UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
 

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

       For the transition period from ____________ to ____________

Commission File Number: 333-167090

ASIA CARBON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
26- 2895795
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

Xi Gu Nan Street, Qing Xu County, Taiyuan City
Shanxi Province, People’s Republic of China
 (Address of principal executive offices) (Zip Code)

86-351-5966868
(Issuer's telephone number, including area code)


Indicate by check mark whether the issuer (1) 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 o   No x

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 x   No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  56,056,858 shares of common stock, $.001 par value, as of August 9, 2013.

 
TABLE OF CONTENTS
 
PART I
 
FINANCIAL INFORMATION
 
Page
         
Item 1.
      F-1
         
        F-1
   
As of June 30, 2013 (Unaudited) and December 31, 2012
   
         
        F-2
   
For the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)
   
         
        F-3
   
For the Six Months Ended June 30, 2013 and 2012 (Unaudited)
   
         
        F-4
   
As of June 30, 2013  (Unaudited) and December 31, 2012
   
         
Item 2.
      3
         
Item 3.
      10
         
Item 4.
      10
         
PART II
 
OTHER INFORMATION
   
         
Item 1.
      11
         
Item 1A.
      11
         
Item 2.
      11
         
Item 3.
      11
         
Item 4. 
      11
         
Item 5.
      11
         
Item 6.
      11
         
    12
     
    13
 

PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements.
 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
ASSETS
           
 Current Assets:
           
Cash and equivalents
  $ 5,317,693     $ 6,664,444  
Accounts receivable, net
    2,479,290       3,622,644  
Inventories
    1,710,831       2,393,121  
Prepaid expenses and other receivable
    6,480       6,420  
Total Current Assets
    9,514,294       12,686,629  
                 
 Property, Plant and Equipment, net
    30,896,251       26,906,929  
                 
 Other Assets:
               
Land use rights, net
    213,815       214,356  
                 
 TOTAL ASSETS
  $ 40,624,360     $ 39,807,914  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
 Current Liabilities:
               
Short term debt
  $ 1,376,596     $ 1,364,014  
Accounts payable
    1,401,725       1,962,695  
Accrued liabilities
    146,969       169,302  
Taxes payable
    235,047       714,413  
Due to shareholder
    26,820       26,625  
Total Current Liabilities
  $ 3,187,157       4,237,049  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity:
               
Series A Convertible Preferred Stock, $0.001 par value, 5,000,000 authorized,
  none issued and outstanding
    -       -  
Blank Check Preferred Stock, $0.001 par value, 5,000,000 authorized,
  none issued and outstanding
    -       -  
Common stock, $0.001 par value, 100,000,000 authorized, 56,056,858 and
  52,857,052 issued and outstanding at June 30, 2013 and December 31, 2012,
  respectively
    56,057       52,857  
Additional paid-in capital
    7,195,501       6,690,461  
Statutory reserves
    2,757,200       2,757,200  
Retained earnings
    23,872,373       22,859,898  
Accumulated other comprehensive income
    3,556,072       3,210,449  
Total Stockholders' Equity
    37,437,203       35,570,865  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 40,624,360     $ 39,807,914  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
ASIA CARBON INDUSTRIES , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net Sales
  $ 5,487,310     $ 13,194,534     $ 11,451,255     $ 25,776,226  
Cost of Sales
    4,187,517       10,257,861       8,762,206       19,913,601  
Gross Profit
    1,299,793       2,936,673       2,689,049       5,862,625  
                                 
Operating Expenses:
                               
Selling
    114,990       93,297       196,775       184,988  
General and administrative
    266,669       247,402       885,377       557,790  
  Total Operating Expenses
    381,659       340,699       1,082,152       742,778  
Income From Operations
    918,134       2,595,974       1,606,897       5,119,847  
Other Income and (Expense)
                               
Interest income
    -       7,044       -       18,104  
Interest expense
    (35,198 )     (49,247 )     (69,449 )     (94,881 )
  Total Other Income and (Expense)
    (35,198 )     (42,203 )     (69,449 )     (76,777 )
Income Before Provision for Income Tax
    882,936       2,553,771       1,537,448       5,043,070  
Provision for income tax
    260,414       682,294       524,973       1,364,512  
Net Income
    622,522       1,871,477       1,012,475       3,678,558  
                                 
Other comprehensive income (loss)
    551,412       (268,325 )     345,623       (283,736 )
Comprehensive Income
  $ 1,173,934     $ 1,603,152     $ 1,358,098     $ 3,394,822  
                                 
Net Income Per Share - Basic
  $ 0.01     $ 0.04     $ 0.02     $ 0.07  
Net Income Per Share - Diluted
  $ 0.01     $ 0.04     $ 0.02     $ 0.07  
Weighted Average Shares Outstanding - Basic
    55,624,316       52,315,538       54,248,333       51,755,060  
Weighted Average Shares Outstanding - Diluted
    55,624,316       52,315,538       54,248,333       51,755,060  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
ASIA CARBON INDUSTRIES , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Six Months Ended June 30,
 
   
2013
   
2012
 
Cash Flows from Operating Activities:
           
Net Income
  $ 1,012,475     $ 3,678,558  
Adjustments to Reconcile Net Income to
 Net Cash Provided by Operating Activities:
               
 Provision for doubtful accounts
    90,638       13,284  
 Depreciation and amortization
    938,554       892,165  
 Stock-Based Compensation
    358,240       225,000  
 Changes in operating assets and liabilities:
               
    Accounts receivable
    1,069,778       (947,564 )
    Inventories
    692,591       (248,528 )
    Prepaid expenses and other receivable
    173       4,842  
    Accounts payable
    (610,076 )     (865,476 )
    Accrued expenses
    12,831       31,646  
    Taxes payable
    (476,717 )     202,247  
Net Cash Provided by Operating Activities
    3,088,487       2,986,174  
                 
