|
|
|
|
(96,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,147
|
|
|
|
9,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
27,502,346
|
|
|
$
|
27,502
|
|
|
$
|
48,760,711
|
|
|
$
|
(51,313,327
|
)
|
|
$
|
93,894
|
|
|
$
|
(2,431,220
|
)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
|
27,262,346
|
|
|
$
|
27,262
|
|
|
$
|
48,753,751
|
|
|
$
|
(50,856,606
|
)
|
|
$
|
66,484
|
|
|
$
|
(2,009,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(101,906
|
)
|
|
|
-
|
|
|
|
(101,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,605
|
|
|
|
15,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
|
27,262,346
|
|
|
$
|
27,262
|
|
|
$
|
48,753,751
|
|
|
$
|
(50,958,512
|
)
|
|
$
|
82,089
|
|
|
$
|
(2,095,410
|
)
|
The accompanying notes are an
integral part of these unaudited consolidated financial statements.
China Carbon Graphite Group, Inc and
subsidiaries
Consolidated Statements of Changes in
Stockholders’ Deficit
For the Two Quarters Ended June 30, 2019
and 2018
(Unaudited)
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
27,262,346
|
|
|
$
|
27,262
|
|
|
$
|
48,753,751
|
|
|
$
|
(51,122,249
|
)
|
|
$
|
93,271
|
|
|
$
|
(2,247,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for directors and employees
|
|
|
240,000
|
|
|
|
240
|
|
|
|
6,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(191,078
|
)
|
|
|
-
|
|
|
|
(191,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
623
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
27,502,346
|
|
|
$
|
27,502
|
|
|
$
|
48,760,711
|
|
|
$
|
(51,313,327
|
)
|
|
$
|
93,894
|
|
|
$
|
(2,431,220
|
)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
27,010,346
|
|
|
$
|
27,010
|
|
|
$
|
48,738,883
|
|
|
$
|
(50,776,149
|
)
|
|
$
|
75,804
|
|
|
$
|
(1,934,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for directors and employees
|
|
|
252,000
|
|
|
|
252
|
|
|
|
14,868
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(182,363
|
)
|
|
|
-
|
|
|
|
(182,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,285
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
|
27,262,346
|
|
|
$
|
27,262
|
|
|
$
|
48,753,751
|
|
|
$
|
(50,958,512
|
)
|
|
$
|
82,089
|
|
|
$
|
(2,095,410
|
)
|
The accompanying notes are an
integral part of these unaudited consolidated financial statements.
China Carbon Graphite Group, Inc. and
subsidiaries
Notes to Unaudited Consolidated Financial
Statements
June 30, 2019
(1) Organization and Business
China Carbon Graphite Group, Inc. (the
“Company”), through its subsidiaries, is engaged in the research and development, rework and sales of graphene
and graphene oxide and graphite bipolar plates in the People’s Republic of China (“China” or the “PRC”).
The Company has developed its own graphene prototype and reworks the products by orders only. The Company outsource the production
of large orders to third parties as it has not commercialized its product prototype. 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
wholly foreign-owned enterprise 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.
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.
The Business and the facilities related
thereto are all located in the People’s Republic of China (“China”). The Business is conducted by Royal Elite
New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a wholly foreign owned enterprise under
laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited, a Hong Kong company, (“Royal HK”),
which is wholly owned by BVI Co.
Royal Shanghai was set up in Shanghai on
June 9, 2010. Royal HK was set up in Hong Kong on January 8, 2010.
The consolidated financial statements presented
herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries in
the following structure chart.
Organizational Structure Chart
The following chart sets forth our organizational
structure:
Liquidity and Working Capital Deficit
As of June 30, 2019 and as of December
31, 2018, 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 June 30, 2019, the Company has incurred operating losses of $51,313,327 and working capital deficit of $2,490,366
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 Consolidated
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, 2018. The consolidated balance sheet as of December 31, 2018 has been derived
from the audited financial statements. The results of the six months ended June 30, 2019 are not necessarily indicative of the
results to be expected for the full fiscal year ending December 31, 2019.
