As of September 30, 2012, there are total 1,229,200 shares warrants outstanding.
(d)
Stock Issuances for Cash
On July 14, 2011, the Company issued an aggregate of 250,000 shares of common stock at a price of $0.64 per share to unrelated parties to raise money for the Company’s operations.
On January 12, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On March 8, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On April 10, 2012, the Company issued 200,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On May 9, 2012, the Company issued 200,000 shares of common stock at a price of $0.56 per share to unrelated parties to raise money for the Company’s operations.
On May 9, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
(e)
Stock Issuances to Consultants
In April 2010, the Company issued an aggregate of 420,000 shares of common stock pursuant to three consulting agreements in exchange for consulting and investor relations services. A fair value of $659,400 was recorded. As of September 30, 2012, these consulting expenses were fully amortized.
During the first quarter of 2011, the Company issued an aggregate of 620,000 shares of common stock pursuant to three consulting agreements in exchange for consulting and investor relations services. A fair value of $1,240,100 was recorded for the consulting expenses relating to all three agreements, with the consulting expenses being amortized over one year for two agreements and one and a half years for the third agreement.
The amount of $0 and $266,100 was amortized and recognized as a general and administrative expense for the three months ended September 30, 2012 and 2011, respectively. $175,700 and $798,300 was amortized and recognized as a general and administrative expense for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, these consulting expenses were fully amortized.
During the second quarter of 2011, the Company issued 365,000 shares of common stock pursuant to a consulting agreement in exchange for consulting and investor relations services. A fair value of $547,500 was recorded for the consulting expenses and amortized over one and a half years.
The amount of
$91,250 was amortized and recognized as a general and administrative expense for the three months ended September 30, 2012 and 2011. The amount of $273,750 and $182,500 was amortized and recognized as a general and administrative expense for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, these consulting expenses were fully amortized.
In April 2012, the Company issued an aggregate of 110,000 shares of common stock pursuant to a consulting agreement in exchange for
investor relations services. A fair value of $96,800 was recorded for the expenses and amortized over one year. The amount of $24,200 and $40,333 was amortized and recognized as a general and administrative expense for the three and nine months ended September 30, 2012, respectively. As of September 30, 2012, $56,467 remained to be amortized and was recorded as a prepaid expense.
In June 2012, the Company issued an aggregate of 100,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A
fair value of $57,000 was recorded for the consulting expenses and amortized over four months. In September 2012, these 100,000 shares of common stock had been canceled due to early termination of the consulting agreement.
In July 2012, the Company issued an aggregate of 45,000 shares of common stock pursuant to a consulting agreement in exchange for investor
relations services. A fair value of $24,750 was recorded for the expenses and amortized over six months. The amount of $13,750 was amortized and recognized as a general and administrative expense for the three and nine months ended September 30, 2012. As of September 30, 2012, $11,000 remained to be amortized and was recorded as a prepaid expense.
In September 2012, the Company issued an aggregate of 30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. The agreement was signed on August 30, 2012 and was for services performed beginning on April 22, 2012 through December 31, 2012. This agreement extended a previous consulting agreement with the same investor relations firm. The fair value of the agreement was calculated to be $13,800. The Company expensed $8,625 as a general and administrative expense for the three and nine months ended September 30, 2012 The remaining unamortized amount of $5,175 will be expensed during the fourth quarter of 2012.
(f)
Other Stock Issuances
On November 29, 2011,
the Company
issued an aggregate of 100,000 shares of common stock to four directors as compensation for services. On November 29, 2011,
the Company
issued 60,000 shares of common stock to an employee. The issuance of these shares was recorded at fair market value, or $104,000.
(g)
Shares Held in Escrow
In a private placement that closed on December 22, 2009 and January 13, 2010, the Company sold an aggregate of 2,480,500 shares of Series B Preferred Stock and five-year warrants to purchase 992,000 shares of common stock at an exercise price of $1.30 per share, for an aggregate purchase price of $2,976,600. The Company also paid the private placement agent an aggregate of $298,000 and issued five-year warrants to purchase 124,025 shares of common stock at an exercise price of $1.32 per share. In connection with the private placement and pursuant to the transaction agreements, the Company deposited into escrow an aggregate of 1,240,250 shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and December 31, 2011.
The Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year 2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company for cancellation. As of September 30, 2012, no Escrow
shares
have been transferred to investors or returned to the Company.
Dividend Distribution for Series B Preferred Stock
Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010. As a result, we declared a dividend for the Series B Preferred Stock in the amount of $
42,279 as of September 30, 2012, compared to $28,099 as of December 31, 2011. For the three months ended September 30, 2012 and 2011, we paid $4,537 and $13,525, respectively, in cash for dividends declared. For the nine months ended September 30, 2012 and 2011, we paid $14,180 and $21,654, respectively, in cash for dividends declared.
(11) Amount Due to a Related Party
As of
September 30, 2012 and December 31, 2011, we had related party notes payable in the amount of $6,270,940 and $5,542,855, respectively, to Mr. Dengyong Jin, who is General Manager of our China operations and chief executive officer and principal shareholder of Xingyong. These amounts are not due prior to September 30, 2013 and are made to the Company by Mr. Jin for business operating purposes. The advances are interest free, therefore the interest expense of $122,668 and $344,401 calculated at an annual interest rate of 8% was recorded into additional paid in capital for the three and nine months ended September 30, 2012.
