Annual Report (10-k)

FORM 10-K

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

For the fiscal year ended December 31, 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: 333-114564

CHINA CARBON GRAPHITE GROUP, INC.

(Exact name of registrant as specified in its charter)

Nevada		98-0550699
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o XingheYongle Carbon Co., Ltd.

787 XichengWai

Chengguantown

Xinghe County

Inner Mongolia, China

(Address of principal executive offices)

(86) 474-7209723

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant Section 13 or 15(d) of the Exchange Act. Yes o No x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

The number of shares of common stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was 16,499,346 . The aggregate market value of voting and nonvoting common stock held by non-affiliates of the registrant, based upon the closing bid quotation for the registrant’s common stock, as reported on the OTC Bulletin Board quotation service, as of June 30 , 2013 was $ 4,289,830 .

The number of shares of the registrant’s common stock outstanding as of April 8, 2014 was 31,518,518.

Documents Incorporated by Reference: None

CHINA CARBON GRAPHITE GROUP, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED

DECEMBER 31, 2013

PART I

ITEM 1 .	Business.	1
ITEM 1A.	Risk Factors.	13
ITEM 1B.	Unresolved Staff Comments.	28
ITEM 2.	Properties.	28
ITEM 3.	Legal Proceedings.	29
ITEM 4.	Mine Safety Disclosures.	29

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	29
ITEM 6.	Selected Financial Data.	32
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	32
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk.	52
ITEM 8.	Financial Statements and Supplementary Data.	F-1

PART III

ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	53
ITEM 9A.	Controls and Procedures.	55
ITEM 9B.	Other Information.	57
ITEM 10.	Directors, Executive Officers and Corporate Governance.	57
ITEM 11.	Executive Compensation.	60
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	61
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence.	62
ITEM 14.	Principal Accounting Fees and Services.	62

PART IV

ITEM 15.	Exhibits and Financial Statement Schedules.	63

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report on Form 10-K, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

OTHER PERTINENT INFORMATION

Unless the context specifically states or implies otherwise, references in this Annual Report on Form 10-K to “we,” “us,” and words of like import refer to China Carbon Graphite Group, Inc., its wholly-owned subsidiaries, Talent International Investment Limited (“Talent”), XingheYongle Carbon Co., Ltd. (“Yongle”), Golden Ivy Limited (“BVI Co.,”), Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”) and Royal Elite International Limited (“Royal HK”), and its controlled entity, Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”), which is a variable interest entity that has entered into contractual arrangements with Yongle. Xingyong’s financial statements are consolidated.

Our business is conducted in the People’s Republic of China (“China” or the “PRC”). “RMB” refers to Renminbiyuan, the official currency of the PRC. Our consolidated financial statements are presented in U.S. dollars in accordance with U.S. GAAP. In this Annual Report, we refer to assets, obligations, commitments and liabilities in our financial statements in U.S. dollars. These dollar references are based on the exchange rate of RMB to U.S. dollars, determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of U.S. dollars, which may result in an increase or decrease in the amount of our obligations (expressed in U.S. dollars) and the value of our assets.

PART I

ITEM 1.

Business.

Overview of Our Business

Historically, we have been engaged in the manufacture of graphite-based products in the PRC. Our products are used in the manufacturing process for 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	graphite electrodes;

o	fine grain graphite;

o

o

o

high purity graphite;

graphene oxide; and

graphite bipolar plates

We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

Based on information we receive about our industry in the course of our business, we believe that we are one of the largest wholesale suppliers of fine grain graphite and high purity graphite in the PRC 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. Historically our 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 2013, our revenues and profits decreased from 2012 due to decreased demand for graphite products, which resulted from substantial oversupply in steel industry in China and from more competitive market conditions, as discussed in greater detail below under the heading “Results of Operations” in Item 7.

Our Growth Strategy

In 2014, our primary strategy is to increase our sales, control our cost, and restructure our business. Our long-term strategy is to:

o	Expand new business opportunities through potential acquisitions and new business model development;

o	increase sales; and

o	improve our gross profits by increase sales and lower the overhead cost.

There are currently 13 nuclear power plants in the PRC, with 25 more plants currently under construction. Each of China’s 13 operating nuclear power reactors requires at least 10,000 tons of nuclear graphite every year. These power plants currently purchase their nuclear graphite from manufacturers in foreign countries, including Japan, Germany and the United States, which involves greater costs than purchasing from local Chinese companies. We know of only one graphite manufacturer in China that currently produces nuclear graphite that meets the specifications of these power plants. Only graphite rods with a diameter of more than 840 millimeters and a purity of more than 99.9999% may be used in nuclear power reactors. To date, we have produced only samples that meet these standards. The highest level of purity of the graphite that we currently produce has a diameter of 800 millimeters. The Company believes that nuclear power plants will increase the demand for graphite and the Company is planning to provide quality products for this increasing demand in the long term.

In 2011, we completed and started operation of a production plant with annual production capacity of 30,000 tons. This facility is used to manufacture ultra-high graphite electrodes with a diameter ranging from 600 to 800 millimeters, along with other fine grain and high-purity graphite products. The industrial applications of the products manufactured in this facility include aerospace, defense, automotive and clean tech end products, which has potential to carry great demand of all forms of graphite. We believe we are one of China’s few producers capable of manufacturing 800 millimeter diameter ultra-high electrodes. As of December 31, 2013, the Company has an annual production capacity of 60,000 tons.

Some of our future business 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 funds from equity or debt markets, or to borrow additional funds from local banks. We currently have no commitments from any financing sources. There is no assurance that we will be able to raise any funds on terms favorable to us, or at all. In the event that we issue shares of equity or convertible securities, holdings of our existing stockholders would be diluted. In addition, there is no assurance that we will be able to successfully manage and integrate the production and sale of new products.

Organizational Structure

We were incorporated in Nevada on February 13, 2003 as Achievers Magazine Inc. On December 17, 2007, we completed a reverse merger with Talent International Investment Limited, or Talent, a company incorporated in the British Virgin Islands on February 1, 2007. Following the reverse merger, our name was changed to China Carbon Graphite Group, Inc.

As a result of the reverse merger, Talent became a wholly-owned subsidiary of the Company. Talent wholly owns Yongle, which is a wholly foreign-owned enterprise organized under the laws of the PRC. On December 14, 2007, Yongle executed a series of exclusive contractual agreements with Xingyong, an operating company organized under the laws of the PRC. Xingyong was founded in 1986 as a state-owned company and converted into a private enterprise in 2001.

PRC law currently has limits on foreign ownership of certain companies. To comply with these foreign ownership restrictions, we operate our businesses in the PRC through Xingyong. Xingyong has the licenses and approvals necessary to operate in the PRC. We have contractual agreements with Xingyong and its stockholders pursuant to which we have the ability to substantially influence Xingyong’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring stockholder approval. As a result of our contractual agreements with Xingyong, we are able to control Xingyong. Consequently, we consolidate Xingyong’s financial statements with our financial statements. There are certain risks related to our contractual arrangements with Xingyong, which are discussed below in Item. 1A under the heading “Risk Factors—Risks Related to Our Corporate Structure.”

Xingyong’s principal stockholder and chief executive officer is Mr. Denyong Jin, our former chief executive officer and General Manager of our China operations. Members of Mr. Jin’s family have control of Sincere Investment (PTC), Ltd. (“Sincere”), which owns approximately 42% of the outstanding shares of our common stock.

Pursuant to the contractual agreements between Yongle and Xingyong, Xingyong has agreed to the following:

Exclusive Technical Consulting and Services Agreement . Pursuant to the technical consulting and services agreement entered into on December 7, 2007 between Yongle and Xingyong, Yongle has agreed to provide technical and consulting services related to the business operations of Xingyong. As consideration for such services, Xingyong has agreed to pay to Yongle a service fee equal to 80% to 100% of the profits of Xingyong. The exact fee is calculated and paid on a quarterly basis, and is determined based on a number of factors, including but not limited to the complexity of the services provided and the commercial value of the services provided. The term of the exclusive technical consulting and services agreement is 10 years from the date thereof. Yongle may extend the term of such agreement. The parties may terminate the agreement, prior to its expiration, upon the mutual consent of Yongle and Xingyong.

Business Operations Agreement. Pursuant to the business operations agreement entered into on December 7, 2007 between Yongle, Xingyong, and the shareholders of Xingyong, Xingyong has agreed not to conduct any material transaction or corporate action without obtaining the prior written consent of Yongle. Furthermore, Xingyong and its shareholders have agreed to implement proposals made by Yongle with respect to the operations of Xingyong’s business and the appointment of directors and officers of Xingyong. Yongle may terminate the business operations agreement at any time. The term of the business operations agreement is indefinite.

Option Agreement . Yongle entered into an option agreement on December 7, 2007 with each of the shareholders of Xingyong, as well as Xingyong itself, pursuant to which Yongle has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Xingyong owned by the shareholders of Xingyong. To the extent permitted by the PRC laws, the purchase price for the entire equity interest shall equal the actual price designated by Yongle to the extent permitted by relevant laws and regulations. The option agreement has a 10 year term. Upon the request of Yongle, the parties shall extend the term of the option agreement .

Equity Pledge Agreement . Pursuant to an equity pledge agreement, dated December 7, 2007, each of the shareholders of Xingyong pledged his equity interest in Xingyong to Yongle to secure Xingyong’s obligations under the VIE agreements described above. In addition, the shareholders of Xingyong agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in Xingyong that would affect Yongle’s interests. The equity pledge agreement will expire when Xingyong fully performs its obligations under the various VIE agreements described above.

Acquisition in December 2013

On December 23, 2013, we acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”). Pursuant to the terms of the acquisition, we will issue an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. . BVI Co. then become a wholly owned subsidiary of the Company. The shares were issued on January 16, 2014.

BVI Co. currently has two business operations as follows (collectively the “Business”):

●

Manufacture of Graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin films and chips. Graphite bipolar plates are primarily used in solar power storage.

●

A business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

The Business and the facilities related thereto are all located in the People’s Republic of China (“China”). The Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited, a Hong Kong company, (“Royal HK”), which is wholly owned by BVI Co. The Business currently generates minimal sales.

Royal Shanghai was set up in Shanghai on June 9, 2010. Royal HK was set up in Hong Kong on January 8, 2010.