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 unaudited 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.
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 and equipment, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete
and/or damaged inventory. 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
and net realizable value. The cost of inventories comprises all costs of purchases, and other costs incurred in bringing
the inventories to their present location and condition. Cost is determined using the weighted average method. Net realizable 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 six months ended June 30, 2019
and 2018, the Company has not made provision for inventory in regards to slow moving or obsolete items.
Lease
The Company used comparative method and adopted ASU 2018-20, Leases (Topic 842) to recognize leases assets
and lease liabilities on the balance sheet and disclosing key information about lease transactions. All existing leases since January
1, 2018 are reported under this rule. After the adoption, $27,696 of operating lease right-of-use asset and $27,696 of operating
lease liabilities were retroactively reflected to December 31, 2018 financial statements.
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 six months ended June 30, 2019 and 2018.
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 June 30, 2019 and 2018 were $9,147 and $15,605, respectively. Translation
adjustments for the six months ended June 30, 2019 and 2018 were $623 and $6,285, respectively. The cumulative translation adjustment
and effect of exchange rate changes on cash for the six months ended June 30, 2019 and 2018 were $(142) and $(34), 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 6.71 RMB and 6.88 RMB to $1.00 at June 30, 2019 and December 31, 2018, respectively. The equity accounts were stated at their
historical rates. The average translation rates applied to income statements for the six months ended June 30, 2019 and 2018 were
6.74 RMB and 6.37 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
The Company derives revenues from distribution
of graphite-based products. We recognize revenue in accordance with ASC 606, Revenue is recognized upon transfer of control of
promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products.
We enter into contracts that can include products, which are generally capable of being distinct and accounted for as separate
performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are
subsequently remitted to governmental authorities. 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 according to shipping terms.
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 transfer
of control of promised products to customers according to shipping terms. The Company does not provide chargeback or price
protection rights to the customers. The customer 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 sell 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 record an allowance 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 six months ended June 30, 2019 and 2018.
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
, amending revenue recognition
guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this ASU on January 1, 2018 for all
revenue contracts with our customers using the modified retrospective approach.
There is no impact of applying this ASU.
Cost of goods sold
Cost of goods sold consists primarily of
the purchase costs of products.
Shipping and handling costs
The Company follows ASC 606, as amended
and clarified by ASU 2016-10, to record shipping and handling cost. The Company classifies shipping and handling costs paid on
behalf of its customers in selling expenses. For the three months ended June 30, 2019 and 2018, shipping and handling costs were
$718 and $3,622, respectively. For the six months ended June 30, 2019 and 2018, shipping and handling costs were $958 and $7,601,
respectively.
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 June 30, 2019 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 June 30, 2019, 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.
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.
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 carrying amount of other receivables,
advance to vendors, advances from customers, other payables, accrued liabilities are reasonable estimates of their fair value because
of the short-term nature of these items.
Loss per share
Basic loss 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 loss 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 loss per share for the six months ended June 30, 2019 and 2018:
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Weighted average shares of common stock outstanding (basic)
|
|
|
27,436,048
|
|
|
|
27,201,086
|
|
Shares issuable upon conversion of Series B Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares of common stock outstanding (diluted)
|
|
|
27,436,048
|
|
|
|
27,201,086
|
|
Net loss available to common shareholders
|
|
$
|
(191,078
|
)
|
|
$
|
(182,363
|
)
|
Net loss per shares of common stock (basic)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net loss per shares of common stock (diluted)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
The following table sets forth the computation
of the number of net loss per share for the three months ended June 30, 2019 and 2018:
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Weighted average shares of common stock outstanding (basic)
|
|
|
27,502,346
|
|
|
|
27,262,346
|
|
Shares issuable upon conversion of Series B Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares of common stock outstanding (diluted)
|
|
|
27,502,346
|
|
|
|
27,262,346
|
|
Net loss available to common shareholders
|
|
$
|
(96,324
|
)
|
|
$
|
(101,906
|
)
|
Net loss per shares of common stock (basic)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Net loss per shares of common stock (diluted)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
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 six
months ended June 30, 2019 and 2018 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 February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)”, to increase the transparency and comparability about leases among entities. The new
guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It
also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning
after December 15, 2018, and requires a modified retrospective approach to adoption. The Company adopted the policy on January
1,2019 and the impact of the adoption of this guidance is listed in Note 14.