Cash Flows from Investing Activities:
               
Additions to construction in progress
    (1,580,504 )     (5,351,940 )
Acquisitions of property, plant and equipment
    (3,052,822 )     (933,441 )
Net Cash Used in Investing Activities
    (4,633,326 )     (6,285,381 )
                 
Cash Flows from Financing Activities:
               
Repayment of short term debt
    -       (1,370,012 )
Proceeds from short term debt
    -       1,358,938  
Proceeds from issuance of common stock
    150,000       149,955  
Net Cash Provided by Financing Activities
    150,000       138,881  
                 
Effect of Exchange Rate Changes on Cash
    48,088       (127,351 )
Net Decrease in Cash and Equivalents
    (1,346,751 )     (3,287,677 )
Cash and Equivalents - Beginning of the Period
    6,664,444       8,092,411  
                 
Cash and Equivalents - End of the Period
  $ 5,317,693     $ 4,804,734  
                 
Supplemental Cash Flow Information:
               
Interest Paid
  $ 67,655     $ 95,032  
Income taxes
  $ 728,753     $ 1,266,291  
                 
Non-cash Investing and Financing Activities:
               
Issuance of stocks for stock-Based Compensation
  $ 2,165     $ -  
Transfer from construction in progress to plant and equipment
  $ 4,991,192     $ -  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Organization

Asia Carbon Industries, Inc. (“Asia Carbon” or “Company”) was incorporated June 23, 2008 under the laws of the State of Maryland.  The Company is a holding Company to develop business opportunities in the People’s Republic of China (“PRC” or “China”).

On November 10, 2008, Asia Carbon formed a wholly-owned subsidiary, Jin Zheng Li-Te-Wei-Si Carbon (Taiyuan) Inc. (“Liteweisi”) under PRC law in Taiyuan, China. Liteweisi is a management company formed to manage operations in China.

Taiyuan Hongxing Carbon Black Ltd. (“Hongxing”) was incorporated December 4, 2003 under the laws of the PRC. Hongxing is located at Qingxu County, Taiyuan, Shanxi province of China. Hongxing had two shareholders with registered capital of $384,300. Hongxing’s registered capital was $3,316,300 after one shareholder contributed $2,932,000 in 2008.

On December 29, 2009, Asia Carbon, through Liteweisi, entered into Entrusted Management, Exclusive Option, Exclusive Purchase, Pledge of Equity and Shareholders’ Voting Proxy Agreements (collectively, the “Entrusted Agreements”) with Hongxing and shareholders of Hongxing, Guoyun Yao and Chunde Meng (“Hongxing Shareholders”). The effect of the Entrusted Agreements was to cede control of management and the economic benefits of Hongxing to Liteweisi.  Asia Carbon issued 36,239,394 restricted shares of its common stock, par value $0.001 per share, to Karen Prudente, nominee and trustee for the Hongxing Shareholders for Hongxing and the Hongxing Shareholders for the Entrusted Agreements with Liteweisi.  The entry into the Entrusted Agreement and the issuance of shares to nominee and trustee holder to the Hongxing Shareholders are collectively referred to as “the transaction” hereafter.

The Entrusted Agreements gave Asia Carbon, through Liteweisi, the ability to substantially influence Hongxing’s operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. As a result of these Entrusted Agreements, which obligate Asia Carbon to absorb a majority of the risk of loss from Hongxing’s activities and enable Asia Carbon to receive a majority of its expected residual returns, Asia Carbon, through its wholly-owned subsidiaries, accounts for Hongxing as its Variable Interest Entity (“VIE”) under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic 810-10. Accordingly, Asia Carbon consolidates Hongxing’s operating results, assets and liabilities.

For accounting purposes, the transaction was accounted for in a manner similar to a reverse merger or recapitalization, since the stockholders of Hongxing owned a majority of Asia Carbon’s common stock immediately following the transaction. Consequently, the assets and liabilities and historical operations reflected in the consolidated financial statements prior to the transaction are those of Hongxing and are recorded at the historical cost of Hongxing, and the consolidated financial statements after completion of the transaction include the assets and liabilities of Asia Carbon, Liteweisi, and Hongxing (collectively, the “Company”), historical operations of Hongxing, and operations of Asia Carbon and Liteweisi from the date of the transaction. The 36,239,394 restricted shares of common stock issued to Karen Prudente were presented as outstanding for all periods.

On April 17, 2012, pursuant to Call Option Agreements dated December 29, 2009 between Karen Prudente and Ms. Guoyun Yao, the Chairman and Chief Executive Officer (“CEO”) of Asia Carbon, and Mr. Chun De Meng, a director and Chief Operating Officer (“COO”) of Asia Carbon, respectively (the “ Call Option Agreements”), Ms. Guoyun Yao and Mr. Chunde Meng exercised options to purchase 32,615,455 shares of common stock.

Asia Carbon, through Hongxing, manufactures three carbon black products N220, N330 and N660 under the brand name “Great Double Star” and other by-products. Most of the Company’s products are used by China’s tire industry.

Basis of Presentation

The accompanying consolidated financial statements were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).


Principles of Consolidation

The consolidated financial statements include the accounts of Asia Carbon, its subsidiaries, and its VIE for which Asia Carbon is the primary beneficiary. All significant inter-company transactions were eliminated in consolidation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Information

These financial statements and other financial information included in this quarterly report on Form 10-Q are unaudited, with the exception of the December 31, 2012 balance sheet. These unaudited interim consolidated financial statements have been prepared in accordance with US GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and related notes for the year ended December 31, 2012, included in the Company’s 2012 Annual Report on Form 10-K. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions which 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 revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and equivalents, accounts receivable, prepaid expenses, short term debt, accounts payable and accrued liabilities, various taxes payable and amounts due to shareholder. The fair value of these financial instruments approximates their carrying amounts in the balance sheets due to their short term maturity or by comparison to other instruments with similar terms.