(12) Loan from Unrelated Parties
During the first quarter of 2012, the Company obtained short term borrowings of approximately $9,162,944 from three unrelated parties. The loans
of $9,162,944
were all repaid by June 30, 2012.
During the third quarter of 2012, the Company obtained short term borrowings of $2,014,174 from an unrelated party.
The interest rate
was
8% and
the
interest
expense
of $201,042 was accrued as of September 30, 2012. Interest expense of $13,428 was accrued for the three months ended September 30, 2012 and the amount was still outstanding as of September 30, 2012. The loans were unsecured.
(13) Short-term Bank Loans
As of September 30, 2012 and December 31, 2011, short-term loans consisted of the following:
|
|
|
September 30, 2012
(unaudited)
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Everbright Bank, dated July 11, 2011, due and repaid on July 11, 2012, with an annual interest rate of 8.528% payable quarterly, secured by property and equipment and land use rights
|
|
$
|
-
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated January 10, 2012, due January 11, 2013, with an annual interest rate of 6.56% payable quarterly, secured by property and equipment and land use rights
|
|
$
|
4,773,000
|
|
|
$
|
4,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated August 23, 2012, due August 22, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
6,364,000
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated August 3, 2012, due August 2, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
6,364,000
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated June 6, 2012, due June 5, 2013 with an annual interest rate of 9.184% payable quarterly, secured by land use rights
|
|
$
|
6,364,000
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated September 7, 2012, due September 6, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
4,773,000
|
|
|
$
|
4,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated September 17, 2012, due September 16, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
4,136,600
|
|
|
$
|
4,092,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from Huaxia Bank, dated June 14, 2011, due and repaid on June 14, 2012, with an annual interest rate of 8.203% payable quarterly, secured by equipment and land use rights
|
|
$
|
-
|
|
|
$
|
5,509,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from Credit Union, dated February 1, 2011, originally due in August 2012, repaid in April 2012, with an annual interest rate of 13.66% payable monthly, secured by guarantee from major shareholder’s wife
|
|
$
|
-
|
|
|
$
|
1,259,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,774,600
|
|
|
$
|
45,488,600
|
|
Each of these loans is renewable at the lender’s discretion. As of September 30, 2012, all land use rights and certain property and equipment were pledged as collateral for our short-term bank loans.
Interest expenses were $1,208,969 and $957,434 for the three months ended September 30, 2012 and 2011, respectively. Interest expenses were $3,658,844 and $2,364,238 for the nine months ended September 30, 2012 and 2011, respectively.
The weighted average interest rates for these loans were 6.77% and 6.73% as of September 30, 2012 and December 31, 2011, respectively.
There was no capitalized interest for the nine months ended September 30, 2012 and 2011.
(14) Subsequent events
On October 4, 2012, the Company issued an aggregate of 260,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
In accordance with ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated events and transactions for potential recognition or disclosure through the reporting date, the date the financial statements were available to be issued and disclose the following.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements.
Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. This Annual Report should be read in its entirety and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
Overview
We are engaged in the manufacture of graphite-based products in the PRC. Our products are used in the manufacturing process of other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors. We currently manufacture and sell primarily the following types of graphite products:
|
o
|
fine grain graphite; and
|
Based on information we receive about our industry in the course of our business, we believe that we are the largest wholesale supplier of fine grain graphite and high purity graphite in China and one of China’s largest producers and suppliers of graphite products overall. Approximately 40% of our products are sold directly to end users in China, primarily consisting of steel manufacturers. All other sales are made to over 200 distributors located throughout 22 provinces in China. Our distributors then sell our products to end users both in China and in foreign countries, including, among others, Japan, the United States, Spain, England, South Korea and India. In the three and nine months ended September 30, 2012, our profits improved from 2011 due to a focus on improving the percentage of our higher profit products in our total sales.
The steel industry started to recover in 2010, in particular since the third quarter of 2010. Our revenues, gross profits and gross margins improved significantly during the second half of 2010, which continued into the end of 2011. Since the
first quarter of 2012, our revenues decreased while our gross margin increased due to our strategy to focus on high profit products. Our gross margin for the three months ended September 30, 2012 was 27.3%, compared to 22.6% for the three months ended September 30, 2011. Our gross margin for the nine months ended September 30, 2012 was 26.7%, compared to 22.4% for the nine months ended September 30, 2011.
We are constructing a new production plant that will specialize in manufacturing high margin products including large size ultra-high power graphite electrodes, high purity graphite and fine gain graphite. We installed a 4200-ton compressor and 36 annular kilns, which we have completed testing. The 4200-ton compressor began trial production in October 2011, and the 36 annular kilns began trial production in August 2011. In addition, the new baking plant will have 36 furnaces, totaling 160 meters in length. The new plant will manufacture a new product, ultra-high power graphite electrodes with a diameter ranging from 600 to 800 millimeters, along with existing fine grain and high purity graphite products. The industrial applications of the products to be manufactured in the new facility include aerospace, defense, automotive and clean tech end products, which currently carries the greatest demand for all forms of graphite. We believe that this expansion will make us China’s first domestic producer of 800 millimeter diameter ultra-high power electrodes and will further strengthen the Company’s leading position in China’s fine grain graphite market. After completion of the expansion, our annual production capacity will increase to 60,000 tons. The Company is currently operating at 75% production capacity of maximum of 30,000 tons annually.
The
current
budgeted investment for the construction of our new facility was approximately $
11.6
million in the aggregate
. Approximately
$10 million
had been spent as of September 30, 2012.