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”, which requires the recognition of
the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06
will be effective for the Company in its first quarter of 2019. The Company does not expect that the adoption of this guidance
will have a material impact on its consolidated financial statements.
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.
Sales to certain customers generated over
10% of the Company’s total net sales. Sales to one Company for the six months ended June 30, 2019 were approximately 34%
of the Company’s net sales. Sales to other Company for the six months ended June 30, 2019 were approximately 22% of the Company’s
net sales. Sales to another Company for the six months ended June 30, 2019 were approximately 12% of the Company’s net sales.
Sales to certain customers generated over
10% of the Company’s total net sales. Sales to one Company for the six months ended December 31, 2018 were approximately
96% of the Company’s net sales.
For the six months ended June 30, 2019, three
suppliers accounted for approximately 90% of total purchases.
For the six months ended December 31, 2018,
one supplier accounted for approximately 97% of total purchases.
(6) Accounts Receivable
The Company establishes an individualized
credit and collection policy based on each individual customer’s credit history. The Company does not have a uniform policy
that applies equally to all customers. The collection period usually ranges from three months to twelve months. The Company
grants extended payment terms only when the Company believes that the payment will be collectible at the end of the term. The Company
grants extended payment terms to customers if based on the following factors: (a) whether or not the Company views a real need,
from the customer’s perspective, for the extension and (b) how critical the Company’s relationship with the customer
and is the customer the Company’s long-term business. The Company grants extended payment terms only when the Company believes
that the payment will be collectible at the end of the term. This meets the criteria of revenue recognition under U.S. GAAP, which
requires that collection of the resulting receivable be reasonably assured.
As of June 30, 2019 and December 31, 2018,
accounts receivable consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Amount outstanding
|
|
$
|
1,647
|
|
|
$
|
5,587
|
|
Less: Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Net amount
|
|
$
|
1,647
|
|
|
$
|
5,587
|
|
(7) Advances to Suppliers
As of June 30, 2019 and December 31, 2018,
advances to suppliers are advances for finished goods and amounted to $8,082 and $7,517, respectively.
Advances to suppliers represent interest-free
cash paid in advance to suppliers for purchases of inventory.
(8) Inventories
As of June 30, 2019 and December 31, 2018,
inventories consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Inventory in transit
|
|
$
|
13,116
|
|
|
$
|
1,834
|
|
Reserve for slow moving and obsolete inventory
|
|
|
-
|
|
|
|
-
|
|
Inventory, net
|
|
$
|
13,116
|
|
|
$
|
1,834
|
|
For the six months ended June 30, 2019
and 2018, the Company has not made provision for inventory in regards to slow moving or obsolete items. As of June 30, 2019 and
December 31, 2018, the Company did not record any provision for inventory in regards to slow moving or obsolete items.
(9) Other Receivables
Other receivables amounted $52,615 and
$29,954 as of June 30, 2019 and December 31, 2018, respectively. Other receivables are mainly export tax rebates.
(10) Property and Equipment, net
As of June 30, 2019 and December 31, 2018,
property, plant and equipment consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Machinery and equipment
|
|
$
|
38,496
|
|
|
$
|
35,705
|
|
Office equipment
|
|
|
11,114
|
|
|
|
11,100
|
|
Motor vehicles
|
|
|
40,693
|
|
|
|
40,630
|
|
Total
|
|
|
90,306
|
|
|
|
87,435
|
|
Less: accumulated depreciation
|
|
|
(53,112
|
)
|
|
|
(48,962
|
)
|
Plant and Equipment, net
|
|
$
|
37,194
|
|
|
$
|
38,473
|
|
For the three months ended June 30, 2019
and 2018, depreciation expenses amounted to $2,075 and $3,991, respectively. For the six months ended June 30, 2019 and 2018, depreciation
expenses amounted to $4,123 and $7,671, respectively.