Foreign Currency Translation

The functional currency of Hongxing and Liteweisi is the Chinese Renminbi (“RMB”).  The reporting currency of the Company is the United States dollar (“US dollar”).

The assets and liabilities of Hongxing and Liteweisi are translated into US dollars at period-end exchange rates. Stockholders' equity is translated at historical rates. The revenues and expenses are translated into US dollars at average exchange rates of the periods. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

The foreign exchange rates used in the translation are follows:

   
Three Months Ended
   
Year Ended
 
   
June 30, 2013
   
December 31,
 
   
2013
   
2012
   
2012
 
RMB/US$ exchange rate at the period end
   
0.1620
     
0.1574
     
0.1589
 
Average RMB/US$ exchange rate for the period
   
0.1612
     
0.1580
     
0.1547
 
 
Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were included in the consolidated results of operations. There was no material foreign currency transaction gain or loss for the six months ended June 30, 2013 or 2012.


Cash and Equivalents

Cash and equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

Inventories

Inventories are stated at the lower of cost, as determined on a weighted average basis, or market. Costs of inventories include raw materials and related costs incurred in bringing the products to the Company’s location and in proper condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The Company writes down inventories to market value if below cost. The Company also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

Property, Plant and Equipment, Net

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.

Long Lived Assets

The Company evaluates potential impairment of long-lived assets, in accordance with ASC subtopic 360-10-15 “Impairment or Disposal of Long-Lived Assets” which requires to evaluate a long-lived asset for recoverability when there are events or circumstances that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.

Revenue Recognition

The Company recognizes revenue from sales of products. Sales are recognized when these four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales revenue is presented net of value added tax (“VAT”), sales rebates and returns. No return allowance is made as product returns are insignificant based on historical experience. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. Credit risk is controlled through credit approvals, limits and monitoring procedures. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted. Freight-in costs are included in cost of sales.

Segment Information

FASB ASC subtopic 280-10, “Segment Reporting”, requires disclosures about segments and related information of a public entity.  The Company manufactures and sells carbon black made from tar oil. The Company and its major suppliers and customers are located in the PRC. The Company operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Statement of Cash Flows

In accordance FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon local currencies using average translation rates. As a result, amounts reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding asset and liabilities balances on the consolidated balance sheets.
 

Income Taxes

The Company accounts for income taxes using the asset and liability method described in FASB ASC subtopic 740-10, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

Uncertain Tax Positions

Interest associated with unrecognized tax benefits are classified as income tax and penalties are classified in selling, general and administrative expenses in the consolidated statements of income and comprehensive income.

Reclassifications

Certain prior period amounts were reclassified to conform to the manner of presentation in the current period.

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Comprehensive Income—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income ("AOCI") by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. ASU 2013-02 will be effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. As this ASU only requires enhanced disclosure, the adoption did not have an impact on the Company’s financial position or results of operations.

NOTE 3 – ACCOUNTS RECEIVABLE, NET

Accounts receivable balances were as follows:

   
June 30, 2013
   
December 31, 2012
 
Accounts receivable
  $ 2,642,854     $ 3,694,429  
Allowance for doubtful accounts
    (163,564 )     (71,785 )
Accounts receivable, net
  $ 2,479,290     $ 3,622,644  

 NOTE 4 – INVENTORIES

Inventories consisted of the following:

   
June 30, 2013
   
December 31, 2012
 
Raw materials
  $ 1,301,150     $ 1,277,286  
Packing and other materials
    20,248       40,664  
Finished products
    389,433       1,075,171  
    $ 1,710,831     $ 2,393,121  
 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment are summarized as follows:

   
Estimated
             
   
Useful Lives
   
June 30, 2013
   
December 31, 2012
 
Plant
  20     $ 8,861,484     $ 8,340,697  
Machinery and equipment
  10       24,881,178       16,839,670  
Transportation equipment
  5       118,836       117,750  
Other machinery and equipment
  5       62,509       61,938  
Construction in progress
          1,619,905       4,969,047  
            35,543,912       30,329,102  
Less: accumulated depreciation
          (4,647,661 )     (3,422,173 )
Property, plant and equipment, net
        $ 30,896,251     $ 26,906,929  

Total depreciation was $473,292 and $936,063 for the three and six months ended June 30, 2013 and $449,400 and $889,707 for the three and six months ended June 30, 2012.  Depreciation included in cost of manufacturing was $441,914 and $878,590 for the three and six months ended June 30, 2013 and $423,676 and $838,175 for the three and six months ended June 30, 2012.

The Company started the construction of a 3000KW power plant including a water recycling system in June 2012, which is to utilize residual exhaust gas generated from the Company’s carbon black manufacturing process.  Total cost of construction of the plant was approximately $6.4 million. The test of the power plant was completed at the beginning of 2013. The plant is currently being utilized for commercial production and satisfies the Company’s electricity needs for the current production capacities.

Beginning in October 2012, the Company terminated its production on the three dry carbon black production lines and began to convert them to special carbon black (“SCB”) production lines. In connection with the construction of the SCB production lines, the Company transferred the book value of the three dry production lines from property, plant and equipment to construction in progress in the fourth quarter of 2012. Most of the equipment and parts were in good condition and suitable to be used in the new SCB production lines. The Company’s policy is to continuously depreciate these assets during the construction period using estimated remaining useful lives until they are reused, sold, or disposed of. As of June 30, 2013, the SCB production lines have been completed and related construction in progress was transferred to property, plant and equipment.

The Company is constructing a circulating tank to recycle water for use by the factory with a total contract price of approximately $4,000,000.