Some of our expansion plans, including the expansion of our product offerings to include nuclear, solar and semiconductor products and pursuing an acquisition, would likely require us to obtain additional financing from equity or debt markets, or borrow additional funds from local banks. We currently have no commitments from any financing sources. There is no assurance that we will be able to raise any funds on terms favorable to us, or at all. In the event that we issue shares of equity or convertible securities, holdings of our existing stockholders would be diluted. In addition, there is no assurance that we will successfully manage and integrate the production and sale of new products.
At September 30, 2012, we had short-term bank loans of approximately
$32.8 million. These bank loans, which are secured by liens on our fixed assets and land use rights, are due between July 2012 and June 2013, including approximately $32.8 million owed to the Construction Bank of China. During the nine months ended September 30, 2012, the Company rolled over all of its short-term bank loans from the China Construction Bank. At September 30, 2012, our cash reserves, including restricted cash, were $13.5 million and are insufficient to pay off all of our loans when due.
We purchase all of our raw materials from domestic Chinese suppliers. We make advance deposits to suppliers with available cash to lock in prices
. As of September 30, 2012 and December 31, 2011, we advanced to suppliers $2,556,244 and $5,921,970, respectively.
The average prices for our products have been increasing since January 2011. In particular, prices for fine grain graphite and high purity graphite products have notably increased in line with the increased raw material cost.
In times of decreasing prices, we may have to sell our products at prices, which are lower than the prices at which we purchased our raw materials. Furthermore, PRC regulations grant broad powers to the government to adjust the price of raw materials and manufactured products. Although the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be implemented in the future, thereby affecting our results of operations and financial condition.
Results of Operations
Three months ended September 30, 2012 and 2011
The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):
|
|
|
Three months ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Sales
|
|
$
|
6,491
|
|
|
|
100.0
|
%
|
|
$
|
13,592
|
|
|
|
100.0
|
%
|
|
Cost of goods sold
|
|
|
4,722
|
|
|
|
72.7
|
%
|
|
|
10,516
|
|
|
|
77.4
|
%
|
|
Gross profit
|
|
|
1,769
|
|
|
|
27.3
|
%
|
|
|
3,076
|
|
|
|
22.6
|
%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
64
|
|
|
|
1.0
|
%
|
|
|
51
|
|
|
|
0.4
|
%
|
|
General and administrative
|
|
|
1,056
|
|
|
|
16.3
|
%
|
|
|
1, 316
|
|
|
|
9.7
|
%
|
|
Depreciation and amortization
|
|
|
56
|
|
|
|
0.9
|
%
|
|
|
98
|
|
|
|
0.7
|
%
|
|
Income from operations
|
|
|
1,177
|
|
|
|
18.1
|
%
|
|
|
1,611
|
|
|
|
11.9
|
%
|
|
Other income
|
|
|
6
|
|
|
|
0.1
|
%
|
|
|
14
|
|
|
|
0.1
|
%
|
|
Other expense
|
|
|
0.3
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
Change in fair value of warrants
|
|
|
(188
|
)
|
|
|
(2.9
|
)%
|
|
|
1
|
|
|
|
0.0
|
%
|
|
Interest expense
|
|
|
(1,209
|
)
|
|
|
(18.6
|
)%
|
|
|
(957
|
)
|
|
(7.0
|
)%
|
|
Income before income tax expense
|
|
|
(799
|
)
|
|
|
(12.3
|
)%
|
|
|
668
|
|
|
|
4.9
|
%
|
|
Net income
|
|
|
(799
|
)
|
|
|
(12.3
|
)%
|
|
|
668
|
|
|
|
4.9
|
%
|
|
Dividend
|
|
|
(5
|
)
|
|
|
(0.1
|
)%
|
|
|
(14
|
)
|
|
|
(0.1
|
)%
|
|
Net income available to common shareholders
|
|
|
(803
|
)
|
|
|
(12.4
|
)%
|
|
|
655
|
|
|
|
4.8
|
%
|
|
Foreign currency translation adjustment
|
|
|
529
|
|
|
|
8.1
|
%
|
|
|
508
|
|
|
|
3.7
|
%
|
|
Total comprehensive income
|
|
$
|
(270
|
)
|
|
|
(4.2
|
)%
|
|
$
|
1,176
|
|
|
|
8.7
|
%
|
Sales
.
During the three months ended September 30, 2012, we had sales o
f $6,491,133, compared to sales of $13,591,978 for the three months ended September 30, 2011, a decrease of $7,100,845, or approximately 52.2%.
Sales decrease was mainly attributable to decreased market demand during the three months ended September 30, 2012
from the slowing down of China’s construction industry. The decrease in tonnage sold is due to fewer orders from certain customers due to price increases and a slight drop in the Chinese construction industry.
The average unit selling price of our products decreased
13% during the three months ended September 30, 2012, compared to the same peri
od for the three months ended September 30, 2011,
with the 45% decrease
in tonnage sold for the period. The average unit selling price of high purity graphite products
decreased 3% during the three months ended September 30, 2012, compared to the same period for the three months ended September 30, 2011, with the 50% decrease in tonnage sold for the period.