Organizational Structure Chart

The following chart sets forth our organizational structure:

Industrial Uses of Graphite

Graphite is considered to be the purest form of carbon. We manufacture our graphite products by using a high temperature process whereby the heavy hydrocarbons are broken down into simpler molecules. The resulting product provides us with a pure grade of carbon, which we use to make our products. Graphite is an excellent conductor of heat and electricity and has a high melting temperature of 3,500 degrees Celsius. It is extremely resistant to acid, chemically inert and highly refractory. The utility of graphite is dependent largely upon its type.

There are three principal types of natural graphite, each occurring in different types of ore deposits:

o	Crystalline flake graphite, or flake graphite, occurs as isolated, flat, plate-like particles with hexagonal edges, if unbroken, and when broken, the edges can be irregular or angular.

o	Amorphous graphite occurs as fine particles and is the result of thermal metamorphism of coal, the last stage of coalification, and is sometimes called meta-anthracite. Very fine flake graphite is sometimes called amorphous in the trade.

o	Lump graphite, or vein graphite, occurs in fissure veins or fractures and appears as massive platy intergrowths of fibrous or acicular crystalline aggregates, and is probably hydrothermal in origin.

All grades of graphite, especially high grade amorphous and crystalline graphite that remains suspended in oil are used as lubricants. Graphite has an extraordinarily low co-efficient of friction under most working conditions. This property is invaluable in lubricants. It diminishes friction and tends to keep the moving surface cool. Dry graphite as well as graphite mixed with grease and oil is utilized as a lubricant for heavy and light bearings. Graphite grease is used as a heavy-duty lubricant where high temperatures may tend to remove the grease.

The flake type graphite is found to possess extremely low resistivity to electrical conductance. The electrical resistivity decreases with the increase of flaky particles. The bulk density decreases progressively as the particles become flakier. Because of this property in flake graphite, it is used in the manufacture of carbon electrodes, plates and brushes required in the electrical industry and dry cell batteries. Flake graphite has been replaced to some extent by synthetic, amorphous, crystalline graphite and acetylene black in the manufacture of plates and brushes.

Flake graphite containing 80 to 85% carbon is used for crucible manufacture; graphite containing a carbon content of 93% and above is preferred for the manufacture of lubricants, and graphite containing a carbon content of 40 to 70% is utilized for foundry facings. Natural graphite, refined or otherwise pure, having carbon content not less than 95% is used in the manufacture of carbon rods for dry battery cells.

Currently, artificially prepared graphite has replaced natural graphite to a great extent. Artificial graphite is prepared by heating a mixture of anthracite, high grade coal or petroleum coke, quartz and saw dust at a temperature of 3,000 degrees Celsius, out of contact with air. Graphite carbon is deposited as residue.

Our Products

Historically, we have manufactured and sold the following products:

o	graphite electrodes;

o	fine grain graphite; and

o	high purity graphite

Graphite electrodes are used as electricity-conducting materials within electric arc furnaces for manufacture of steel and non-ferrous metals such as brown alumina, yellow phosphorus, or other metals.

Fine grain graphite blocks are used to make graphite crucibles in various industries and continuous casting dies for non-ferrous metals and spark erosion tools in the automotive industry. Fine grain graphite blocks are also machined to produce piston rings, sealing rings and jigs in the molding industry. In the space industry, fine grain graphite is used in the manufacture of rocket nozzles. Fine grain graphite is widely used in smelting for colored metals and rare-earth metal smelting as well as the manufacture of molds. We hope to penetrate some of these markets as we increase our production capacity and market our products to new customers.

High purity graphite is used in the chemistry industry, semiconductor material and precious metal smelting industry, food industry and nuclear industry. Graphite bricks and rounds of high purity are used as moderators in atomic reactors. In the nuclear field, graphite is a good and convenient material as a moderator but only if the graphite is low in certain neutron absorbing elements notably boron and rare-earth metals and is of consistent quality particularly with regard to density and orientation. High purity graphite is used in, among other things, the metallurgy, mechanical, aviation, electronic, atomic energy, chemical and food industries. We hope to penetrate some of these markets as we increase our production capacity and market our products to new customers.

Through our newly acquired subsidiary we now manufacture and sell the following products:

o	graphene oxide; and

o	graphite bipolar plates.

Graphene Oxide has wide applications as a conductive agent, such as in lithium ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin films and chips.

Graphite bipolar plates are primarily used in solar power storage.

Our product types are differentiated based upon qualities such as density, thermal conductivity, electrical resistivity, thermal expansion and strength. With respect to each of our product types, we sell products that vary in size and purity, depending on the particular specifications requested by our distributors. We regularly customize each of our products by increasing size, density and purity, in accordance with customer demands.

Based on informal discussions with others in our industry, we believe that the rods produced by us are currently the largest available in China’s graphite market. We are capable of producing ultra-high electrodes with a diameter as large as 800 millimeters and rounded fine grain electrodes with a diameter as large as 600 millimeters. We believe we are China’s first domestic producer of 800 millimeter diameter ultra-high graphite electrodes. Such expansion further strengthened our position in China’s graphite market.

Our Manufacturing Facilities

We currently manufacture all of our graphite products at our facilities located in Inner Mongolia. In 2009, the Company had the capacity to produce 15,000 tons of materials annually. In 2010, our annual production capacity was doubled to 30,000 tons. In 2011, the Company completed building and started operating a facility with additional 30,000 tons production capacity. We can manufacture ultra-high graphite electrodes with a diameter ranging from 600 to 800 millimeters.

The manufacturing process of each of our graphite products generally involves various steps, including calcining, which is a thermal treatment process applied to raw materials, crushing raw materials into smaller particles, screening, mixing, forming, dipping, baking graphitization and machining. The technology and procedures used in this process vary among the different products that we manufacture. We have developed proprietary technology to support the forming stage of production and, as discussed below under the heading “Intellectual Property,” we have been granted a patent by the State Intellectual Property Office of the PRC to protect our rights to this technology.

We manufacture graphene oxide and graphite bipolar plates through Royal Shanghai in Shanghai, PRC.

Because we employ advanced methods of quality control and environmental management, we have been able to obtain ISO90001 certification and ISO14000 certification for all of our graphite products manufactured in Inner Mongolia.

Our Raw Materials and Suppliers

The principal raw materials that we use are coal asphalt, asphalt coke, metallurgy coke, needle coke, metallurgy coke power, quartzose sand, coal, petroleum coke and calcined coke, all of which are carbon rich and used in manufacturing graphite with a high degree of density, strength and purity. We purchase all of our raw materials from domestic Chinese suppliers. We do not have any long-term contracts with our suppliers. As a result, the cost of our raw materials is not fixed. Average prices for our major raw materials have decreased during the year ended December 31, 2013. 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 prices 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.

For the year ended December 31, 2013, one supplier accounted for 10% or more of our total purchases, representing 25.7%. For the year ended December 31, 2012, two suppliers accounted for 10% or more of our total purchases, representing 51.6% and 16.3%, respectively.

Because of the diversity of available sources of these raw materials, we believe that our raw materials are currently in adequate supply and will continue to be so in the future.

Our Customers

Our customers include over 200 distributors located throughout 22 provinces in China as well as end users located in China. Our distributors sold 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. These end users consist of companies in various industries, including automobile, defense, molding, machinery and tool manufacturers. Our direct sales consist of sales of our graphite electrodes to steel manufacturers and metallurgy companies located in China and sales of our fine grain graphite and high purity graphite products to molding companies located in China.

We generally do not enter into long-term contracts with our distributors or customers. Our distributors and customers generally purchase our products pursuant to purchase orders. We currently have one long-term agreement with one of our distributors; however, the volume of sales from such distributor is not material to our business.

Our distributors and customers generally purchase on credit, depending on their credit history and volume of purchases from us. During 2010, as a result of the global economic recovery and the expansion of our production capacity, we experienced an increased demand for our products and increased sales. This trend continued in 2011 due to the continued recovery of the global economy. However since the beginning of 2012, the demand of our products decreased due to lower production levels by the steel companies that are our major clients. This led to a decrease in our net accounts receivable from $11.2 million at December 31, 2012 to $4.49 million at December 31, 2013.

For the year ended December 31, 2013, two customers accounted for 10% or more of sales revenues, representing 37.0% and 18.5%, respectively of the total sales. For the year ended December 31, 2012, two customers accounted for 10% or more of sales revenues, representing 33.1% and 27.8%, respectively of the total sales. As of December 31, 2013, there were two customers that constituted 40.8% and 11.7% of the accounts receivable. As of December 31, 2012, there were three customers that constituted 42.2%, 16.5% and 10.3% of the accounts receivable.

We have not entered into long-term agreements with our distributors. Consequently, if orders from any large distributors decrease, our business could be harmed.

Our Sales and Marketing Efforts

We have not spent a significant amount of capital on advertising. Our sales and marketing force consists of 30 people located at our Inner Mongolia facility who market our products primarily to distributors, and, to a lesser extent, end users, in the PRC. Our marketing effort is oriented toward working with distributors, who purchase our products and then sell them to end users in China and in foreign countries, including Japan, the United States, Spain, England, South Korea and India.

Research and Development

We have an informal agreement with Hunan University, pursuant to which the University provides us with basic research and we perform experiments based upon their research. The research that the university is currently engaged in focuses on the development of high purity graphite with a diameter of 840 millimeters. A diameter of more than 840 millimeters and a purity of at least 99.9999% are threshold requirements for use in nuclear power reactors. The highest level of purity of the graphite that we currently produce has a diameter of 800 millimeters. Our research and development expenses have not been significant to date.

Intellectual Property

We hold one Chinese patent, Patent No IL: 2004 1 0044348.7, which relates to the molding process for high density, high strength and wear-resistant graphite material. The patent will expire in 2024. However, this patent affords us only limited protection, and any actions we take to protect our intellectual property rights may not be adequate. Most of our intellectual and proprietary property consists of trade secrets relating to the design and manufacture of graphite products and customer lists that are accessible only by key executives and accounting personnel. Effective intellectual property protection may not be available in China and other countries in which our products are sold. Intellectual property rights in China are still developing, and there are uncertainties involved in the protection and the enforcement of such rights.

Competition and Competitive Advantages

We compete with a number of domestic and international companies that manufacture graphite products. Because of the nature of the products that we sell, we believe that the reputation of the manufacturer and the quality of the product may be as important as price.

In addition to a number of domestic companies, there are three major international companies that offer competing products. They are SGL Group, Toyo Tanso and Poco Graphite. SGL Group is considered one of the world’s leading manufacturers of carbon-based products. In 1974, Toyo Tanso became the first company in Japan to develop isotropic graphite, significantly expanding the possibilities of carbon use. Its products are now widely used in a variety of cutting edge technology fields, including the semi-conductor and aerospace industries. Poco Graphite’s products are used in semiconductor and general industrial products, biomedical products, glass products and in the electrical discharge machining (EDM) markets.