NOTE 6 – LAND USE RIGHTS, NET

On December 29, 2005, the Company lent RMB554,130 ($89,764) to Xigu Village (“Village”), which was interest free and due December 29, 2008. The Village failed to repay the loan by December 29, 2008. Pursuant to the loan agreement, once the Village was in default, the Company had the right to use the outstanding amount as a prepayment to its future rent obligation for 49 mu (8.07 acre) of land the Village owns. The lease requires a yearly payment of RMB10,000 ($1,620) from July 2003 through July 2053. The Company has no obligation to pay this lease due to the default of the Village loan. The balance of the Village loan receivable was capitalized on December 31, 2008 as land use rights and is amortized over the remaining life of the land use rights.

On October 31, 2007, the Company lent an additional RMB 1,000,000 ($161,991) to the Village. The loan was interest free and due October 31, 2010. The Village failed to repay the loan as of October 31, 2010. Pursuant to the loan agreement, if the Village was unable to repay the loan when due, the Company had the right to offset the defaulted loan balance against future rent obligations of the Company’s newly leased second 49 mu (8.07 acre) parcel of land. The lease requires a yearly payment of RMB10,000 ($1,620) through June 2056 from June 2006. The Company has no obligation to pay this lease due to the default of the Village loan. The balance of the Village loan receivable was capitalized on November 1, 2010 as land use rights and is amortized over the remaining life of the land use rights.
 

Land use rights balances were as follows:

   
June 30, 2013
   
December 31, 2012
 
Land use rights
  $ 244,573     $ 249,453  
Less: accumulated amortization
    (30,758 )     (35,097 )
Land use rights, net
  $ 213,815     $ 214,356  

Amortization of land use rights was recorded as rent. Rent expense was $1,253 and $2,491 for the three and six months ended June 30, 2013 and $1,227 and $2,458 for the three and six months ended June 30, 2012.

As of June 30, 2013, the estimated future amortization of land use rights is as follows:

Years Ending
December 31,
     
2013
  $ 2,518  
2014
    5,035  
2015
    5,035  
2016
    5,035  
2017
    5,035  
2018
    5,035  
Thereafter
    186,122  
    $ 213,815  

NOTE 7 – SHORT TERM DEBT

Short term debt consisted of the following:

   
June 30, 2013
   
December 31, 2012
 
To Xigu Credit Union
           
  Interest at 12%, payable December 26, 2013
  $ 502,171     $ 497,581  
To Chengguan Credit Union
               
  Interest at 12%, payable December 26, 2013
    874,425       866,433  
    $ 1,376,596     $ 1,364,014  

The short term loans are renewable based on the past credit of the Company. Interest is paid quarterly. There are no other terms or loan covenants relating to these short term loans.

The Xigu Creidt Union short-term loan of $502,171 (RMB 3,100,000) was due on December 27, 2012 and was renewed at interest rate of 12%, the new maturity date is December 26, 2013.

The Chengguan Credit Union short-term loan of $874,425 (RMB 5,398,000) was due on December 27, 2012 and was renewed at interest rate of 12%, the new maturity date is December 26, 2013.

NOTE 8 – TAXES PAYABLE

Taxes payable consisted of the following:

   
June 30, 2013
   
December 31, 2012
 
PRC corporation income tax
  $ 261,650     $ 464,481  
Value added tax
    (26,603 )     230,352  
Other
    -       19,580  
Total
  $ 235,047     $ 714,413  
 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Country Risk

As the Company's principal operations are conducted in the PRC, it is subject to considerations and risks not typically associated with companies in North America and Western Europe. These risks include, among others, risks associated with the political, economic and legal environments and foreign currency exchange limitations encountered in the PRC. The Company's results of operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, among other things.

In addition, all of the Company's transactions in the PRC are denominated in RMB, which must be converted into other currencies before remittance from the PRC. Both conversion of RMB into foreign currencies and remittance of foreign currencies abroad require approval of the PRC government.

Lack of Insurance

The Company currently has no insurance for its office facilities and operations and is not certain it can cover the risks associated with such lack of insurance or that it will be able to obtain and/or maintain insurance to cover these risks at economically feasible premiums.

Entry Into Guaranty Agreements – Related Party Transaction

On May 24, 2012, Liteweisi and Hongxing separately entered into a Guaranty Agreement with Mr. Liang Qiao, an individual residing in the PRC (the “Lender”), Ms. Guoyun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO for a loan totaling RMB18 million ($2,872,371) (the “Loan”) due on August 23, 2012. Liteweisi and Hongxing were jointly liable for the Loan until it was repaid when the guaranty obligation ended.  The Loan was repaid in full in September 2012 and Liteweisi and Hongxing’s joint guaranty obligation extinguished accordingly.

Capital Commitments

As of June 30, 2013, the Company had capital commitments amounting to $2,429,800 to complete the circulating tank to recycle water for use by the factory.

NOTE 10 – STOCKHOLDERS’ EQUITY

On March 15, 2012, the Board of Directors (“BOD”) passed a resolution to issue and sell 156,250 shares of common stock of the Company to an accredited investor in China for $100,000. The stock was valued at $0.45 per share (the market closing price on March 14, 2012).
 
On May 3, 2012, the BOD passed a resolution to issue and sell 222,222 shares of common stock of the Company to two accredited investors in China for $100,000. The stock was valued at $0.38 per share (the market closing price on May 2, 2012).

On December 5, 2012, the BOD passed a resolution to issue and sell 500,000 shares of common stock of the Company to two accredited investors in China for $100,000. The stock was valued at $0.14 per share (the market closing price on December 4, 2012).

On March 7, 2013, the BOD passed a resolution to authorize the Company to issue 31,848 shares of common stock to a director for his past services.  The cost is estimated at $5,000 based on the closing price of $0.16 of the common stock on March 6, 2013.

On March 20, 2013, the BOD passed a resolution to issue and sell 250,000 shares of common stock of the Company to one accredited investor in China for $50,000. The stock was valued at $0.20 per share (the market closing price on March 19, 2013).