The breakdown of revenues for each of graphite electrodes, fine grain graphite and high purity graphite, during the three months ended September 30, 2012 and 2011, respectively, was as follows:
|
|
|
September 30, 2012
Sales
|
|
|
% of Total
Sales
|
|
|
September 30, 2011
Sales
|
|
|
% of Total
Sales
|
|
|
Graphite Electrodes
|
|
$
|
788,769
|
|
|
|
12.1
|
%
|
|
$
|
1,812,189
|
|
|
|
13.3
|
%
|
|
Fine Grain Graphite
|
|
|
2,666,957
|
|
|
|
41.1
|
%
|
|
|
5,780,071
|
|
|
|
42.5
|
%
|
|
High Purity Graphite
|
|
|
2,763,836
|
|
|
|
42.6
|
%
|
|
|
5,729,840
|
|
|
|
42.2
|
%
|
|
Others (1)
|
|
|
271,571
|
|
|
|
4.2
|
%
|
|
|
269,878
|
|
|
|
2.0
|
%
|
|
Total
|
|
$
|
6,491,133
|
|
|
|
100.0
|
%
|
|
$
|
13,591,978
|
|
|
|
100.0
|
%
|
(1) “Other” sales represent revenue generated by sales of semi-processed products and other types of products.
Cost of goods sold; gross margin
.
Our cost of goods sold consists of the cost of raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the three months ended September 30, 2012, our cost of goods sold was
$4,722,151, compared to $10,515,933 for the cost of goods sold for the three months ended September 30, 2011, a decrease of $5,793,782, or approximately 55.1%.
The decrease in the cost of sales was directly associated with the decrease in our sales. Our gross margin increased from 22.6% for the three months ended September 30,
2011 to 27.3% for
the three months ended September 30, 2012. This increase reflects
that
the
increase
in our
average unit selling price
is
higher
than the increase in average unit cost.
Operating expenses.
Operating expenses totaled $1,176,968 for the three months ended September 30, 2012, compared to $1,465,103 for the three months ended September 30, 2011, a decrease of $288,135, or approximately 19.7%.
Selling, general and administrative expenses
Selling expenses increased from
$51,223 for the three months ended September 30, 2011 to $64,487 for the three months ended September 30, 2012, an increase of $13,264, or 25.9%. The increase of the selling expenses are due to increased transportation expenses for our clients during the three months ended September 31, 2012 compared to the same period last year.
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 $1,056,283 for the three months ended September 30, 2012, compared to $1,316,048 for the three months ended September 30, 2011, a decrease of $259,765, or 19.7%.
The decrease in general and administrative expenses was
due to decreased 3
rd
party consulting expenses and decreased property tax expense for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The Company appropriately accrued property tax for the fiscal ended December 31, 2011 for all owned land regardless of the
purpose of the land. However, in 2012, the government exempted property taxes related to land used that was used for planting green plants and not used for business operations. Therefore, as of September 30, 2012, the Company reversed the property tax expenses that were previously accrued and subsequently exempted. The Company treated the update as a change in accounting estimate. The Company
incurred $137,825 and $357,350 for stock based compensation during the three months ended September 30, 2012 and 2011, respectively.
Depreciation and amortization expenses
Depreciation and amortization expenses totaled $564,467 for the three months ended September 30, 2012, compared to $458,680 for the three months ended September 30, 2011, an increase of $105,787, or approximately 23.1%. For the three months ended September 30, 2012, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $508,269 and $56,198, respectively. For the three months ended September 30, 2011, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $360,848 and $97,832, respectively. The increase in depreciation and amortization expenses is a result of additional fixed assets placed in service during 2011.
Income from operations.
As a result of the factors described above, operating income was $592,014 for the three months ended September 30, 2012, compared to $1,610,942 for the three months ended September 30, 2011, a decrease of approximately $1,018,928, or 63.3%.
Other income and expense.
Our interest expense was $1,208,969 for the three months ended September 30, 2012, compared to $957,434 for the three months ended September 30, 2011, reflecting increased interest payments on loans from banks. We used the bank loans to secure additional inventory and to make advanced payments to our suppliers. Other expense, which mainly consisted of fees paid to the government for gardening, was $272 for the three months ended September 30, 2012, compared to $0 for the three months ended September 30, 2011. Other income, which consisted of government grants, was $6,080 for the three months ended September 30, 2012, compared to $14,118 for the three months ended September 30, 2011. Income from changes in the fair value of our warrants was $(188,046) for the three months ended September 30, 2012, compared to $508 for the three months ended September 30, 2011.
Income tax.
During the three months ended September 30, 2012 and 2011, we benefited from a 100% tax holiday from the PRC enterprise tax. As a result, we had no income tax due for these periods. The enterprise income tax at the statutory rates would have been approximately $0 and $175,112, respectively, for the three months ended September 30, 2012 and 2011 without consideration of adjustments on taxable income. The tax holiday is from 2008 through 2017.
Net income (loss).
As a result of the factors described above, our net loss for the three months ended September 30, 2012 was $(798,649), compared to $668,134 of net income for the three months ended September 30, 2011, a decrease of $1,466,783, or 219.5%.
Foreign currency translation.
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our
foreign currency translation gain for the three months ended September 30, 2012 was $528,509 compared to $508,300 for the three months ended September 30, 2011, an increase of $20,209, or 4.0%.
Dividend expense.
Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010
. As a result, we incurred dividend expenses of $4,537 and $13,525 for the three months ended September 30, 2012 and 2011, respectively.
Net income (loss) available to common stockholders.
Net income (loss) available to
our common stockholders was $(803,186), or $(0.03) per share (basic and diluted), for the three months ended September 30, 2012, compared to $654,609, or $0.03 per share (basic and diluted), for the three months ended September 30, 2011.