Government Regulations

Statutory Reserve

Before December 31, 2013, all of our business operations were carried out by Xingyong. On December 31, 2013, the Company acquired new operations carried through BVI Co., and its subsidiaries Royal HK and Shanghai HK. All of the cash generated by our operations has been held by our China entities. In order to transfer such cash to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada Corporation, we would need to rely on dividends, loans or advances made by our PRC subsidiaries or VIE entity. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, 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 and Royal Shanghai, may purchase foreign currency from designated financial institutions in connection with current account transactions, including profit repatriation.

These factors will limit the amount of funds that we can transfer from Xingyongand Royal Shanghai to our parent entity and may delay any such transfer. In addition, upon repatriation of earnings of Xingyongand Royal Shanghai to the United States, those earnings may become subject to United States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly, taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.

Approvals for New Products

Before we develop certain new products, we must obtain a variety of approvals from local and municipal governments in the PRC. Our products may also be required to comply with the regulations of foreign countries into which they are ultimately sold. There is no assurance that we will be able to obtain all required licenses, permits, or approvals from these government authorities. If we fail to obtain all required licenses, permits or approvals, we may be unable to expand our operations.

Environmental Regulations

Xingyong, which manufactures our products, is subject to Chinese and regional environmental laws and regulations. Our refineries and related water treatment systems are built to meet government requirements, and we received a manufacturing license from the government department of environmental protection. Xingyong has passed environmental impact assessments by local environmental authorities.

We believe that we are in compliance in all material respects with all applicable environmental protection laws and regulations.

Regulations Governing Electrical Equipment

Our products are subject to regulations pertaining to electrical equipment, which may materially adversely affect our business. These regulations regulate the design, components and operation of our products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these regulations may restrict our ability to sell our products in the PRC. In addition, these regulations may increase the cost of supplying our products by forcing us to redesign existing products or to use more expensive designs or components. Consequently, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring our products into compliance. This may have an adverse effect on our revenues, gross profit margins and results of operations and increase the volatility of our financial results.

Circular 106 Compliance and Approval

The State Administration of Foreign Exchange (“SAFE”) issued an official notice known as “Circular 106,” which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure to facilitate foreign financing or subsequent acquisitions in China. We believe that our wholly-owned subsidiary Talent was not required to obtain SAFE’s approval to establish its offshore company Yongle as a “special purpose vehicle” for capital raising activities on behalf of Xingyong because the owners of Xingyong are not stockholders of Talent, and Talent’s sole stockholder is not a resident of the PRC.

Restrictions on Exports of Natural Resources

In 2010, the Chinese government decided to implement a number of new restrictions on natural resource industry sectors. As a result, domestic Chinese companies in certain natural resource industries face export restrictions. Such restrictions may limit our ability to export our products in the future, or may increase the expense of our exports, which may impact our business.

Employees

As of December 31, 2013 and 2012, we had 570 full-time employees, of whom 210 were in manufacturing, 262 were technical employees who were also engaged in research and development, 64 were executive and administrative employees and 34 were sales and marketing employees. We believe that our relationship with our employees is good.

ITEM 1A.

Risk Factors.

From time to time, information provided by us, including but not limited to statements in this report, or other statements made by or on our behalf, may contain “forward-looking” information. Such statements involve a number of risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those anticipated. Set forth below are important factors that could cause our results, performance, or achievements to differ materially from those in any forward-looking statements made by us or on our behalf.

Going Concern

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

We have recently incurred substantial net losses, and we expect to continue to incur substantial net losses until the PRC steel market recovers.

We have incurred significant net losses in each of 2012 and 2013. We have funded our operations through debt financings. We anticipate that our revenue will not significantly increase from current level in the near future, thereby leading to continued losses until the PRC steel market and our business recover.

The limited operating history of our newly acquired subsidiaries Royal HK and Royal Shanghai makes it difficult to evaluate its current business and future prospects and its inability to execute on its current business plan may adversely affect its results of operations and prospects.

Our newly acquired subsidiary, Royal Shanghai, is a development stage company that has generated limited revenues to date. Therefore, Royal Shanghai not only has a very limited operating history, but also a limited track record in executing its business model which includes, among other things, manufacturing and operating a website. Royal Shanghai’s limited operating history makes it difficult to evaluate its current business model and future prospects.

In light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development with limited operating history, there is a significant risk that Royal Shanghai will not be able to:

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implement or execute its current business plan, or demonstrate that its business plan is sound; and/or

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raise sufficient funds in the capital markets or otherwise to effectuate its long-term business plan.

Royal Shanghai’s inability to execute any one of the foregoing or similar matters may adversely affect our results of operations and prospects.

Risks Related to Our Corporate Structure

We control Xingyong through a series of contractual arrangements, which may not be as effective in providing control over the entity as direct equity ownership and may be difficult to enforce.

We operate our business in the PRC through our variable interest entity, Xingyong. Xingyong holds the licenses, approvals and assets necessary to operate our business in the PRC. We have no equity ownership interest in Xingyong and rely on contractual arrangements with Xingyong and its shareholders that allow us to substantially control and operate Xingyong. These contractual arrangements may not be as effective as direct equity ownership in providing control over Xingyong because Xingyong or its shareholders could breach these arrangements.

Our contractual arrangements with Xingyong are governed by PRC law. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. If Xingyong or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages.

The legal environment in the PRC is not as developed as in the United States and uncertainties in the Chinese legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, our business, financial condition and results of operations could be materially adversely affected.

Because the relationship between Xingyong and Yongle is entirely contractual, our interest in Xingyong depends on the enforceability of those agreements under the laws of the PRC. We are not aware of any judicial decision as to the enforceability of similar agreements under PRC law.

If the PRC government determines that the contractual arrangements through which we control Xingyong do not comply with applicable laws and regulations, our business may be adversely affected.

Although we believe the contractual arrangements through which we control Xingyong comply with current licensing, registration and regulatory requirements of the PRC, we cannot assure you that the PRC government would agree, or that new and burdensome regulations will not be adopted in the future. If the PRC government determines that our structure or operating arrangements do not comply with applicable law and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that may be harmful to our business.

Potential conflicts of interest may arise between the Company and Mr. Denyong Jin, the controlling stockholder and chief executive officer of Xingyong, which could adversely affect our business.

Mr. Denyong Jin, General Manager of our China operations, is the controlling stockholder and chief executive officer of Xingyong. The Company has entered into a series of contractual agreements with Xingyong through which we operate our business in China. Because Mr. Jin is a significant employee of the Company and the controlling stockholder and chief executive officer of Xingyong, conflicts of interest may arise due to his relationship with both companies. We cannot assure investors that, when conflicts of interest arise, Mr. Jin will act in the best interests of the Company or that conflicts of interest will be resolved in our favor. In addition, Mr. Jin may breach or cause Xingyong to breach or refuse to renew the existing contractual agreements that allow us to operate our business in China and receive economic remuneration from Xingyong. We rely on Mr. Jin to act in good faith and in the best interests of the Company, and not use his positions for personal gain. If we cannot resolve any conflicts of interest or disputes between us and Mr. Jin, we may have to rely on legal proceedings, which could result in disruption of our business and substantial uncertainty as to the outcome of any such legal proceedings.

Because the payments we receive from Xingyong are subject to annual negotiation, we may not be entitled to receive 100% of Xingyong’s net income in the future.

Pursuant to the business operations agreement between Yongle and Xingyong, Xingyong is obligated to pay between 80% and 100% of its net income to Yongle, subject to annual negotiation. Although Xingyong paid 100% of its net income to Yongle in 2011 and 2012, there is no assurance that it will continue to do so in the future. Our profitability would be affected if the percentage of Xingyong’s net income that is payable to us decreases.

Failure to continue to improve our operational, financial and management controls may impair our ability to effectively operate our business and result in the deterioration of our financial position.

To manage our business effectively and to continue to generate significant profits, we need to continue to improve our operational, financial and management controls. These system enhancements and improvements may require significant capital expenditures and management resources. Failure to implement these improvements could impair our ability to manage our business and could result in a further deterioration of our financial position and the results of our operations.

Risks Related to Our Business

If the downturn of the steel industry in China continues, we may have decreased sales, which may impair our ability to continue operating our business.

Steel consumption is highly cyclical and follows general economic and industrial conditions both worldwide and in regional markets. The steel industry has historically been characterized by significant decreases of demand during periods of economic weakness. In 2013, the Chinese steel industry experienced a significant decrease in demand, which in turn led to a significant decrease in demand for our products, which serve as raw materials for the steel industry. As a result, our sales decreased in 2013. If the steel industry continues to downturn, our business will be affected.

If our lenders demand payment when our loans are due, we may have difficulty in making payments, which may impair our ability to continue operating our business.

At December 31, 2013, we had short-term bank loans of approximately $40.6 million and long-term bank loans of approximately $22.6 million. These bank loans, which are secured by liens on our fixed assets and land use rights, are due between January 2014 and July 2016, including approximately $40.6 million short-term bank loans and $18.1 million long-term bank loans owed to the Construction Bank of China. Historically, we have rolled over our short-term loans when they became due. However, we cannot assure investors that our lenders, including the Construction Bank of China, will not demand repayment when these loans mature. If the lenders demand repayment when due, we may not be able to obtain the necessary funds to pay off these loans, which could result in the imposition of penalties, including a 50% increase in interest rates and a request from the banks for additional security for the loans. Our cash reserves, including restricted cash, which at December 31, 2013 were $35.8 million , are insufficient to pay off our loans when due.

We will require additional financing to implement our expansion plans, which funds may not be available to us on favorable terms, or at all. Without additional funds, we may not be able to maintain or expand our business.

Some of our expansion plans, including the expansion of our product offerings to include nuclear, solar and semiconductor products and pursuing an acquisition, would likely require us to obtain additional funds from equity or debt markets, or to borrow additional funds from local banks. We currently have no commitments from any financing sources. There is no assurance that we will be able to raise any funds on terms favorable to us, or at all. In the event that we issue shares of equity or convertible securities, holdings of our existing stockholders would be diluted.

An increase in the cost of raw materials would affect our profitability if we are unable to pass along the cost to our customers.