On April 16, 2013, the BOD granted 30,000 shares of restricted stock to an officer of the Company vesting in four tranches quarterly with a performance target of the Company filing its periodic reports in a timely fashion.
 

On April 26, 2013, the BOD passed a resolution to issue and sell 384,615 shares of common stock of the Company to one accredited investor in China for $50,000. The stock was valued at $0.13 per share (the market closing price on April 24, 2013).

Also on April 26, 2013, the BOD passed a resolution to authorize the Company to issue 103,333 shares of common stock to the former CFO of the Company for his past services.  The fair value was $12,400 based on the closing price of $0.12 per share that day.

On May 29, 2013, the BOD passed a resolution to issue and sell 400,000   shares of common stock of the Company to one accredited investor in China for $50,000. The stock was valued at $0.125 per share (the market closing price on May 28, 2013).

2011 Stock Incentive Plan

On September 13, 2011, the BOD of Asia Carbon passed a resolution to adopt Asia Carbon’s 2011 Incentive Stock Plan (the “Plan”) which aims to support and increase the Company’s ability to attract, engage and retain individuals of exceptional talent, to provide additional incentive for persons employed by the Company, including without limitation any employee, director, general partner or officer, and to advance the best interests of the Company by providing to those persons who have a substantial responsibility for its management, affairs, and growth, a proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with the Company. The Plan reserved 5,000,000 shares of common stock of the Company for the issuance of equity awards thereunder.

On March 16, 2012, the BOD passed a resolution to issue 1,000,000 shares of common stock of the Company under the Plan to 10 senior managers or key employees as part of compensation for 2011. The cost is estimated at $450,000 based on the closing price of the Company’s common stock on March 15, 2012 of $0.45. The Company expensed this compensation cost in 2012.

On March 27, 2013, the BOD passed a resolution to authorize the Company to issue 2,000,000 shares of common stock of the Company under the Plan to 10 senior managers or key employees as part of compensation for 2012. The cost is estimated at $340,000 based on the closing price of $0.17 of the Company’s common stock on February 6, 2013. The Company expensed this compensation cost in the six months ended June 30, 2013.

Restricted stock awards (“RSA”)

The Company has granted RSAs to one officer of the Company for services provided to the Company.

The following table summarizes the activities for the Company’s unvested RSAs for the six months ended June 30, 2013:

   
Number of Shares
   
Weighted-Average Grant-Date Fair Value per share
 
Unvested at December 31, 2012
    -       -  
Granted
    30,000     $ 0.14  
Vested
    (6,000 )   $ 0.14  
Unvested at June 30, 2013
    24,000     $ 0.14  

As of June 30, 2013, there was unrecognized compensation cost of $3,360 related to RSAs.

For the three and six months ended June 30, 2013, stock-based compensation expense of $13,240 and $358,240 was included in general and administrative expenses. For the three and six months ended June 30, 2012, stock-based compensation expense of  $112,500 and $225,000 was included in general and administrative expenses.

NOTE 11 – CONCENTRATION OF CREDIT RISK

The Company maintains cash balances in various banks in China. Currently, no deposit insurance system has been set up in China. Therefore, the Company will bear all risk if any of these banks become insolvent. As of June 30, 2013 and December 31, 2012, the Company’s uninsured cash balances were approximately $5,312,000 and $6,632,000, respectively.
 

NOTE 12 – INCOME TAXES

The Company generated substantially all of its net income from its PRC operations for the six months ended June 30, 2013 and 2012 and has recorded income tax provision for the periods. The Company’s China operation is subject to the PRC standard enterprise income tax rate of 25% based on its taxable net profit.

Current PRC Tax Law also imposes a 10% withholding tax on all dividends paid by PRC companies to non-PRC shareholders  unless any foreign shareholder’s jurisdiction has a tax treaty with the PRC that provides for a different withholding arrangement and contains rules governing such matters as international transfer pricing.  No provision for withholding or other tax on the undistributed earnings of the PRC companies has been made as the earnings of these PRC companies, in the opinion of the management, will be reinvested indefinitely.

The Company did not have any significant temporary differences giving rise to deferred tax liabilities as of June 30, 2013 and December 31, 2012.

For the six months ended June 30, 2013 and 2012, reconciliation of the differences between the statutory US Federal income tax rate and the effective rate was as follows:

   
Six Months Ended June 30,
 
   
2013
   
2012
 
             
US statutory tax rate
    34.0 %     34.0 %
Tax rate difference
    -9.0 %     -9.0 %
Change in valuation allowance
    9.1 %     2.1 %
Effective rate
    34.1 %     27.1 %
 
At June 30, 2013, the Company had US net operating loss carry forwards of $2,193,958. A 100% valuation allowance was recorded against their potential tax benefit due to the uncertainty of its realization.

For the six months ended June 30, 2013 and 2012, the Company had no unrecognized tax benefits and related interest and penalties expenses.  Currently, the Company is not subject to examination by major tax jurisdictions.

NOTE 13 – MAJOR CUSTOMERS AND VENDORS

For the six months ended June 30, 2013, four customers accounted for 25%, 18%, 16% and 13% of the Company’s total revenue. At June 30, 2013, the outstanding trade receivables from these four customers were 24%, 18%, 15% and 14% of the total outstanding trade receivables.

For the six months ended June 30, 2012, four customers accounted for 23%, 20%, 12% and 12% of the Company’s total revenue.  At June 30, 2012, the outstanding trade receivables from these four customers were 20%, 20%, 11% and 13% of the total outstanding trade receivables.

For the six months ended June 30, 2013, four suppliers accounted for 29%, 29%, 27% and 15% of the Company’s total purchases. At June 30, 2013, the outstanding trade payables to these four suppliers were 30%, 30%, 17% and 3% of the total outstanding trade payables.