Nine months ended September 30, 2012 and 2011
The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):
|
|
|
Nine months ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Sales
|
|
$
|
28,430
|
|
|
|
100.0
|
%
|
|
$
|
37,200
|
|
|
|
100.0
|
%
|
|
Cost of goods sold
|
|
|
20,851
|
|
|
|
73.3
|
%
|
|
|
28,856
|
|
|
|
77.6
|
%
|
|
Gross profit
|
|
|
7,579
|
|
|
|
26.7
|
%
|
|
|
8,344
|
|
|
|
22.4
|
%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
140
|
|
|
|
0.5
|
%
|
|
|
158
|
|
|
|
0.4
|
%
|
|
General and administrative
|
|
|
3,078
|
|
|
|
10.8
|
%
|
|
|
3,920
|
|
|
|
10.5
|
%
|
|
Depreciation and amortization
|
|
|
160
|
|
|
|
0.6
|
%
|
|
|
192
|
|
|
|
0.5
|
%
|
|
Income from operations
|
|
|
4,200
|
|
|
|
14.8
|
%
|
|
|
4,075
|
|
|
|
11.0
|
%
|
|
Other income
|
|
|
221
|
|
|
|
0.8
|
%
|
|
|
90
|
|
|
|
0.2
|
%
|
|
Other expense
|
|
|
(215
|
)
|
|
|
(0.8
|
)%
|
|
|
-
|
|
|
|
-
|
%
|
|
Change in fair value of warrants
|
|
|
(222
|
)
|
|
|
(0.8
|
)%
|
|
|
83
|
|
|
|
0.2
|
%
|
|
Interest expense
|
|
|
(3,659
|
)
|
|
|
(12.9
|
)%
|
|
|
(2,364
|
)
|
|
(6.4
|
)%
|
|
Income before income tax expense
|
|
|
326
|
|
|
|
1.1
|
%
|
|
|
1,883
|
|
|
|
5.1
|
%
|
|
Net income
|
|
|
326
|
|
|
|
1.1
|
%
|
|
|
1,883
|
|
|
|
5.1
|
%
|
|
Dividend
|
|
|
(14
|
)
|
|
|
(0.0
|
)%
|
|
|
22
|
|
|
|
(0.1
|
)%
|
|
Net income available to common shareholders
|
|
|
312
|
|
|
|
1.1
|
%
|
|
|
1,862
|
|
|
|
5.0
|
%
|
|
Foreign currency translation adjustment
|
|
|
518
|
|
|
|
1.8
|
%
|
|
|
1,330
|
|
|
|
3.6
|
%
|
|
Total comprehensive income
|
|
$
|
844
|
|
|
|
3.0
|
%
|
|
$
|
3,213
|
|
|
|
8.6
|
%
|
Sales
.
During the nine months ended September 30, 2012, we had sales of $
28,429,886, compared to sales of $37,200,337 for the nine months ended September 30, 2011, a decrease of $8,770,451, or approximately 23.6%.
Sales decrease was mainly attributable to lower market demand during the nine months ended September 30, 2012, which resulted from the company’s decision in focusing in manufacturing and selling higher margin products. The average unit selling price of our products increased
15% during the nine months ended September 30, 2012, compared to the same period for the nine months ended September 30, 2011, offset by a 34% decrease in tonnage sold during the period. The average unit selling price of high purity graphite products increased 19% during the nine months ended September 30, 2012, compared to the same period ended September 30, 2011, offset by a 33% decrease in tonnage sold during the period. The increase in the average unit selling price of high purity graphite is due to an increase in the cost for raw materials. The decrease in tonnage sold is due to fewer orders from certain customers due to price increases and a slight drop in the Chinese construction industry. The average unit selling price of graphite electrodes products decreased 6% combined with a 34% decrease in tonnage sold during the nine months ended September
30, 2012, compared to the same period ended September 30, 2011. The decrease in average unit selling price and tonnage sold of graphite electrodes is due to decreased demand for lower end products.
The breakdown of revenues for each of graphite electrodes, fine grain graphite and high purity graphite, during the nine months ended September 30, 2012 and 2011, respectively, was as follows:
|
|
|
September 30, 2012
Sales
|
|
|
% of Total
Sales
|
|
|
September 30, 2011
Sales
|
|
|
% of Total
Sales
|
|
|
Graphite Electrodes
|
|
$
|
3,434,285
|
|
|
|
12.1
|
%
|
|
$
|
5,535,851
|
|
|
|
14.9
|
%
|
|
Fine Grain Graphite
|
|
|
12,443,155
|
|
|
|
43.8
|
%
|
|
|
15,773,229
|
|
|
|
42.4
|
%
|
|
High Purity Graphite
|
|
|
12,024,784
|
|
|
|
42.3
|
%
|
|
|
15,125,154
|
|
|
|
40.7
|
%
|
|
Others (1)
|
|
|
527,662
|
|
|
|
1.8
|
%
|
|
|
766,103
|
|
|
|
2.0
|
%
|
|
Total
|
|
$
|
28,429,886
|
|
|
|
100.0
|
%
|
|
$
|
37,200,337
|
|
|
|
100.0
|
%
|
(1) “Other” sales represent revenue generated by sales of semi-processed products and other types of products.
Cost of goods sold; gross margin
.