We purchase all of our raw materials from domestic Chinese suppliers. Because we do not have any long-term contracts with our suppliers, any increase in the prices of our raw materials would affect the price at which we can sell our products. If we are unable to pass on increased costs to our customers, we would be unable to maintain our profit margins. Raw material prices increased significantly in 2011 and decreased in 2012 and 2013 and we anticipate the prices will be relatively stable in 2014.

In times of decreasing prices, we may have to sell our products at prices that are lower than the costs at which we purchased our raw materials. Furthermore, PRC regulations grant broad powers to the government to adjust the prices 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.

As we expand our operations, we may need to establish a more diverse supplier network for our raw materials. The failure to secure a more diverse and reliable supplier network may have an adverse effect on our financial condition.

In 2013 and 2012, we purchased almost all of our raw materials from a small number of suppliers. As we increase the scale of our production, we may need to establish a more diverse supplier network, while attempting to continue to leverage our purchasing power to obtain favorable pricing and delivery terms. However, in the event that we need to diversify our supplier network, we may not be able to procure a sufficient supply of raw materials at competitive prices, which may have an adverse effect on our results of operations, financial condition and cash flows.

Furthermore, despite our efforts to control our supply of raw materials and maintain good relationships with our existing suppliers, we could lose one or more of our existing suppliers at any time. The loss of one or more key suppliers could increase our reliance on higher cost or lower quality supplies, which may negatively affect our profitability. Any interruptions to, or decline in, the amount or quality of our raw materials supply may materially disrupt our production and adversely affect our business, financial condition and financial prospects.

A large percentage of our revenues depends on a limited number of distributors, the loss of one or more of which may materially adversely affect our operations and revenues.

Our revenue is dependent in large part on significant orders from a limited number of distributors, who may vary from period to period. During the year ended December 31, 2013 , two distributors accounted for 10% or more of sales revenues, representing 37.0% and 18.5%, respectively of our revenue, and during the year ended December 31, 2012, three distributors accounted for approximately $31.06 million, or 65.9%, of our revenue. We do not have long-term contracts with these distributors. Demand for our products depends on a variety of factors including, but not limited to, the financial condition of our distributors, the end users of our products and their customers and general economic conditions. If sales to any of our large distributors are substantially reduced for any reason, as occurred during the recent economic downturn, such reduction may have a material adverse effect on our business, financial condition and results of operations.

If our competitors sell higher quality products or similar products at a lower price, or if they are otherwise more successful in penetrating the market, our financial condition may be affected.

We face competition from both Chinese and international companies, many of which are better known and have greater financial resources than us. Many of the international companies, in particular, have longer operating histories and have more established relationships with customers and end users. If our competitors are successful in providing similar or better graphite products, provide graphite products at a lower price than we offer our products, or if they are otherwise more successful in penetrating the market, we may experience a decline in demand for our products, which would negatively impact our sales and results of operations.

Because the end users of graphite products seek products that incorporate the latest technological development, including increased purity, our failure to offer such products may impair our ability to market our products.

Our products are either used in the manufacturing process of other products, particularly metals, or incorporated in various types of products or processes. The end users typically view both the purity of the graphite and the bend strength, compression strength, resistivity, bulk density and porosity of graphite as key factors in making a decision as to which products to purchase. Accordingly, our failure or inability to offer products manufactured with the most current manufacturing technology may adversely affect our sales.

Our intellectual property rights are valuable, and any inability to protect them may reduce the value of our products.

Our trade secrets and patent are important assets for us. Our intellectual and proprietary property consists of one patent, trade secrets relating to the design and manufacture of graphite products and our customer lists. Various factors outside of our control pose a threat to our intellectual property rights as well as to our products. Effective intellectual property protection may not be available in China and other countries in which our products are sold. Intellectual property rights in China are still developing, and there are uncertainties involved in the protection and the enforcement of such rights.

Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete with other companies.

We depend on third-party distributors over whom we have no control to market our products to end users in international markets.

Although there is an international market for graphite products and many of the end users of our products are located outside of the PRC, most of our direct sales are made to distributors and customers in the PRC. We do not have any offices outside of the PRC, and we depend on distributors based in the PRC, over whom we have no control, to sell our products in the international market. Any problems encountered by these third parties, including potential violations of laws of the PRC or other countries, may affect their ability to sell our products, which would, in turn, affect our net sales.

Because our products are purchased pursuant to individual purchase orders, and not long-term agreements, the results of our operations may vary significantly from quarter to quarter.

We sell our products pursuant to purchase orders and, with the exception of one customer, whose purchases are not material to our overall revenues, we do not have long-term contracts with any distributors or customers. As a result, we must continually seek new customers and new orders from existing customers, and we cannot assure investors that we will have a continuing stream of revenue from any customer. Our failure to generate new business on an ongoing basis may materially impair our ability to operate profitably.

We rely on highly skilled personnel and, if we are unable to hire or retain qualified personnel, we may not be able to grow effectively.

Our performance largely depends on the talents and efforts of highly skilled individuals, including our executive officers and Mr. Denyong Jin, the chief executive officer of Xingyong and General Manager of our China operations. We do not have employment agreements with any of our executive officers or with Mr. Jin. Our future success depends on our continuing ability to retain these individuals and to hire, develop, motivate and retain other highly skilled personnel for all areas of our organization.

Because we consume significant amounts of electricity, any failure or interruption in electricity services may harm our ability to operate our business.

Our systems are heavily reliant on the availability of electricity. If we were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly and their fuel supply may be inadequate during a major power outage. This may result in disruption to our business.

If we fail to obtain all required licenses, permits, or approvals, we may be unable to expand our operations.

Before we develop certain new products, we must obtain a variety of approvals from local and municipal governments in the PRC. Our products may also be required to comply with the regulations of foreign countries where they are ultimately sold. There is no assurance that we will be able to obtain all required licenses, permits, or approvals from these government authorities. If we fail to obtain all required licenses, permits or approvals, we may be unable to expand our operations.

Compliance with existing and future environmental laws and regulations may have a material adverse effect on our operations and financial condition.

As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes, noise and safety. We cannot assure investors that we will be able to comply with these regulations at all times, as the Chinese environmental legal requirements are constantly evolving and becoming more stringent. If the Chinese national government or local governments impose more stringent regulations in the future, we may have to incur additional, and potentially substantial, costs and expenses in order to comply with such regulations, which may negatively affect our results of operations. For instance, during 2009, we incurred significant expenditures for environmental improvements required by new government regulations. In addition, if we fail to comply with any of the present or future environmental regulations in any material respect, we may suffer from negative publicity and be subject to claims for damages that may require us to pay substantial fines or cause our operations to be suspended or ceased.

If global economic and financial market conditions remain uncertain and/or weak for an extended period of time, any of the following factors, among others, could have a material adverse effect on our financial condition and results of operations:

if our customers experience declining revenues, or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, inability of customers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and an increased bad debt expense;

o	slower consumer spending may result in reduced demand for our products, reduced orders from customers for our products, order cancellations, lower revenues, increased inventories, and lower gross margins;

o	continued volatility in the global markets and fluctuations in exchange rates for foreign currencies and contracts in foreign currencies could negatively impact our reported financial results and condition; and

o	continued volatility in the prices for commodities and raw materials that we use in our products could have a material adverse effect on our costs, gross margins, and ultimately our profitability.

Risks Related to Doing Business in the PRC

Our business operations take place primarily in the PRC. Because Chinese laws, regulations and policies are constantly changing, our Chinese operations face several risks summarized below.

Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses.

The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms introduced in China in recent years are regarded by China’s national government as a way to introduce economic market forces into China. Given the overriding desire of the national government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.

Any change in policy by the Chinese government may adversely affect investments in Chinese businesses.

Changes in policy could result in the imposition of restrictions on currency conversion, imports or the source of supplies, as well as new laws affecting joint ventures and foreign-owned enterprises doing business in China. Although China has been pursuing economic reforms, events such as a change in leadership or social disruptions that may occur upon the proposed privatization of certain state-owned industries, may significantly affect the government’s ability to continue with its reform.

We face economic risks in doing business in China because the Chinese economy is more volatile than other countries.

As a developing nation, China’s economy is more volatile than those of developed Western industrial nations. It differs significantly from that of the U.S. or a Western European country in such respects as structure, level of development, capital reinvestment, legal recourse, resource allocation and self-sufficiency. Only in recent years has the Chinese economy moved from what had been a command economy through the 1970s to one that during the 1990s encouraged substantial private economic activity. In 1993, the Constitution of China was amended to reinforce such economic reforms. The trends of the 1990s indicate that future policies of the Chinese government will likely emphasize greater utilization of market forces. For example, in 1999 the Government announced plans to amend the Chinese Constitution to recognize private property, although private businesses will likely remain subordinate to state-owned companies, which are the mainstay of the Chinese economy. However, we cannot assure investors that, under some circumstances, the government’s pursuit of economic reforms will not be restrained or curtailed. Actions by the national government of China may have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects of our Chinese operations.

PRC regulations relating to acquisitions of PRC companies by foreign entities may limit our ability to acquire PRC companies and adversely affect the implementation of our acquisition strategy as well as our business and prospects.

The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in China. The public notice states that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC company’s assets or equity interests to foreign entities, such as us, for equity interests or assets of the foreign entities.

In April 2005, SAFE issued another public notice further explaining the January notice. In accordance with the April notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the January notice, the PRC residents must each submit a registration form to the local SAFE branch with respect to their respective ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations.

On May 31, 2007, SAFE issued another official notice known as “Circular 106,” which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure to facilitate foreign financing or subsequent acquisitions in China.

If we decide to acquire a company organized under the laws of the PRC, we cannot assure investors that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals, filings and registrations for the acquisition. This may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.

Fluctuation in the value of the RMB may have a material adverse effect on the value of our stock.

Fluctuations in the value of the RMB against the U.S. dollar and other currencies may be affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the Chinese government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in the appreciation of the RMB against the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the Chinese government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the RMB against the U.S. dollar. Because approximately 90% of our costs and expenses are denominated in RMB, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. In addition, as we rely entirely on dividends paid to us by our operating subsidiary, any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any of our dividends payable on our ordinary shares in foreign currency.

Capital outflow policies in the PRC may hamper our ability to remit income to the United States.

The PRC has adopted currency and capital transfer regulations. These regulations may require that we comply with complex regulations for the movement of capital and as a result we may not be able to remit all income earned and proceeds received in connection with our operations to the United States or to our stockholders.

China’s foreign currency control policies may impair the ability of our Chinese operating company to pay dividends to us.