For the six months ended June 30, 2012, five suppliers accounted for 13%, 13%, 13%, 13% and 13% of the Company’s total purchases.  At June 30, 2012, the outstanding trade payables to these five suppliers were 15%, 14%, 15%, 14% and 14% of the total outstanding trade payables.

The loss of any of these suppliers or customers could have a material adverse effect on the Company’s financial position and results of operations.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as the slow-down of the global financial markets and its impact on economic growth in general, the competition in the carbon black industry and the impact of such competition on pricing, revenues and margins, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

Unless the context indicates otherwise, as used in the following discussion, “Company”, “we,” “us,” and “our,” refer to (i) Asia Carbon Industries, Inc. (“Asia Carbon”), a corporation incorporated in the State of Maryland; (ii) Jin Zheng Li-Te-Wei-Si Carbon (Taiyuan) Inc. (“Liteweisi”), a wholly-owned subsidiary of Asia Carbon organized under the laws of the PRC; (iii) Taiyuan Hongxing Carbon Black Ltd. (“Hongxing”), a company organized under the laws of the PRC, the Variable Interest Entity (“VIE”) of Asia Carbon.

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “US dollar” and “$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.
 
The Company, through Hongxing, its operating company in the PRC, manufactures carbon black products under the brand name “Great Double Star” and other by-products.

The Company currently manufactures two “hard” and one “soft” carbon black products, N220, N330, and N660, respectively. N220 and N330 are hard carbon black. N220 has good strength and elongation properties, and is mainly used in the manufacturing of automobile tires. N330 has a lower production cost and is mainly used in manufacturing the sides of automobile tires. N660 is a soft carbon black which has the flexibility necessary for the production of automobile tire inner tubes and hoses.

Most of the Company’s products are used by the tire industry in China.

Recent Development

In October 2012, the Company began converting its three dry production lines to special carbon black (“SCB”) production lines. SCB has a broader range of use compared to the more traditional products including use as a pigmenting agent, UV stabilizer or conductive agent in a variety of products, such as plastics, toners and printing ink and coating, battery and electrical parts. Management believes SCB will generate more revenues as a result of higher sales prices. The conversion affected the Company’s operating results in the first half of 2013 as the three dry production lines had not been in operations since the fourth quarter of 2012. The SCB production lines were completed at the end of June 2013. This project was funded by cash from the Company’s operations. The total cost was approximately $5.6 million.

In May 2013, the Company began to build a circulating tank to recycle water for use by the factory in order to comply with government environmental requirement. The construction is expected to be completed in October 2013. The total cost is expected to be approximately $4.0 million.
 
  
Results of Operations

Comparisons for the three and six months Ended June 30, 2013 and 2012

Sales

   
Three Months Ended June 30,
 
   
2013
   
2012
 
   
Sales
   
Quantity
(Metric Ton)
   
Sales
   
Quantity
(Metric Ton)
 
N220   $ 5,007,768       5,990     $ 8,085,500       8,307  
N330     -       -       2,183,574       2,426  
N660     -       -       2,084,357       2,425  
Naphthalene oil
    479,542       900       841,103       1,050  
Total:
  $ 5,487,310       6,890     $ 13,194,534       14,208  

   
Six Months Ended June 30,
 
   
2013
   
2012
 
   
Sales
   
Quantity
(Metric Ton)
   
Sales
   
Quantity
(Metric Ton)
 
N220   $ 9,909,751       11,801     $ 15,900,710       16,307  
N330     281,376       333       4,174,381       4,710  
N660     219,309       284       4,006,678       4,714  
Naphthalene oil
    1,040,819       1,740       1,694,457       2,100  
Total:
  $ 11,451,255       14,158     $ 25,776,226       27,831  

Total net sales decreased $7,707,224 or 58% and $14,324,971 or 56% during the three and six months ended June 30, 2013, respectively compared to the same periods of 2012.  The decrease in sales was primarily due to the decrease in production as affected by the conversion to SCB production lines and the decrease in unit sales prices as a result of the lower coal tar oil prices which is the primary raw material for carbon black products.

During the second quarter of 2013, the average selling prices of our products was $796 per metric ton, a decrease of $133, or 14%, from $929 in the same period of 2012.

During the second quarter of 2013, the Company sold 6,890 metric tons of carbon black and naphthalene oil, a decrease of 7,318 metric tons or 52%, compared to 14,208 metric tons in the same period of 2012. The decrease was mainly attributable to the Company’s SCB production lines renovation project. Beginning in October 2012, the Company suspended production on its three dry carbon black production lines and began to convert them to SCB production lines.

During the first half of 2013, the average selling prices of our products was $809 per metric ton, a decrease of $117, or 13%, from $926 in the same period of 2012.

During the first half of 2013, the Company sold 14,158 metric tons of carbon black and naphthalene oil, a decrease of 13,673 metric tons or 49%, compared to 27,831 metric tons in the same period of 2012. The decrease was mainly attributable to the aforementioned conversion to SCB production lines.
 

Cost of Sales

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
% Change
   
2013
   
2012
   
% Change
 
Cost of Sales
  $ 4,187,517     $ 10,257,861       -59 %   $ 8,762,206     $ 19,913,601       -56 %

Cost of goods sold decreased $6,070,344 or 59% and 11,151,395 or 56% during the quarter and six months ended June 30, 2013, respectively, compared to the same periods of 2012. It was mainly attributable to the decrease in production and average purchase price of the primary raw material, coal tar.

The average price of coal tar was $356 per metric ton in the second quarter of 2013, a decrease of $47 per metric ton, or 12% from $403 per metric ton in the same period of 2012.  The quantity of coal tar used in production in the second quarter of 2013 was 8,971 metric tons, a decrease of 13,570 metric tons, or 60% compared to 22,541 metric tons in the same period of 2012. 