Our cost of goods sold consists of the cost of
raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the nine months ended September 30, 2012, our cost of goods sold was $20,850,882, compared to $28,855,956 for the cost of goods sold for the nine months ended September 30, 2011, a decrease of $8,005,074, or approximately 27.7%. The decrease in the cost of sales was directly associated with a decrease in our sales. Our gross margin increased from 22.4% for the nine months ended September 30, 2011 to 26.7% for the nine months ended September 30, 2012. This increase reflects the variance in our product mix, which is attributable to an increase of percentage in our sales of fine
grain graphite products and high purity graphite products (higher margin products compared to graphite electrodes and other products).
Operating expenses.
Operating expenses totaled $
3,378,609 for the nine months ended September 30, 2012, compared to $4,269,760 for the nine months ended September 30, 2011, a decrease of $891,151, or approximately 20.9%.
Selling, general and administrative expenses
Selling expenses
decreased from $158,398 for the nine months ended September 30, 2011 to $140,437 for the nine months ended September 30, 2012, a decrease of $17,961, or 11.3%. The decrease was in line with lower sales during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
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 $3,078,144 for the nine months ended September 30, 2012, compared to $3,919,776 for the nine months ended September 30, 2011, a decrease of $841,632, or 21.5%. The decrease in general and administrative expenses was mainly due to decreased 3
rd
party consulting expenses and property tax expenses for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The company appropriately accrued property tax for the fiscal year ended December 31, 2011 for all owned land regardless of the purpose of the land. However, in 2012, at the completion of the construction on the land, the government exempted property taxes related to land used that was used for planting green plants and not used for business operations. Therefore, as of September 30, 2012, the company reversed the property tax expenses that were previously accrued and subsequently exempted. The company treated the update as a change in accounting estimate. The company incurred $512,158 and $980,800 for stock based compensation during the nine months ended September 30, 2012 and 2011, respectively.
Depreciation and amortization expenses
Depreciation and amortization
expenses totaled $1,925,159 for the nine months ended September 30, 2012, compared to $1,328,990 for the nine months ended September 30, 2011, an increase of $596,169, or approximately 44.9%. For the nine months ended September 30, 2012, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $1,765,131 and $160,028, respectively. For the nine months ended September 30, 2011, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $1,137,404 and $191,586, respectively. The increase in depreciation and amortization expenses is a result of additional fixed assets placed in service during 2011.
Income from operations.
As a result of the factors
described above, operating income was $4,200,395, for the nine months ended September 30, 2012, compared to $4,074,621 for the nine months ended September 30, 2011, an increase of approximately $125,774, or 3.1%.
Other income and expenses.
Our interest expense was
$3,658,844 for the nine months ended September 30, 2012, compared to $2,364,238 for the nine months ended September 30, 2011, reflecting increased interest payments on loans from banks. We used the bank loans to secure additional inventory and to make advanced payments to our suppliers. Other income, which consisted of government grants, was $221,270 for the nine months ended September 30, 2012, compared to $89,902 for the nine months ended September 30, 2011. Expenses from changes in the fair value of our warrants was $(221,846) for the nine months ended September 30, 2012, compared to income of $83,200 for the nine months ended September 30, 2011.
Income tax.
During the nine months ended September 30, 2012 and 2011, we benefited from a 100% tax holiday from the PRC enterprise tax. As a result, we had no income tax due for these periods. The enterprise income tax at the statutory rates would have been approximately $235,909 and $534,872, respectively, for the nine months ended September 30, 2012 and 2011 without consideration of adjustments on taxable income. The tax holiday is from 2008 through 2017.
Net income.
As a result of the factors described above, our net
income for the nine months ended September 30, 2012 was $325,779, compared to $1,883,485 for the nine months ended September 30, 2011, a decrease of $1,557,706, or 82.7%.
Foreign currency translation.
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements
denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the nine months ended September 30, 2012 was $518,452 compared to $1,329,748 for the nine months ended September 30, 2011, a decrease of $811,296, or 61.0%.
Dividend expense.
Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6
% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010. As a result, we incurred dividend expenses of $14,180 and $21,654 for the nine months ended September 30, 2012 and 2011, respectively.
Net income available to common stockholders.
Net income available to our common stockholders was $311,599, or $0.01 and $0.01 per share (basic and diluted), for the nine months ended September 30, 2012, compared to $1,861,831, or $0.08 and $0.08 per share (basic and diluted), for the nine months ended September 30, 2011.
Liquidity and Capital Resources
All of our business operations are carried out by Xingyong, 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 or VIE entity. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, Xingyong would have to transfer funds to our parent entity through our wholly-owned subsidiaries, Talent and Yongle.
PRC regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:
|
|
1.
|
10% of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.
|
|
|
2.
|
If the accumulate balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.
|
|
|
3.
|
Allocation can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.
|
Therefore, the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The maximum amount of the shareholders has not been reached. The company has never distributed earnings to shareholders and has consistently stated in the Company’s filings it has no intentions to do so.
The RMB is not freely convertible into Dollars. The State Administration of Foreign Exchange (“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment Enterprises, such as Xingyong, 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 Xingyong to our parent entity and may delay any such transfer. In addition, upon repatriation of earnings of Xingyong 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 have been cash generated from short-term and long-term loans
from banks in China, loans from an unrelated party and loans from a related party.