Because our operations are conducted through our Chinese operating company, we rely on dividends and other distributions from our Chinese operating company to provide us with cash flow to pay dividends or meet our other obligations. Any dividend payment is subject to foreign exchange rules governing repatriation. Any liquidation is subject to the relevant government agency’s approval and supervision as well as the foreign exchange control. Current regulations in China permit our operating company to pay dividends to us only out of accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our Chinese operating company is required to set aside at least 10% (up to an aggregate amount equal to half of our registered capital) of its accumulated profits each year for employee welfare. Such cash reserves may not be distributed as cash dividends. In addition, if our operating company in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. The inability of our operating company to pay dividends or make other payments to us may have a material adverse effect on our financial condition.

Because our funds are held in banks that do not provide insurance, the failure of any bank in which we deposit our funds may affect our ability to continue to operate.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash may impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue to operate.

If we are unable to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.

Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type that would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment. We have not obtained fire, casualty and theft insurance, and there is no insurance coverage for our raw materials, goods and merchandise, furniture and buildings in China. Any losses incurred by us will have to be borne by us without any assistance, and we may not have sufficient capital to cover material damage to, or the loss of, our production facility due to fire, severe weather, flood or other cause, and such damage or loss may have a material adverse effect on our financial condition, business and prospects.

The Chinese legal and judicial system may negatively impact foreign investors because the Chinese legal system is not yet comprehensive.

In 1982, the National People’s Congress amended the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in China. However, China’s system of laws is not yet comprehensive. The legal and judicial systems in China are still under development, and enforcement of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the Chinese judiciary is relatively inexperienced in enforcing the laws that exist, anticipation of judicial decision-making is more uncertain than in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. China’s legal system is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges adjudicating other cases. In addition, the interpretation of Chinese laws may shift to reflect domestic political changes.

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. We cannot assure you that a change in leadership, social or political disruption, or unforeseen circumstances affecting China’s political, economic or social life, will not affect the Chinese government’s ability to continue to support and pursue these reforms. Such a shift may have a material adverse effect on our business and prospects.

Because our principal assets are located outside of the United States and some of our directors and all of our executive officers reside outside of the United States, it may be difficult for investors to enforce your rights based on U.S. federal securities laws against us and our officers and directors in the United States or to enforce judgments of U.S. courts against us or them in the PRC.

Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification may result in unfavorable tax consequences to us and our non-PRC shareholders.

China passed a New Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with de facto management bodies within China is considered a resident enterprise, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to be PRC source income and subject to PRC withholding tax. This recent circular also subjects such resident enterprises to various reporting requirements with the PRC tax authorities.

Although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences may follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. This would also mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC authorities responsible for enforcing the withholding tax have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, dividends paid to stockholders with respect to their shares of our common stock or any gains realized from transfer of such shares may generally be subject to PRC withholding taxes on such dividends or gains at a rate of 10% if the shareholders are deemed to be a non-resident enterprise or at a rate of 20% if the shareholders are deemed to be a non-resident individual.

It may be difficult for our stockholders to effect service of process against our subsidiaries and our officers and directors.

Our operating subsidiaries and substantially all of our assets are located outside of the United States. Investors may find it difficult to enforce their legal rights based on the civil liability provisions of U.S. federal securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in the courts of the PRC. In addition, it is unclear whether extradition treaties in effect between the United States and the PRC would permit effective enforcement of criminal penalties under U.S. federal securities laws or otherwise against us or those of our officers and directors that reside outside of the United States.

The Chinese economy is evolving and we may be harmed by any economic reform.

Although the Chinese government owns the majority of productive assets in China, during the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffective, we are unable to assure investors that:

o	we will be able to capitalize on economic reforms;

o	the Chinese government will continue its pursuit of economic reform policies;

o	the economic policies, even if pursued, will be successful;

o	economic policies will not be significantly altered from time to time; and

o	business operations in China will not become subject to the risk of nationalization.

Since 1979, the Chinese government has reformed its economic system. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, may lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

Price inflation in China could affect our results of operation if we are unable to pass along raw material price increases to our customers.

Inflation in China has continued to rise over the last few years. Because we purchase raw materials from suppliers in China, price inflation has caused an increase in the cost of our raw materials. Price inflation may affect the results of our operations if we are unable to pass along the price increases to our customers. Similarly, the cost of constructing our new facility and the installation of equipment may increase as a result of these recent inflationary trends, which are expected to continue in the near future. In addition, if inflation continues to rise in China, China could lose its competitive advantage as a low-cost manufacturing venue, which may in turn lessen the competitive advantages of our being based in China. Accordingly, inflation in China may weaken our competitiveness domestically and in international markets.

Failure to comply with the U.S. Foreign Corrupt Practices Act may subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time to time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our reputation and our business, financial condition and results of operations.

Risks Related to our Common Stock

The controlling stockholders of Sincere, our majority stockholder, may have significant influence over the outcome of matters submitted to our stockholders for approval, which may prevent the Company from engaging in certain transactions.

As of December 31, 2013, Sincere owned 37.4% of our outstanding common stock. Family members of Mr. Denyong Jin, General Manager of our China operations, have control of Sincere. As a result, they exercise significant influence over all matters requiring stockholder approval, including the appointment of our directors and the approval of significant corporate transactions. Their ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination that may be in the best interests of the Company.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of internal controls over financial reporting.

During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2013, we identified significant deficiencies related to: (i) lack of entity level controls establishing a “tone at the top”, including but not limited to, communication between committee members and senior management regarding corporate decisions and planning; (ii) insufficient knowledge of accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines; (iii) an inadequate amount of review by management of the financial statement reporting process, including understanding and reporting all required disclosures necessary, by those in charge of corporate governance; (iv) lack of corporate governance policies in place, such as an internal audit function, fraud and risk assessment policies and a whistleblower policy; and (v) inadequate segregation of duties over certain information system access controls. We cannot assure investors that, if our independent auditors are required to attest to our internal controls, they will agree with our analysis or will not have identified other material weaknesses in our internal controls or disclosure controls.

Our reporting obligations as a public company place a significant strain on our management and operational and financial resources and systems. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting may result in the loss of investor confidence in the reliability of our financial statements, which in turn may harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

There is a limited market for our common stock, which may make it difficult for holders of our common stock to sell their stock.

Our common stock trades on the OTC Bulletin Board under the symbol CHGI.OB. There is a limited trading market for our common stock and at times there is no trading in our common stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock. Further, many brokerage firms will not process transactions involving low price stocks, especially those that come within the definition of a “penny stock.” If we cease to be quoted, holders of our common stock may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our common stock, and the market value of our common stock would likely decline.

If a more active trading market for our common stock develops, the market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and holders of our common stock may be unable to sell their shares at or above the price at which they were acquired.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:

o	quarterly variations in our revenues and operating expenses;

o	developments in the financial markets and worldwide economies;

o	announcements of innovations or new products or services by us or our competitors;

o	announcements by the PRC government relating to regulations that govern our industry;

o	significant sales of our common stock or other securities in the open market;

o	variations in interest rates;

o	changes in the market valuations of other comparable companies; and

o	changes in accounting principles.

In addition, the market for Chinese companies that went public in the U.S. through reverse mergers, such as ours, is currently extremely volatile due primarily to recent allegations and, in some instances, findings of fraud among some of these companies. If a stockholder were to file a class action suit against us following a period of volatility in the price of our securities, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to responding to such litigation, which may harm our business and reputation.

We have not paid dividends in the past and do not expect to pay dividends to holders of our common stock for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.

We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. To the extent that we do not pay dividends, our stock may be less valuable because a return on investment will occur only if, and to the extent that, our stock price appreciates, which may never occur. In addition, holders of our common stock must rely on sales of their common stock after price appreciation as the only way to realize a return on their investment, and if the price of our stock does not appreciate, then there will be no return on their investment.

If we become subject to the recent scrutiny and negative publicity involving U.S.-listed Chinese companies, our business operations, stock price and reputation could be harmed.

Recently, U.S. public companies that have substantially all of their operations in China, and in particular companies that have completed reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity resulting from financial and accounting irregularities, a lack of effective internal control over financial reporting, inadequate corporate governance policies or a lack of adherence thereto and allegations of fraud. As a result, the publicly traded stock of many U.S.-listed Chinese companies has sharply declined in value. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is unclear what effect this may have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company, which may impact our business operations and the value of our stock.

The rights of the holders of our common stock may be impaired by the potential issuance of preferred stock.

Our board of directors has the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that may adversely affect the voting power and equity interest of the holders of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.

Transactions engaged in by our majority stockholder may have an adverse effect on the price of our stock.

We do not know what plans, if any, Sincere, our majority stockholder, has with respect to its ownership of our stock. In the event that it sells a substantial number of its shares of our common stock, such sale may lower the price of our stock.

ITEM 1B.

Unresolved Staff Comments.

Not required

ITEM 2.

Properties.

There is no private ownership of land in China and all urban land ownership is held by the government, its agencies and collectives. Land use rights can be obtained from the government for a period of up to 50 years for industrial usage, 40 years for commercial usage and 70 years for residential usage, and are typically renewable. Land use rights can be transferred upon approval by the State Land Administration Bureau and payment of the required land transfer fee.

The Company has land use rights of 368,804 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 112,171 square meters expiring in 2052 and the land use right with respect to 256,634 square meters expiring in 2053. In addition, in 2010, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities. The Company was not required to sign a land use right agreement or pay a fee. In exchange, the Company will allow public use of this 387,838 square meters of land and keep the land in good condition. The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000. Because of our current relationship with the local government, we believe that it is unlikely that we will have to pay for the land use right. The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans. We believe that our facilities are sufficient to meet our current and near future requirements and that any additional space that we may require would be available on commercially reasonable terms.

We currently manufacture all of our products at our facilities located in Inner Mongolia. In 2009, the Company had the capacity to produce 15,000 tons of materials annually. In 2010, our annual production capacity was doubled to 30,000 tons. In 2011, the Company completed building and started operating a facility with 30,000 ton productions capacity. We currently have production capacity of 60,000 tons annually.

ITEM 3.

Legal Proceedings.

We are not aware of any material existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our current directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.

ITEM 4.

Mine Safety Disclosures.

Not required.

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is quoted on the OTC Bulletin Board, or OTC, under the symbol “CHGI.OB”. As of April 15, 2014, the closing price for our common stock was $0.12 per share . The bid prices set forth below reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.

The following table sets forth, for the periods indicated, the high and low bid prices of our common stock.