The Company purchased approximately $2,769
and $9,600 property and equipment during the six months ended June 30, 2019 and 2018, respectively.
The Company reviews the carrying value
of property 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 six months ended June 30, 2019 and 2018.
(11) Stockholders’ deficit
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
The Company has total outstanding shares
of common stock of 27,502,346 and 27,262,346 as of June 30, 2019 and December 31, 2018, respectively.
(a)
Stock Issuances For Compensation
On February 20, 2019, the Company issued an
aggregate of 200,000 shares of common stock to four directors as compensation for services provided in 2018. The issuance of these
shares was recorded at grant date fair market value at $0.03 per share.
On February 20, 2019, the Company issued
40,000 shares of common stock to the CFO. The issuance of these shares was recorded at grant date fair market value of $0.03.
(b)
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 June 30, 2019, no Escrow Shares
have been transferred to investors or returned to the Company.
(12) Related Parties
As of June 30, 2019 and December 31,
2018, $638,938 and $581,662 are the salary owed to Mr. Donghai Yu, who is CEO of the Company. As of June 30, 2019 and December
31, 2018, $45,000 and $45,000 are the salary owed to Ms. Grace King, who is VP finance of the Company. Ms. Grace King has
resigned from the Company in 2018.
(
13) Other Payable
Other payable amounted $1,611,586 and
$1,539,606 as of June 30, 2019 and December 31, 2018, respectively. Other payables are mainly money borrowed from
unrelated parties for operating purpose. These payable are without collateral, interest free, and due on demand.
(14) Lease Commitment
Our
principal executive office is located in US. The Company leased its corporate address month to month for a monthly fee of $365.
The lease is month to month.
Royal Shanghai has operating leases for
corporate offices. Our leases have remaining lease terms of 6 months to 24 months.
Royal Shanghai leases an office in Shanghai
China. The lease term of the office space is from March 16, 2019 to March 15, 2021. The current monthly rent including monthly
management fee is approximately $1,052 (RMB 7,063).
Royal Shanghai leases another office in
Shanghai China. The lease term of the office space is from August 29, 2018 to November 30, 2019. The current monthly rent including
monthly management fee is approximately $2,513 (RMB 16,866).
The components of lease expense were as
follows:
|
|
Six months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
21,022
|
|
|
$
|
19,094
|
|
Supplemental cash flow information related
to leases was as follows:
|
|
Six months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
3,132
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
3,132
|
|
|
|
-
|
|
Supplemental balance sheet information
related to leases was as follows:
|
|
June 30,
2019
|
|
|
December 31, 2018
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets-non current
|
|
$
|
30,834
|
|
|
$
|
27,696
|
|
|
|
|
|
|
|
|
|
|
Total operating lease right-of-use assets
|
|
|
30,834
|
|
|
|
27,696
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability-current
|
|
$
|
21,952
|
|
|
$
|
27,696
|
|
Operating lease liability-non current
|
|
|
8,882
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
30,834
|
|
|
$
|
27,696
|
|
Maturities of lease liabilities were as
follows:
Year Ending June 30,
|
|
Operating
Leases
|
|
|
|
|
|
2020
|
|
$
|
22,906
|
|
2021
|
|
|
7,928
|
|
|
|
|
|
|
Total lease payments
|
|
|
30,834
|
|
Less imputed interest
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
30,834
|
|
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion of the results
of our operations and financial condition should be read in conjunction with our financial statements and the related notes, which
appear elsewhere in this report. The following discussion includes forward-looking statements. For a discussion of important factors
that could cause actual results to differ from our forward-looking statements, see the section entitled “Cautionary Note
Regarding Forward Looking Statements” above.
In some cases, you can identify forward-looking
statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predicts,” “projects,”
“should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.