At September 30, 2012, we had short-term loans in the aggregate amount of $
32,774,600 outstanding, as described below.
|
|
|
September 30, 2012
(unaudited)
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Everbright Bank, dated July 11, 2011, due and repaid on July 11, 2012, with an annual interest rate of 8.528% payable quarterly, secured by property and equipment and land use rights
|
|
$
|
-
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated January 10, 2012, due January 11, 2013, with an annual interest rate of 6.56% payable quarterly, secured by property and equipment and land use rights
|
|
$
|
4,773,000
|
|
|
$
|
4,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated August 23, 2012, due August 22, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
6,364,000
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated August 3, 2012, due August 2, 2013, with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
6,364,000
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated June 6, 2012, due June 5, 2013 with an annual interest rate of 9.184% payable quarterly, secured by land use rights
|
|
$
|
6,364,000
|
|
|
$
|
6,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated September 7, 2012, due September 6, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
4,773,000
|
|
|
$
|
4,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from China Construction Bank, dated September 17, 2012, due September 16, 2013 with an annual interest rate of 6.10% payable quarterly, secured by land use rights
|
|
$
|
4,136,600
|
|
|
$
|
4,092,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from Huaxia Bank, dated June 14, 2011, due and repaid on June 14, 2012, with an annual interest rate of 8.203% payable quarterly, secured by equipment and land use rights
|
|
$
|
-
|
|
|
$
|
5,509,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan from Credit Union, dated February 1, 2011, originally due in August 2012, repaid in April 2012, with an annual interest rate of 13.66% payable monthly, secured by guarantee from major shareholder’s wife
|
|
$
|
-
|
|
|
$
|
1,259,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,774,600
|
|
|
$
|
45,488,600
|
|
Historically we have rolled over our short-term loans on an annual basis. Although we believe that we will be able to obtain extensions of these loans when they mature, we cannot assure investors that such extensions will be granted. In the event repayment of the loans is not extended and we default on our obligations, the lenders could call the loans, foreclose on the collateral securing the loans or seek other remedies. In such an event, our operations and financial conditions would be materially adversely affected and we would be forced to cease operations if alternative funding is not obtained.
Despite a low amount of working capital, we are able to operate our business through bank financing, loans from related and unrelated parties and issuing equity in exchange for certain services provided. Our long-term goal is to continue to roll over short-term loans and obtain positive cash flows from collecting our outstanding accounts receivable and sales of inventory until our new facility is operating at full capacity. We have the ability to manage and predict our cash flow for inventory purchases and advances to suppliers because the length of the time it takes to complete purchase orders for customers, which on average is six months. Our customers must order products well in advance of productions, as a purchase order is fulfilled only six months after such order is placed, thereby allowing us to predict cash flow. We believe that increased market demand for our products and the increased production capacity, together with better management of our accounts receivable, inventory and advances to suppliers will produce a positive cash flow in future periods. During the interim, we expect that anticipated cash flows from future operations, short-term and long-term bank loans and loans from unrelated or related parties will be sufficient to fund our operations through at least the next twelve months, provided that:
|
o
|
We continue to generate sufficient business to generate substantial profits, which cannot be assured;
|
|
o
|
Our banks continue to provide us with the necessary working capital financing; and
|
|
o
|
We are able to generate savings by improving the efficiency of our operations.
|
We may require additional equity, debt or bank funding to finance acquisitions or to allow us to produce graphite for the nuclear industry, which is one of our primary growth strategies. We can provide no assurances that we will be able to enter into any additional financing agreements on terms favorable to us, if at all, especially considering the current global instability of the capital markets.
At September 30, 2012, cash and cash equivalents were $119,885, compared to $521,450 at December 31, 2011, a decrease of $401,565. Restricted cash increased to $13,364,400 as of September 30, 2012 from $11,694,820 as of December 31, 2011, which was restricted as a requirement by our lenders. Our working capital increased by $7,277,100 to $8,333,165 at September 30, 2012 from $1,056,065 at December 31, 2011.
As of September 30, 2012, accounts receivable, net of allowance,
was $
11,812,372
, compared to $12,541,321 at December 31, 2011, a decrease of $
728,949
, or 5.81%.
The increase was due to slower collection of some outstanding receivables during the nine months ended September 30, 2012. 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. The Company believes its allowance was sufficient as of September 30, 2012.
As of September 30, 2012, inventories
were $47,867,399, compared to $37,430,248 at December 31, 2011, an increase of $10,437,151, or 27.88%. The increase in inventories is due to an increase in the cost of raw materials.
As of September 30, 2012, prepaid expenses
were $74,017, compared to $452,730 at December 31, 2011, a decrease of $378,713, or 83.65%. The decrease in prepaid expenses is attributable to the amortization of various prepaid consulting fees paid from stock issuances.
Advances to suppliers decreased from $5,921,970 at December 31, 2011
to $2,556,244 at September 30, 2012, a decrease of $3,365,726. The decrease is because the Company has received a lot of advanced products by the end of September 30, 2012. No allowance for doubtful accounts was necessary for the balance of advances to suppliers.
Notes payable reflect our obligations to bank lenders who have guaranteed our future payment obligations as requested by
certain of our suppliers. Notes payable increased from $16,763,100 to $24,342,300 from December 31, 2011 to September 30, 2012. The notes payable were secured by $13,364,400 of restricted cash at September 30, 2012. Notes payable allow the Company to reserve more cash resources for other operating expenses. Restricted cash represents amounts held by a bank as security for bank acceptance notes and is subject to withdrawal restrictions.
Accounts payable increased from $1,340,498 at
December 31, 2011 to $4,699,301 at September 30, 2012, an increase of $3,358,803. The increase in accounts payable resulted from an increase in the purchase of inventories and other purchases as of September 30, 2012 because of an increase in raw material cost.