	High		Low
Fiscal Year Ended December 31, 2014
First Quarter	$	0.16	$	0.11
Second Quarter (through April 12 , 2014)	$	0.14	$	0.11

Fiscal Year Ended December 31, 2013
First Quarter	$	0.68	$	0.40
Second Quarter	$	0.42	$	0.24
Third Quarter	$	0.28	$	0.11
Fourth Quarter	$	0.18	$	0.12

Fiscal Year Ended December 31, 2012
First Quarter	$	1.22	$	0.45
Second Quarter	$	0.98	$	0.51
Third Quarter	$	0.68	$	0.33
Fourth Quarter	$	0.72	$	0.33

Approximate Number of Holders of Our Common Stock

On April 15 , 2014, there were approximately 45 stockholders of record of our common stock.

Transfer Agent

The transfer agent for the common stock is Empire Stock Transfer Inc. The transfer agent’s address is 2470 Saint Rose Parkway, Suite 304, Henderson, NV, and its telephone number is (702) 974-1444.

Dividend Policy

While we are required to pay dividends on the shares of our Series B Preferred Stock, we have never declared or paid cash dividends on our common stock and have no present plans to do so in the foreseeable future. In addition, any dividend payment that the Company makes is subject to foreign exchange rules governing repatriation. Current regulations in China permit our operating company to pay dividends to us only out of accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. The inability of our operating company to pay dividends or make other payments to us may limit our ability to pay dividends to holders of our Series B Preferred Stock.

As of December 31, 2013, there were no shares of our Series A Preferred Stock outstanding and 300,000 shares of our Series B Preferred Stock outstanding. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Redemption of Series B Preferred Stock

On December 22, 2011, all outstanding shares of Series B Preferred Stock became redeemable. The redeemable preferred stock was recorded as temporary equity as of December 31, 2012 and December 31, 2013. The redemption price for the outstanding shares of Series B Preferred Stock is $320,000. As of December 31, 2013, the Company has paid $90,000 and accrued additional $230,000 in connection with the redemption of the Series B Preferred Stock. The $230,000 will be paid in installments payments of $40,000 per month for 5 months from January 2014 and $30,000 for the last month. The preferred stock will be canceled after all payments are made.

As a result of China’s foreign currency control, the Company has applied to SAFE to obtain approval to make the foreign currency payment of the redemption price to holders of the outstanding shares of Series B Preferred Stock.

Issuances of Unregistered Securities

During the year ended December 31, 2012, we issued an aggregate of 126,110 shares of common stock to holders of Series B Preferred Stock upon conversion of an aggregate of 126,110 shares of Series B Preferred Stock. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.

During the year ended December 31, 2012, we issued an aggregate of 310,000 shares of common stock to four different parties in exchange for consulting and investor relations services. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.

During the year ended December 31, 2012, we issued an aggregate of 160,000 shares of common stock to our directors and one employee as compensation. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.

During the year ended December 31, 2012, we issued an aggregate of 1,500,000 shares of common stock at prices between $0.50 and $0.56 per share to unrelated parties to raise money for our operations. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.

During the year ended December 31, 2013, we issued an aggregate of 240,000 shares of common stock to four different parties in exchange for consulting and investor relation services. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.

During the year ended December 31, 2013, we issued an aggregate of 25,000 shares of common stock to one director and 1,000,000 shares of common stock to one employee for compensation. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D, based upon representations made by the stockholders.

ITEM 6.

Selected Financial Data.

Not required.

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of the results of our operations and financial condition should be read in conjunction with our financial statements and the related notes, which appear elsewhere in this report. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from our forward-looking statements, see the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” above.

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. This Annual Report should be read in its entirety and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Overview

We are engaged in the manufacture of graphite-based products in the PRC and operate 1 business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. 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 products:

o	graphite electrodes;

o	fine grain graphite;

o

o

o

high purity graphite;

graphene oxide; and

graphite bipolar plates.

Based on information we receive about our industry in the course of our business, we believe that we are one of the largest wholesale suppliers 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. Historically our 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 2013, our revenues and profits decreased substantially from 2012 due to a decrease in demand for our products, which resulted from the struggles of steel companies in China relating to severe oversupply. In particular, the market for fine grain graphite and high purity graphite products has experienced extremely low demand. We are experiencing competitive market conditions. Refer to discussion in greater detail below under the heading “Results of Operations.”

Since 2013, the steel industry continued to struggle and lowered the demand for graphite products. As a result, our revenues and gross margin decreased dramatically in 2013. Our gross loss for the year ended December 31, 2013 was (243.1%), compared to gross margin of 21.5% for the year ended December 31, 2012.

Our cash increased and our accounts receivables decreased during the year ended December 31, 2013 compared to the year ended December 31, 2012, while collectability of our receivables remained highly probable. We believe that our allowance for doubtful accounts as of December 31, 2013 was adequate. The decrease of accounts receivable is caused by decreased sales in the year ended December 31, 2013 compared to the same period 2012.

The current budgeted investment for the construction of our new facility and for the land improvement are approximately $ 0.83 million and $0.08 million, respectively. Approximately $29.0 million had been spent on these construction projects as of December 31, 2013 . The purpose of our expansion is to well position the Company for long term development.

Some of our future business 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 December 31, 2013, we had short-term bank loans of approximately $40.6 million. These bank loans, which are secured by liens on our fixed assets and land use rights, are due between March 2014 and September 2014, all of which is owed to the Construction Bank of China. We have used the proceeds of these short-term loans for raw material purchase and other operating purpose. During the year ended December 31, 2013 and the first quarter of 2014, pursuant to a secured line of credit obtained from China Construction Bank in January 2012, the Company rolled over all of its short-term bank loans from the China Construction Bank. In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $71 million (or RMB 430 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter. As of December 31, 2013, the unpaid principal balance drawn from the secured line of credit was $58.8 million, including $40.6 million of short-term bank loans as disclosed above and $18.2 million of long-term bank loans as disclosed below. We have used the proceeds of these long-term loans for raw material purchase and other operating purpose. Historically, we have rolled over our short-term loans when they became due. However, we cannot assure investors that our lenders, including the Construction Bank of China, will not demand repayment when these loans mature. If our lenders demand repayment when due, we may be unable to obtain the necessary funds to pay off these loans, which could result in the imposition of penalties, including a 50% increase in interest rates and a request from the banks for additional security for the loans. At December 31, 2013, our cash reserves, including restricted cash, were $35.8 million and are insufficient to pay off all of our loans when due.

We purchase all of our raw materials from domestic Chinese suppliers. Because we do not have any long-term contracts with our suppliers, any increase in the prices of our raw materials would affect the price at which we can sell our products. If we are unable to pass on increased costs to our customers, we may be unable to maintain our profit margins. Raw material prices increased significantly in 2010 and 2011, but decreased during the years ended December 31, 2012 and 2013. Selling price of our products also decreased in 2012 and 2013, resulting in decreases in our revenue and gross margin. As of December 31, 2013 and 2012, advances to suppliers amounted to $ 532,178 and $1,177,462, respectively.

In times of decreasing prices, we have had to sell our products at prices which are lower than our cost of goods sold. 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

Fiscal Years Ended December 31, 2013 and 2012

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):

	Year ended December 31,
	2013					2012
Sales	$	9,527		100.0	%	$	31,483			100.0	%
Cost of goods sold		32,690		343.1	%		24,708			78.5	%
Gross profit (loss)		(23,163	)	(243.1	)%		6,775			21.5	%
Operating expenses
Selling expenses		60		0.6	%		254			0.8	%
General and administrative		10,076		105.8	%		6,785			21.6	%
Impairment of property, plant and equipment and construction in progress		24,606		258.3	%		-			-	%
Depreciation and amortization		636		6.7	%		237			0.8	%
Income (loss) from operations		(58,541	)	(614.5	)%		(501	)		(1.6	)%
Other income		820		8.6	%		1,652			5.2	%
Other expense		-		0.0	%		(357	)		(1.1	)%
Change in fair value of warrants		211		2.2	%		(50	)		(0.2	)%
Interest income		877		9.2	%		313		1.0		%
Interest expense		(5,247	)	(55.1	)%		(4,618	)	(14.7		)%
Net loss		(61,879	)	(649.5	)%		(3,562	)		(11.3	)%
Preferred Stock Dividend		(8	)	(0.1	)%		(19	)		(0.1	)%
Net loss available to common shareholders	$	(61,887	)	(649.6	)%	$	(3,580	)		(11.4	)%

Sales .

During the year ended December 31, 2013, we had sales of $ 9,526,709 , compared to sales of $31,482,852 for the year ended December 31, 2012, a decrease of $ 21,956,143 , or approximately 69.7 %. Sales decrease was mainly because the graphite industry experienced low demand during the year ended December 31, 2013 as a result of the struggles of steel companies in China relating to severe oversupply. In particular, the market for fine grain graphite and high purity graphite products has experienced extremely low demand.

The breakdown of revenues for each of graphite electrodes, fine grain graphite and high purity graphite, in 2013 and 2012, respectively, was as follows:

	2013 Sales		% of Total Sales			2012 Sales		% of Total Sales
Graphite Electrodes	$	2,640,623		27.7	%	$	4,606,297		14.6	%
Fine Grain Graphite		3,578,206		37.6	%		13,180,892		41.9	%
High Purity Graphite		2,811,612		29.5	%		13,208,307		42.0	%
Others (1)		496,268		5.2	%		487,356		1.5	%
Total	$	9,526,709		100.0	%	$	31,482,852		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, depreciation expenses in our manufacturing facilities, and inventory impairment cost. During the year ended December 31, 2013, our cost of goods sold was $ 32,689,538 , compared to $24,707,625 for the cost of goods sold for the year ended December 31, 2012, an increase of $ 7,981,913 , or approximately 32.3 %. The increase in the cost of sales for the year ended December 31, 2013 compared to the same period 2012 was mainly due to $21,089,248 impairment loss of inventory charged to cost of goods sold, and due to decrease in sales volume and due to decreased average raw material cost .

Our gross margin decreased from 21.5% for the year ended December 31, 2012 to gross loss of ( 243.1) % for the year ended December 31, 2013. Our sales did not offset the costs we incurred during this period for raw materials, utilities, labor, depreciation, and inventory impairment cost. Sales of our higher margin products decreased significantly during the year ended December 31, 2013 due to decreased demand and strong competition. The decrease of gross profit margin is also due to $21,089,248 inventory impairment cost and due to increased allocation of production costs to each unit produced resulting from increased depreciation expenses during the year ended December 31, 2013 . There was no inventory impairment cost during the year ended December 31, 2012 . The increased allocation is a result of increased property and equipment related to our ongoing expansion for long term development in conjunction with decreased production quantities resulting from decreased sales.