Given these uncertainties, undue reliance should not be placed on these forward-looking statements. Also, forward-looking statements
represent our estimates and assumptions only as of the date of this report. This Annual Report should be read in its entirety and
with the understanding that our actual future results may be materially different from what we expect. Except as required by law,
we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
Overview
We engage in the research and development,
small production and sales of graphene and graphene oxide and graphite bipolar plates in the People’s Republic of China.
We have developed our own graphene prototype and produces the products by orders only, for which we sell domestically and export
internationally. We outsource the production of large orders to third parties as we have not commercialized our product prototype.
Starting in the second quarter of 2018, we have started producing our graphene products on a regular basis and standardized the
packaging for our customers’ commercial use. We also operate a business-to-business and business-to-consumers Internet portal
(www.roycarbon.com) for graphite related products.
As of and for the six months ended June
30, 2019, the Company has incurred operating losses. The ability of the Company to continue as a going concern is dependent on
the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain
adequate capital, it could be forced to cease operations. In order to continue as a going concern, the Company will need, among
other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1)
obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings
from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will
be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with or acquire 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
Comparison of Results of Operation for the
Three Months Ended June 30, 2019 and 2018
Sales
During
the three months ended June 30, 2019, we had sales of $37,522, compared to sales of $412,359 for the three months ended June 30,
2018, a decrease of $374,837, or approximately 90.9%. Significant sales decrease was mainly due to the Company lost import
business.
Cost of goods sold
Our cost of goods sold consists of the
purchase cost. During the three months ended June 30, 2019, our cost of goods sold was $23,395, compared to $395,892 for the
cost of goods sold for the three months ended June 30, 2018, a decrease of $372,497 or approximately 94.09%. The decrease
in the cost of sales was primarily attributable to the significant decrease in sales volume.
Gross profit
Our gross profit decreased from $16,467
for the three months ended June 30, 2018 to $14,127 for the three months ended June 30, 2019. The decrease of the gross profit
is mainly attributed to decrease in the sales and cost of goods sold.
Gross profit Margin
Our gross profit margin increased from
4.0% for the three months ended June 30, 2018 to 37.6% for the three months ended June 30, 2019 due to sale of high margin profit
products such as graphene during the three months ended June 30, 2019, compared to the three months ended June 30, 2018.
Operating expenses
Operating expenses
totaled $107,760 for the three months ended June 30, 2019, compared to $114,614 for the three months ended June 30, 2018, a decrease
of $6,854, or approximately 5.98%.
Selling, general and administrative
expenses
Selling expenses decreased from $7,100 for
the three months ended June 30, 2018 to $6,740 for the three months ended June 30, 2019, a decrease of $360, or approximately 5.07%.
The decrease is mainly attributed to lower freight cost.
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
$101,020 for the three months ended June 30, 2019, compared to $107,514 for the three months ended June 30, 2018, a decrease of $6,494
or 6.04%. The decrease of general and administrative expenses is mainly due to decreased payroll expense, decreased rent expenses,
and decreased stock compensation.
Loss from operations
As a result of the factors described above,
operating loss was $(93,633) for the three months ended June 30, 2019, compared to operating loss of $(98,147) for the three months
ended June 30, 2018, an increase in loss of approximately $(4,514), or 4.60%.
Other income and expenses
Our interest expense was $0 for
the three months ended June 30, 2019, compared to interest income of $17 for the three months ended June 30, 2018. The reason is
due to decreased debt.
Other expenses of $(2,691) and other
expense of $(3,759) were recorded as other income for the three months ended June 30, 2019 and 2018, respectively.
Income tax
During the three months ended June 30,
2019 and 2018, we did not incur any income tax due for these periods.
Net loss
As a result of the factors described above,
our net loss for the three months ended June 30, 2019 was $96,324, compared to net loss of $101,906 for the three months ended
June 30, 2018, an increase in loss of $5,582, or approximately 5.48%.
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 June 30, 2019 was $9,147, compared a translation loss of $15,605
for the three months ended June 30, 2018, a decrease in loss of $6,458.