Nine months ended September 30, 2012 Compared to Nine months ended September 30, 2011
The following table sets forth information about our net cash flow for the nine months indicated:
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Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
For Nine Months Ended
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Net cash flows provided by (used in) operating activities
|
|
$
|
|
|
|
$
|
(9,916,027
|
)
|
|
Net cash flows used in investing activities
|
|
$
|
(1,544,591
|
)
|
|
$
|
(7,137,821
|
)
|
|
Net cash flows provided by financing activities
|
|
$
|
607,301
|
|
|
$
|
17,791,406
|
|
Net cash flow provided by operating activities
was $538,078 for the nine months ended September 30, 2012, compared to $9,916,027 net cash flow used in operating activities for the nine months ended September 30, 2011, an increase of $10,454,105, or 105.4%. The increase in net cas
h flow provided by operating activities was mainly due to the use of our prepaid advances to suppliers of
$5.3 million, the increase in accounts payable and accrued liabilities of $6.1 million due to raw material purchases and the increase in accounts receivable collections during the period of $3.8 million,
offset by the increase of inventories
of $3.3 million because of the increasing cost of raw materials and decreased advances from customers of $3.1 million
.
Net cash flow used in
investing activities was $1,544,591 for the nine months ended September 30, 2012, compared to $7,137,821 for the nine months ended September 30, 2011, a decrease of $5,593,230, or 78.4%. The decrease is mainly attributable to fewer payments for construction in process during the nine months ended September 30, 2012 as there was more construction during the nine months ended September 30, 2011. In the nine months ended September 30, 2011, the Company was constructing a 4200-ton compressor and 36 annular kilns. The 4200-ton compressor began trial production in October 2011, and the 36 annular kilns began trial production in August 2011. For land improvements
related to the property adjacent to the property, phase 1 is near completion, causing fewer payments during the period.
Net cash flow provided by financing activities was
$607,301 for the nine months ended September 30, 2012, compared to $17,791,406 net cash flow provided by financing activities for the nine months ended September 30, 2011, a decrease of $17,184,105, or 96.6%. The decrease in net cash flow provided by financing activities was mainly due to increased net repayment to bank loans of $19 million offset by increased net loans from unrelated parties of $2 million.
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.
For the nine months ended September 30, 2012, two customers accounted for 10% or more of sales revenues, representing 32.5%, and 26.2%, respectively of the total sales. For the nine months ended September 30, 2011, three customers accounted for 10% or more of sales revenues, representing 32.8%, 25.5%, and 10.2%, respectively of the total sales. As of September 30, 2012, there were two customers that constituted 44.9%, and 20.0% of the accounts receivable. As of December 31, 2011, there were two customers that constituted 41.2% and 16.3% of the accounts receivable.
For the nine months ended September 30, 2012, three suppliers accounted for 10% or more of our total purchases, representing 28.0%, 16.1% and 10.4%, respectively. For the nine months ended September 30, 2011, four suppliers accounted for 10% or more of our total purchases, representing 41.6%, 14.0%, 13.1% and 12.5% of our total purchase, respectively.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Significant Accounting Estimates and Policies
The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an ongoing basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
This section should be read together with the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.
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 may be expected to cause a material impact on its financial condition or the results of its operations. Please refer to Note 3 of the accompanying financial statements for further details of recent accounting pronouncements.
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk.
|
Not applicable to smaller reporting companies.
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Item 4.
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Controls and Procedures.
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Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of September 30, 2012.
Changes in Internal Control over Financial Reporting
During the nine months ended September 30, 2012, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and make changes that our management deems necessary.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any pending legal proceedings which involve us or any of our properties or subsidiaries.
ITEM 1A. Risk Factors
Pursuant to regulations for interim reporting, we are required to disclose material changes to risk factors identified in our annual report on Form 10-K. For a complete listing of risk factors, refer to our annual report on Form 10-K for the year ended December 31, 2011.
Our auditor, like other independent registered public accounting firms operating in China, is not subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.
Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
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Item 2.
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Unregistered Sales Of Equity Securities And Use Of Proceeds
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On May 9, 2012, the Company issued 200,000 shares of common stock at a price of $0.56 per share to unrelated parties to raise money for the Company’s operations.
On May 9, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On April 24, 2012, the Company issued 110,000 shares of common stock as compensation for one service company.
On June 21, 2012, the Company issued 100,000 shares of common stock as compensation for one service company. On September 7, the Company retired these 100,000 shares of common stock.
On July 6, 2012, the Company issued 45,000 shares of common stock as compensation for one service company.
On September 6, 2012, the Company issued 30,000 shares of common stock as compensation for one service company
.
Based on representations made by the third parties to whom we issued these shares, such issuances were exempt from registration pursuant to Section 4(2) of the Securities Act and either Regulation 506 of the SEC thereunder or Regulation S.
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Item 3.
|
Defaults Upon Senior Securities
|
None.
|
Item 4.
|
Mine Safety Disclosures
|
None.
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Item 5.
|
Other Information
|
None.
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
32.1
|
Section 1350 Certification of Chief Executive Officer
|
|
32.2
|
Section 1350 Certification of Chief Financial Officer
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
CHINA CARBON GRAPHITE GROUP, INC.
|
|
|
|
|
|
Date: November
13
, 2012
|
By:
|
/s/ Donghai Yu
|
|
|
|
Donghai Yu
|
|
|
|
Chief Executive Officer
|
|
Date: November
13
, 2012
|
By:
|
/s/ Zhenfang Yang
|
|
|
|
Zhenfang Yang
|
|
|
|
Chief Financial Officer
|