Operating expenses.

Operating expenses totaled $ 35,377,739 for the year ended December 31, 2013, compared to $7,275,959 for the year ended December 31, 2012, an increase of $ 28,101,780 , or approximately 386.2 %.

Selling, general and administrative expenses

Selling expenses decreased from $253,604 for the year ended December 31, 2012 to $ 59,626 for the year ended December 31, 2013, a decrease of $193,978, or 76.5%. The decrease was mainly due to decreased sales commission and lower shipping and handling expenses during the year ended December 31, 2013 as compared to the year ended December 31, 2012, which resulted from lower sales.

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 $ 10,075,818 for the year ended December 31, 2013, compared to $6,785,273 for the year ended December 31, 2012, an increase of $ 3,290,545 , or 48.5 %. The increase in general and administrative expenses was mainly due to increased bad debt expenses of $3,372,295 for the year ended December 31 , 2013 compared to the year ended December 31 , 2012.

Impairment of property and equipment and construction in progress

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $24,606,208 and $0 of impairment expenses for property, plant, and equipment and construction in progress was recorded during the years ended December 31, 2013 and 2012, respectively.

Depreciation and amortization expenses

Depreciation and amortization expenses tota led $2,897,885 for the year ended December 31, 2013, compared to $3,298,709 for the year ended December 31, 2012, a decrease of $400,824, or approximately 12.2%. For the year ended December 31, 2013, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts of $2,161,798 and $636,087, respectively. Fo r the year ended December 31, 2012, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $3,061,627 and $237,082, respectively. The decrease in depreciation and amortization expenses is due to Company made adjustments for depreciation and amortization expenses in the year ended December 31, 2012 .

(Loss) from operations.

As a result of the factors described above, operating loss was $(58,540,568) for the year ended December 31, 2013, compared to operating loss of $(500,733) for the year ended December 31, 2012, an increase of approximately $ 58,039,835 , or 11,591.0 %.

Other income and expenses.

Our interest expense was $ 5,246,606 for the year ended December 31, 2013, compared to $4,618,413 for the year ended December 31, 2012, reflecting increased interest payments on loans from banks. Other income, which consisted of government grants, was $ 819,970 for the year ended December 31, 2013, compared to $1,651,640 for the year ended December 31, 2012. Income from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $ 210,895 for the year ended December 31, 2013, compared to $(49,557) for the year ended December 31, 2012.

Income tax.

During the years ended December 31, 2013 and 2012, 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 $0, respectively, for 2013 and 2012 without consideration of adjustments on taxable income. The tax holiday is from 2008 through 2017.

Net (loss).

As a result of the factors described above, our net loss for the year ended December 31, 2013 was $ (61,878,880) , compared to net loss of $(3,561,515) for the year ended December 31, 2012, an increase of $ 58,317,365 , or 1,637.4 % for the reasons stated above.

Foreign currency translation.

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the year ended December 31, 2013 was $ 445,224 , compared to $1,039,383 for the year ended December 31, 2012, a decrease of $ 594,159 , or 57.2 %.

Preferred Stock Dividend.

Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010 until December 31, 2011. We incurred dividend expenses of $8,199 and $18,717 for the years ended December 31, 2013 and 2012, respectively. The expenses incurred in 2012 and 2013 reflect adjustments for under booked preferred dividend expenses .

Net income (loss) available to common stockholders.

Net loss available to our common stockholders was $ (61,887,079) , or $ (2.39) and $ (2.39) per share (basic and diluted), for the year ended December 31, 2013, compared to net loss of $(3,580,232), or $(0.15) and $(0.15) per share (basic and diluted), for the year ended December 31, 2012.

Liquidity and Capital Resources

Before December 31, 2013, all of our business operations were carried out by Xingyong. On December 23, 2013, the Company acquired new operations carried through BVI Co., and its subsidiaries Royal HK and Shanghai HK, whose operations have generated nominal revenues between December 23, 2013 to December 31, 2013. All of the cash generated by our operations has been held by our China entities. In order to transfer such cash to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada corporation, we would need to rely on dividends, loans or advances made by our PRC subsidiaries or VIE entity. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, Xingyong and Royal Shanghai would have to transfer funds to our parent entity through our wholly-owned subsidiaries, Talent, Yongle, and Royal Hong Kong, respectively.

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.

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 and to fund our construction in progress. Our primary sources of financing, outside of revenues generated by sales of our products, have been cash generated from short-term and long-term loans from banks in China, loans from unrelated parties and loans from related parties. Currently and for the last two fiscal years, the Company has managed to operate the business with a low or negative net working capital. The Company’s negative working capital is primarily due to substantial short-term loans from banks and borrowing from related parties and a substantial reduction in revenues generated by sales of our products. The Company is able to operate with a low or negative net working capital because of local bank, localcommunity and governmental support in Inner Mongolia. For example, the local Chinese government and the Company agreed on terms for the land use rights of 368,804 square meters of land located adjacent to the Company’s facilities, as described below under the heading “Summary of Significant Accounting Policies—Land Use Rights.”

We are currently undergoing new construction, including new buildings and equipment, in connection with the manufacturing of graphite products. Although the current market for our products is extremely weak, we expect the market to improve in the long run. The current budgeted investment for the construction of our new production facility was approximately $29.2 million in the aggregate. Approximately $29.0 million had been spent as of December 31, 2013. We have used proceeds from a long-term loan to fund this construction.

Some of our future business plans would likely require us to obtain additional financing from equity or debt markets, or borrow additional funds from local banks. 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.

As of December 31, 2013 and 2012, we had short-term loans in the aggregate amount of $40,636,305 and $38,680,500 outstanding, respectively, as described below.

	December 31, 2013		December 31, 2012

Bank loan from China Construction Bank, dated June 8, 2013, due June 8, 2014 with an annual interest rate of 6.6% payable monthly, secured by property, equipment, building and land use rights	$	6,607,529	$	-

Bank loan from China Construction Bank, dated August 6, 2013, due August 5, 2014 with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by property, equipment, building and land use rights.		6,607,529		6,420,000

Bank loan from China Construction Bank, dated August 22, 2013, due August 21, 2014 with an annual interest rate of 6.0%plus 10% floating rate and interst payable monthly, secured by property, equipment, building and land use rights.		6,607,529		6,420,000

Bank loan from China Construction Bank, dated March 20, 2013, due March 19, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on March 20, 2014, due March 20, 2015, with an annual interest rate of 6.0% plus 10% floating rate.		6,607,529		-

Bank loan from Huaxia Bank, dated November 16, 2012, due on November 15, 2013, with an annual interest rate of 7.80% payable quarterly, secured by building and land use rights. This loan was paid on November 15, 2013.		-		5,617,500

Bank loan from China Construction Bank, dated September 10, 2013, due September 9, 2014 with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by property, equipment, building and land use rights.		4,955,647		4,815,000

Bank loan from China Construction Bank, dated January 11, 2013, due January 10, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on January 10, 2014, due January 10, 2015, with an annual interest rate of 6.0% plus 10% floating rate.		4,955,647		-

Bank loan from China Construction Bank, dated September 17, 2013, due September 16, 2014, with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by property, equipment, building and land use rights.		4,294,894		4,173,000

Bank loan from China Construction Bank, dated June 6, 2012, due June 5, 2013 with an annual interest rate of 8.834% payable monthly, secured by property, equipment, building and land use rights		-		6,420,000

Bank loan from China Construction Bank, dated January 13, 2012, due January 12, 2013 and repaid, with an annual interest rate of 6.56% payable monthly, secured by property, equipment, building and land use rights		-		4,815,000
	$	40,636,305	$	38,680,500

In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $71 million (or RMB 430 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit , the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter. As of December 31, 2013, the unpaid principal balance drawn from the secured line of credit was $58.8 million, including $40.6 million of short-term bank loans as disclosed above and $18.2 million of long-term bank loans as disclosed below.

Each of these loans is renewable at the lender’s discretion. As of December 31, 2013, all land use rights and certain property and equipment were pledged as collateral for our short-term bank loans.

Interest expenses were $ 5,246,606 and $4,618,413 for the years ended December 31, 2013 and 2012, respectively.

The weighted average interest rates for these loans were 6.79% and 6.92% as of December 31, 2013 and 2012, respectively.

Capitalized interest were $1,108,403 and $0 for the years ended December 31, 2013 and 2012.

Long term bank loan:

	December 31, 2013		December 31, 2012

Bank loan from China Construction Bank, dated January 22, 2013, due in January 21, 2016, with an annual interest rate of 6.15%, payable monthly, secured by machinery.	$	11,563,176	$	-

Bank loan from China Construction Bank, dated July 2, 2013, due in July 1, 2016, with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by machinery.		6,607,529		-

Bank loan from Credit Union, dated April, 2012, due in April 2015, with an annual interest rate of 15.295% payable monthly, secured by machinery.		4,427,045		4,782,900
	$	22,597,750	$	4,782,900

Historically we have been able to renew 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. If a lender foreclosed on our land, the lender would acquire the land use rights to such land, which rights are currently held by us. In addition, because we did not pay for the land use rights that were granted to us with respect to a portion of our facilities, we are required to keep such property in good condition and to allocate a portion of the land as a park that can be accessed by the public. 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.