The average price of coal tar was $357 per metric ton in the first half of 2013, a decrease of $38 per metric ton, or 10% from $395 per metric ton in the same period of 2012.  The quantity of coal tar used in production in the first half of 2013 was 17,363 metric tons, a decrease of 28,040 metric tons, or 62% compared to 45,403 metric tons in the same period of 2012.

The decrease in usage of coal tar in the second quarter and the first half of 2013 was mainly due to the suspension of production on the three dry carbon black production lines for conversion to SCB production lines.

Gross Profit

Gross profit was $1,299,793 in the quarter ended June 30, 2013, a decrease of $1,636,880, or 56%, compared to $2,936,673 in the same period of 2012. The gross profit margin was 24% for the second quarter of 2013 compared to 22% for the same period of 2012.

Gross profit was $2,689,049 in the six months ended June 30, 2013, a decrease of $3,173,576, or 54%, compared to $5,862,625 in the same period of 2012. The gross profit margin was 23% for the six months ended June 30, 2013 and 2012.

The decrease in gross profit in the second quarter and the first half of 2013 was a result of the decrease in sales and production.

Operating Expenses

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
% Change
   
2013
   
2012
   
% Change
 
Operating expenses
  $ 381,659     $ 340,699       12 %   $ 1,082,152     $ 742,778       46 %
% of Sales
    7 %     3 %             9 %     3 %        

Operating expenses increased by $40,960 or 12% and 339,374 or 46% during the quarter and six months ended June 30, 2013, respectively compared to the same periods of 2012.

The higher operating expenses in dollars and as a percentage of sales in the second quarter of 2013 were mainly due to an increase in   bad debt allowance of $87,471 to reflect our expectations about the unrecoverable accounts receivable as some have become deeper in overdue, an increase in shipping expense of 20,303 resulting from price increase in freight charges, an increase in professional fees of $12,406 and an increase in administrative personnel and facility expenses of $14,295. The increase in operating expenses was partly offset by a decrease in stock-based compensation of $99,260.
 

The higher operating expenses in dollars and as a percentage of sales in the first half of 2013 were mainly due to an increase in stock-based compensation of $133,240, an increase in   administrative personnel and facility expenses of $122,640 as a result of office building repairs as wells as  higher salaries and an increase in bad debt allowance of $77,353. The increase in operating expenses was partly offset by a decrease in professional fees of $10,288.

As most of the general and administrative expenses are fixed, the decrease in sales also contributed to the increases in operating expenses as a percentage of sales.

Net Income

Net income was $622,522 in the quarter ended June 30, 2013, a decrease of $1,248,955, or 67%, compared to $1,871,477 in the same period of 2012.

Net income was $1,012,475 in the six months ended June 30, 2013, a decrease of $2,666,083, or 72%, compared to $3,678,558 in the same period of 2012

The decreases in net income were a result of aforementioned lower gross profit and higher operating expenses, partly offset by lower income taxes.

Liquidity and Capital Resources

We had cash and equivalents of $5,317,693 and $6,664,444 as of June 30, 2013 and December 31, 2012, respectively. Our funds are kept in financial institutions in the PRC, which do not provide insurance for amounts on deposit.  Moreover, we are subject to the regulations of the PRC which restrict the transfer of cash from the PRC, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations incurred outside the PRC.

Accounts receivable were $2,479,290 and $3,622,644, or 26% and 29%, of current assets, as of June 30, 2013 and December 31, 2012, respectively. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay, or to fail to make payments in a timely manner, our liquidity and results of operations could be adversely affected. An economic or industry downturn could adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations. A significant deterioration in our ability to collect accounts receivable could affect our cash flow and working capital and could also impact the cost or availability of financing available to us.

Accounts receivable aging as of June 30, 2013 and December 31, 2012 was as follows:

   
Total
   
Current
   
31-90 days
   
91-180 days
   
181-360 days
   
Over 361 days
 
June 30, 2013
    100.00 %     72.17 %     18.41 %     0.00 %     5.86 %     3.56 %
December 31, 2012
    100.00 %     79.13 %     19.40 %     0.00 %     1.47 %     0.00 %
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer’s credit worthiness deteriorates, or our customers’ actual defaults exceed historical experience, our estimates could change and impact our reported results. We have not experienced significant amount of bad debt since the inception of our operations. Allowance for doubtful accounts was $163,564 and $71,785 as of June 30, 2013 and December 31, 2012, respectively.
 

Operating activities:

For the six months ended June 30, 2013, net cash provided by operating activities was $3,088,487. This was primarily due to net income of $1,012,475, adjusted by non-cash related expenses including provision for doubtful accounts of $90,638, depreciation and amortization of $938,554 and stock-based compensation of $358,240, then increased by favorable changes in working capital of $688,580. The favorable changes in working capital mainly resulted from a decrease in accounts receivable of $1,069,778 as some prior period accounts receivable got collected and a decrease in inventory of $692,591 as a result of the SCB production lines conversion, partly offset by a decrease in accounts payable of $610,076 and a decrease in taxes payable of $476,717.

For the six months ended June 30, 2012, net cash provided by operating activities was $2,986,174. This was primarily due to net income of $3,678,558, adjusted by non-cash related expenses including provision for doubtful accounts of $13,284, depreciation and amortization of $892,165 and stock-based compensation of $225,000, then decreased by unfavorable changes in working capital of $1,822,833. The unfavorable changes in working capital mainly resulted from an increase in accounts receivable of $947,564, an increase in inventory of $248,528 and a decrease in accounts payable of $865,476, partly offset by an increase in taxes payable of $202,247.
.
Investing activities:

Net cash used in investing activities was $4,633,326 for the six months ended June 30, 2013 due to the capital expenditures on construction of the circulating tank of $1,580,504 and on the construction of SCB production lines of $3,052,822.