Net loss available to common stockholders
Net loss available to our common stockholders
was $0.00, or $0.00 per share (basic and diluted), for the three months ended June 30, 2019, compared to net loss of $0.00, or
net loss of $0.00 per share (basic and diluted), for the three months ended June 30, 2018.
Comparison of Results of Operation for the
Six Months Ended June 30, 2019 and 2018
Sales
During the six months ended June 30, 2019,
we had sales of $58,838, compared to sales of $1,104,170 for the six months ended June 30, 2018, a decrease of $1,045,332, or approximately
94.67%. Significant sales decrease was mainly due to the Company lost import business.
Cost of goods sold
Our cost of goods sold consists of the
purchase cost. During the six months ended June 30, 2019, our cost of goods sold was $36,164, compared to $1,051,283 for the
cost of goods sold for the six months ended June 30, 2018, a decrease of $1,015,119 or approximately 96.56%. The decrease
in the cost of sales was primarily attributable to the significant decrease in sales volume.
Gross profit
Our gross profit decreased from $52,887
for the six months ended June 30, 2018 to $22,674 for the six months ended June 30, 2019. The decrease of the gross profit is mainly
attributed to decrease in the sales and cost of goods sold.
Gross profit Margin
Our gross profit margin increased from
4.8% for the six months ended June 30, 2018 to 38.5% for the six months ended June 30, 2019 due to sale of high margin profit products
such as graphene during the six months ended June 30, 2019, compared to the six months ended June 30, 2018.
Operating expenses
Operating expenses
totaled $210,974 for the six months ended June 30, 2019, compared to $231,881 for the six months ended June 30, 2018, a decrease
of $20,907, or approximately 9.02%.
Selling, general and administrative
expenses
Selling expenses decreased from $15,785
for the six months ended June 30, 2018 to $11,114 for the six months ended June 30, 2019, a decrease of $4671, or approximately
29.59%. The decrease is mainly attributed to lower freight cost.
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
$199,860 for the six months ended June 30, 2019, compared to $216,096 for the six months ended June 30, 2018, a decrease of $16,236
or 7.51%. The decrease of general and administrative expenses is mainly due to decreased payroll expense, decreased rent expenses,
and decreased stock compensation.
Loss from operations
As a result of the factors described above,
operating loss was $(188,300) for the six months ended June 30, 2019, compared to operating loss of $(178,994) for the six months
ended June 30, 2018, an increase in loss of approximately $9,306, or 5.20%.
Other income and expenses
Our interest expense was $(2,778) for
the six months ended June 30, 2019, compared to interest income of $(3,384) for the six months ended June 30, 2018. The reason
is due to decreased debt.
Other income of $0 and other expense of
$15 were recorded as other income for the six months ended June 30, 2019 and 2018, respectively.
Income tax
During the six months ended June 30, 2019
and 2018, we did not incur any income tax due for these periods.
Net loss
As a result of the factors described above,
our net loss for the six months ended June 30, 2019 was $(191,078), compared to net loss of $(182,363) for the six months ended
June 30, 2018, an increase in loss of $8,715, or approximately 4.78%.
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 loss for the six months ended June 30, 2019 was $623, compared a translation loss of $6,285 for
the six months ended June 30, 2018, a decrease in loss of $5,662.
Net loss available to common stockholders
Net loss available to our common stockholders
was $0.01, or $0.01 per share (basic and diluted), for the six months ended June 30, 2019, compared to net loss of $0.01, or net
loss of $0.01 per share (basic and diluted), for the six months ended June 30, 2018.
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:
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1.
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10% of after tax income to
be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.
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2.
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If the accumulate balance
of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s
after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.
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3.
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Allocation can be made to
the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.
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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 30, 2019, 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 six months ended June 30, 2019.
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, provided that:
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we generate sufficient business
so that we are able to generate substantial profits, which cannot be assured;
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●
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we are able to generate savings
by improving the efficiency of our operations.
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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
June 30, 2019, cash and cash equivalents were $21,389, compared to $9,137 at December 31, 2018, an increase of $12,252 Our working
capital deficit increased by $176,232
to a deficit of $2,490,366
at June 30, 2019 from $2,314,134
at
December 31, 2018.