Net cash used in investing activities were $6,285,381 in the six months ended June 30, 2012. Capital expenditures of $933,441 are related to the Company’s warehouse built in 2012, $5,351,940 related to the Company’s construction of power plant.

Financing Activities:

Net cash provided by financing activities was $150,000 for the six months ended June 30, 2013 which was the issuance of the Company’s common stock to three investors.

Net cash provided by financing activities was $138,881 in the six months ended June 30, 2012 which included $149,955 received from private investors and $11,074 net repayment of short term loan.
 
Short Term Debt

Short term debt consisted of the following:

   
June 30, 2013
   
December 31, 2012
 
To Xigu Credit Union
           
  Interest at 12%, payable December 26, 2013
  $ 502,171     $ 497,581  
To Chengguan Credit Union
               
  Interest at 12%, payable December 26, 2013
    874,425       866,433  
    $ 1,376,596     $ 1,364,014  

The short term loans are renewable based on the past credit of the Company. Interest is paid quarterly. There are no other terms or loan covenants relating to these short term loans.

The Xigu Creidt Union short-term loan of $502,171 (RMB 3,100,000) was due on December 27, 2012 and was renewed at interest rate of 12%, the new maturity date is December 26, 2013.

The Chengguan Credit Union short-term loan of $874,425 (RMB 5,398,000) was due on December 27, 2012 and was renewed at interest rate of 12%, the new maturity date is December 26, 2013.
 

Our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we do not have sufficient available cash, we will have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.

We have funded our operations and capital expenditures using cash generated from operations and funds raised from issuing common stocks. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. However, as we are seeking to increase our production capacity in the near future, and it is possible that cash from operations will not be enough to support our expansion and we may require additional funding from external source, either debt or equity financing. We cannot be sure funding will be available on reasonable terms when we require such funding, if at all.

Contractual Obligations

As of June 30, 2013, the Company had capital commitments amounting to $2,429,800 to complete the circulating tank to recycle water for use by the factory.

Off-balance Sheet Arrangements

On May 24, 2012, Liteweisi and Hongxing separately entered into a Guaranty Agreement with Mr. Liang Qiao, an individual residing in the PRC, Ms. Guoyun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO for a loan totaling RMB18 million ($2,863,980) (the “Loan”). The Loan was due on August 23, 2012. Liteweisi and Hongxing were jointly liable for the Loan until it was repaid at which point the guaranty obligation extinguished. The Loan was repaid in full in September 2012 and Liteweisi and Hongxing’s joint guaranty obligation extinguished accordingly.

Critical Accounting Policies and Estimates

The Company believes the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America (“US GAAP”). The Company applies the following critical accounting policies related to revenue recognition in the preparation of its financial statements.
 
General

The Company’s consolidated financial statements are prepared in accordance with US GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Revenue is recognized when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Revenue is presented net of value added tax (“VAT”), sales rebates and returns. No return allowance is made as product returns are insignificant based on historical experience. The Company performs ongoing credit evaluations of its customers’ financial condition, but usually does not require collateral to support customer receivables.  The credit risk is controlled through credit approvals, limits and monitoring procedures.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors.  Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted.  Freight-in costs are included in cost of sales.
 

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and equivalents, accounts receivable, prepaid expenses, short term debt, accounts payable and accrued liabilities, various taxes payable and amounts due to shareholder.  The fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to their short term maturity or by comparison to other instruments with similar terms.

Foreign Currency Translation

The consolidated financial statements of the Company are translated pursuant to ASC 830, “Foreign Currency Matters.” The functional currency of Hongxing and Liteweisi is the Chinese Renminbi (“RMB”).  The reporting currency of the Company is the United States dollar (“US dollar”). The financial statements of Hongxing and Liteweisi are translated to US dollars using year-end exchange rates for assets and liabilities, historical rates for equities, and average exchange rates for revenues, costs and expenses. Translation adjustments are recorded in accumulated other comprehensive income as a component of stockholders’ equity. Transaction gains or losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.

Segment Information

ASC 280-10, “Disclosure About Segments of and Enterprise and Related Information”, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.



Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

Smaller reporting companies are not required to provide the information required by this item.
 
Item 4.  Controls and Procedures.
 
(a)             Evaluation of disclosure controls and procedures .
 
At the conclusion of the period ended June 30, 2013 we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
(b)   Changes in internal controls .
 
As reported in our Annual Report on Form 10-K for our fiscal year ended December 31, 2012, as of such fiscal year end we identified material weaknesses in our internal control over financial reporting and described several actions we plan to take to remedy such material weaknesses.  During the quarter ended June 30, 2013, we continued on job training of accounting and other related personnel.
 
Other than as set forth herein, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II
 
OTHER INFORMATION
 
Item 1.  Legal Proceedings.
 
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
Item 1A.  Risk Factors.
 
Smaller reporting companies are not required to provide the information required by this item.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
On May 29, 2013, the Company issued 400,000 shares of common stock of the Company to one accredited investor in China for $50,000.   The issuance was in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended.

Item 3.  Defaults Upon Senior Securities
 
None.

Item 4.  Mine Safety Disclosures

Not applicable.

 
None.

Item 6.  Exhibits.

The exhibits required by this item are set forth in the Exhibit Index attached hereto.
 
 

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  ASIA CARBON INDUSTRIES, INC.  
       
Date:  August 14, 2013
By:
/s/ Guoyun Yao  
    Guoyun Yao  
   
Chief Executive Officer, President, Secretary and Chairman of the Board
 
    (principal executive officer)  
       
       
Date:  August 14, 2013
By:
/s/ Elaine Zhao  
    Elaine Zhao  
    Chief Financial Officer  
    (principal financial officer and principal accounting officer)  
 
 
 
EXHIBIT INDEX
 
No.
 
Description
     
31.1
 
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
     
32.1
 
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Taxonomy Extension Schema Document
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
* Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements. The XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
 
 
13
 
 
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