Accounts receivable, net of allowance, were
$1,647 and $5,587 as of June 30, 2019 and December 31, 2018, respectively. The decrease was mainly due to decreased sales during
the six months ended June 30, 2019. Accounts receivable are recorded at the invoiced amount and do not bear interest. Our management
reviews the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends and the aging
of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the
current economic conditions to make adjustments in the allowance when it is considered necessary.
As of June 30, 2019, inventories were $13,116,
compared to $1,834 at December 31, 2018, an increase of $ 11,282, or 615.16%. As of June 30, 2019 and December 31, 2018, the
Company has not made provision for inventory in regards to slow moving or obsolete items.
Advances to suppliers decreased from $7,517
at December 31, 2018 to $8,082 at June 30, 2019, a increase of $565. The decrease of advances to suppliers is mainly because the
Company made less advanced payments to suppliers during the six months ended June 30, 2019. No allowance for doubtful
accounts for the balance of advances to suppliers was reserved as of June 30, 2019 and December 31, 2018, respectively.
The following table sets forth information
about our net cash flow for the three months indicated:
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For the Six months ended
June 30,
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2019
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2018
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Net cash flows provided by operating activities
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$
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15,163
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$
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4,462
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Net cash flows used in investing activities
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$
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(2,769
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)
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$
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(9,600
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)
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Net cash flows (used in) financing activities
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$
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-
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$
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-
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Net cash flow provided by operating activities
was $15,163 for the six months ended June 30, 2019, compared to $4,462 provided by operating activities for the six months ended
June 30, 2018, an increase of $10,701.
Net
cash flow used in investing activities was $(2,769) for the six months ended June 30, 2019, compared to $(9,600) for the six months
ended June 30, 2018, a decrease of $6,831, or 71.16%. The decrease
is
mainly due to decrease acquisitions of plant and equipment in the six months ended June 30, 2019.
Net cash flow used in financing activities
was $nil and nil for the six months ended June 30, 2019 and 2018.
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.
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
The Company derives revenues from distribution
of graphite-based products. 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 according to shipping terms.
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 delivery
of goods and passage of title according to shipping terms. The Company does not provide chargeback or price protection rights
to the customers. The customer 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 sell 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 record an allowance 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 six months ended June 30, 2019 and 2018.
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
, amending revenue recognition
guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this ASU on January 1, 2018 for all
revenue contracts with our customers using the modified retrospective approach.
There is no impact of applying this ASU.
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 June 30, 2019 and December 31, 2018.
Inventories
Inventories are stated at the lower of
cost, determined on a weighted average basis, and net realizable value. 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. For the six months
ended June 30, 2019 and 2018, 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
six months ended June 30, 2019 and 2018.
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 six months ended June 30, 2019 and 2018 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:
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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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.
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
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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.
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.
$7,200 and $15,120 of stock compensation
expenses were amortized and recognized as general and administrative expenses for the six months ended June 30, 2019 and 2018,
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 February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)”, to increase the transparency and comparability about leases among entities. The new
guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It
also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning
after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company does
not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU No.
2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity
in how certain cash receipts and cash payments are presented and classified in the statement of cash flows”. The amendments
provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement
of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the
Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds
from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including
Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization
Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective
for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition
method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments
for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect that the adoption
of this guidance will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”, which requires the recognition of
the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06
will be effective for the Company in its first quarter of 2019. The Company does not expect that the adoption of this guidance
will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17,
“Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”. The amendments affect
reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations
involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the
primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable
interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting
entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of this guidance
will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine
when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business,
a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create
output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take
effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all
other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The Company does not expect that the adoption of this guidance will have a material
impact on its consolidated financial statements.
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.
Off-Balance Sheet Arrangements
We have not entered into any off-balance
sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
Not applicable because we are a smaller
reporting company.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
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 June 30, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s
internal control over financial reporting during the three months ended June 30, 2019, which were identified in connection with
management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.