As of December 31, 2013 and December 31, 2012, notes payable consisted of the following:

	December 31, 2013

Notes payable from China Everbright Bank Co., Ltd, dated July 30, 2013, due January 30, 2014, and restricted cash required 50% of loan amount, paid back on January 30, 2014.	$	6,607,529

Notes payable from China Everbright Bank Co., Ltd, dated July 22, 2013, due January 22, 2014, and restricted cash required 50% of loan amount, paid back on January 22, 2014.		6,607,529

Notes payable from China Everbright Bank Co., Ltd, dated November 14, 2013, due May13, 2014, and restricted cash required 50% of loan amount		9,911,294

Notes payable from China Construction Bank, dated November 26, 2013, due May 26, 2014, and restricted cash required 50% of loan amount		7,103,094

Notes payable from China Construction Bank, dated September 03, 2013, due March 03, 2014, and restricted cash required 50% of loan amount, paid back on March 3, 2014.		4,955,647

Notes payable from Huaxia Bank, dated December 03, 2013, due June 03, 2014, and restricted cash required 60% of loan amount		8,589,788

Notes payable from Huaxia Bank, dated December 11, 2013, due June 11, 2014, and restricted cash required 0% of loan amount		4,129,706

Notes payable from Huaxia Bank, dated December 17, 2013, due June 17, 2014, and restricted cash required 60% of loan amount		4,129,706

Notes payable from Credit Union, dated December 27, 2013, due June 27, 2014, and restricted cash required 50% of loan amount		9,911,294

Notes payable from Bank of Inner Mongolia, dated August 16, 2013, due February 16, 2014, and restricted cash required 50% of loan amount, paid back on February 16, 2014.		6,607,529
	$	68,553,116

	December 31, 2012

Notes payable from China Everbright Bank Co., Ltd, dated July 30, 2012, due January 30, 2013, and restricted cash required 50% of loan amount	$	6,420,000

Notes payable from China Everbright Bank Co., Ltd, dated July 26, 2012, due January 26, 2013, and restricted cash required 50% of loan amount		6,420,000

Notes payable from China Everbright Bank Co., Ltd, dated September 30, 2012, due May 30, 2013, and restricted cash required 50% of loan amount		9,630,000

Notes payable from China Construction Bank, dated August 21, 2012, due February 20, 2013, and restricted cash required 60% of loan amount		4,815,000

Notes payable from China Construction Bank, dated November 23, 2012, due May 23, 2013, and restricted cash required 60% of loan amount		6,901,500

Notes payable from Huaxia Bank, dated November 27, 2012, due May 27, 2013, and restricted cash required 60% of loan amount		6,420,000
	$	40,606,500

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 and long-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. 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 generate sufficient business so that we are able 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 December 31, 2013, cash and cash equivalents were $131,545, compared to $129,746 at December 31, 2012, an increase of $1,799. Restricted cash increased to $35,643,666 as of December 31, 2013 from $22,149,000 as of December 31, 2012, which was restricted as a requirement by our lenders. Our working capital deficit increased by $47,192,707 to a deficit of $47,684,454 at December 31, 2013 from a deficit of $491,747 at December 31, 2012.

As of December 31, 2013, accounts receivable, net of allowance, was $4,488,310, compared to $11,239,002 at December 31, 2012, a decrease of $6,750,692, or 60.06%. The decrease was mainly due to decreased sales during the year ended December 31, 2013. 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 December 31, 2013.

As of December 31, 2013, inventories were $27,901,417, compared to $48,417,875 at December 31, 2012, a decrease of $20,516,458, or 42.37%. As of December 31, 2013 and December 31, 2012, the Company has provision for inventory in regards to slow moving or obsolete items of $21,089,248 and $0, respectively.

As of December 31, 2013, prepaid expenses were $528,464, compared to $280,779 at December 31, 2012, an increase of $247,685, or 88.21%. The increase in prepaid expenses is attributable to increased prepaid services during the quarter ended December 31, 2013 offset by the amortization of various prepaid consulting fees paid from stock issuances.

Advance to suppliers decreased from $1,177,462 at December 31, 2012 to $532,178 at December 31, 2013, a decrease of $645,284. The decrease of advance to suppliers is mainly due to the Company decreased purchases caused by decreased sales, and due to that the Company made more allowances for advance to suppliers in the year ended December 31, 2013 than the year ended December 31, 2012. $3,548,068 and $1,578,310 of allowance for doubtful accounts for the balance of advance to suppliers were reserved as of December 31, 2013 and December 31, 2012, respectively.

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 $40,606,500 to $68,553,116 from December 31, 2012 to December 31, 2013. The increase is due to the Company obtaining additional fund to secure its inventory. The notes payable were secured by $35,643,666 of restricted cash at December 31, 2013. 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.

Fiscal Year Ended December 31, 2013 Compared to Fiscal Year Ended December 31, 2012

The following table sets forth information about our net cash flow for the years indicated:

Cash Flows Data:
	For Year Ended December 31
	2013			2012
Net cash flows used in operating activities	$	(2,740,948	)	$	(4,934,906	)
Net cash flows used in investing activities	$	(29,184,458	)	$	(5,679,080	)
Net cash flows provided by financing activities	$	31,923,981		$	10,222,383

Net cash flow used in operating activities was $2,740,948 for the year ended December 31, 2013, compared to $4,934,906 for the year ended December 31, 2012, a decrease of $2,193,958, or 44.5%. The decrease in net cash flow used in operating activities was mainly due to increased impairment of property and equipment and construction in progress of $24.6 million, increased impairment of inventory of $21.1 million, more increase of other payables of $3.5 million ， increased bad debt expenses of $3.4 million, more decrease in accounts receivable of $2.5 million, and less payments made to acquire inventories of $10.6 million, which was offset by increased net loss of $58.3 million, more payments for advance to suppliers of $4.5 million, and increased accounts payable and accrued liabilities of $1.2 million.

Net cash flow used in investing activities was $29,184,458 for the year ended December 31, 2013, compared to $5,679,080 for the year ended December 31, 2012, an increase of $23,505,378 , or 413.9%. Approximately $0.07 million was spent on construction costs, $0.12 million was spent to acquire land use right, and $29.0 million was spent for construction in progress for our construction projects during the year ended December 31, 2013. Approximately $0.07 million was spent on construction costs and $5.6 million was spent for construction in progress for our new construction during the year ended December 31, 2012, including the installation of a 4200-ton compressor and 36 annular kilns.

Net cash flow provided by financing activities w as $31,923,981 for the year ended December 31, 2013, compared to $10,222,383 for the year ended December 31, 2012, an increase of $21,701,598, or 212.3%. The increase in net cash flow provided by financing activities was due to the decrease in repayments for short-term loans of $11.3 million, increased proceeds from notes payables of $60.4 million, and increased proceeds from long-term loans of $13.2 million entered into during the year ended December 31, 2013, which offset by a decrease in the amount of restricted cash of $2.6 million required to secure our notes payable, increased repayment of notes payable of $57.3 million, decreased proceeds from short-term loans of $2.9 million, and increased proceeds of loans to unrelated parties of $2.3 million. The Company had approximately $26.3 million of notes payable for the year ended December 31, 2013, compared to $23.2 million for the year ended December 31, 2012. In addition, the aggregate amount of outstanding short-term loans borrowed and repaid increased for the year ended December 31, 2013. The Company borrowed $40.0 million in short-term bank loans and repaid $39.1 million during the year ended December 31, 2013, whil e the Company borrowed $42.9 million in short-term bank loans and repaid $50.5 million for the year ended December 31, 2012.

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 year ended December 31, 2013, two customers accounted for 10% or more of sales revenues, representin g 37.0% and 18.5%, respectively of the total sales. For the year ended December 31, 2012, two customers accounted for 10% or more of sales revenues, representing 33.1% and 27.8%, respectively of the total sales. As of December 31, 2013, there were two customers that constituted 40.8% and 11.7% of the accounts receivable. As of December 31, 2012, there were three customers that constituted 42.2%, 16.5% and 10.3% of the accounts receivable.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Significant Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an ongoing basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.

In accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

The Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the years ended December 31, 2013 and 2012.

Comprehensive Income

We have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.

Income Taxes

We account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Effective January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation of this law gradually become subject to the new tax rate within five years after the implementation of this law.

We have been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. The Xing He District Local Tax Authority in the Nei Mongol province granted us a 100% tax holiday with respect to enterprise income tax for ten years from 2008 through 2017. Afterwards, based on the present tax law and our status as a qualified high technology and science company, we will be subject to a corporate income tax rate of 15% effective in 2018.

Accounts Receivable and Allowance For Doubtful Accounts

Accounts receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted to $6,999,753 for the year ended December 31, 2013. Management believes that this allowance is sufficient based on a review of customer credit history, historic payment records, aging, the market and other factors.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. For the years ended December 31, 2013 and 2012 the Company has provision for impairment of inventory in regards to slow moving or obsolete items of $21,089,248 and $0, respectively.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets after taking into account the estimated residual value. The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair va lue of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment, $19,426,726 and $0 of impairment expenses for property, plant, and equipment recorded in operating expenses as of December 31, 2013 and 2012, respectively.

Land Use Rights

There is no private ownership of land in China. All land ownership is held by the government, its agencies and collectives. Land use rights are obtained from the government, and are typically renewable. Land use rights can be transferred upon approval by State Land Administration Bureau and payment of the required transfer fee. We record the property subject to land use rights as intangible asset.

The Company has land use rights of 368,804 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 112,171 square meters expiring in 2052 and the land use right with respect to 256,634 square meters expiring in 2053. In addition, in 2010, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities. The Company was not required to sign a land use right agreement or pay a fee. In exchange, the Company will allow public use of this 387,838 square meters of land and keep the land in good condition. The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000. The Company has not accrued the liability or recorded the land use right asset for this property in accordance with ASC 450, Contingencies. Because of our current relationship and agreement with the local government to keep the land in good condition, we believe that it is unlikely that we will have to pay for the land use right. The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans. We believe that our facilities are sufficient to meet our current and near future requirements and that any additional space that we may require would be available on commercially reasonable terms.

Each intangible asset is reviewed periodically or more often if circumstances dictate, to determine whether its carrying value has become impaired. We consider assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. We also re-evaluate the amortization periods to determine whether subsequent events and circumstances warrant revised estimates of useful lives.

Research and Development

Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of the cost of material used and salaries paid for the development of our products and fees paid to third parties. Our research and development expense for the years ended December 31, 2013 and 2012 has not been significant.

Value Added Tax

Pursuant to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice of the PRC, the Company paid VAT and business tax based on tax invoices issued.

The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes that are determined to be late or deficient. In the event that a tax penalty is assessed on late or deficient payments, the penalty will be expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due.

Fair Value of Financial Instruments

On January 1, 2008, the Company began recording financial assets and liabilities subject to recurring fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. On January 1, 2009, the Company began recording non-recurring financial as well as all non-financial assets and liabilities subject to fair value measurement under the same principles. These fair value principles prioritize valuation inputs across three broad levels. The three levels are defined as follows:

●

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

●

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

●

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

The carrying amounts of financial assets and liabilities, including cash and cash equivalents, accounts receivable, notes receivable, advances to suppliers, other receivables, short-term bank loans, notes payable, accounts payable, advances from customers and other payables, approximate their fair values because of the short maturity period for these instruments.

The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of December 31, 2013:

	Carrying Value at December 31 ,		Fair Value Measurement at December 31 , 2013
	2013		Level 1		Level 2		Level 3
Warrant liability	$	13,467		-		-	$	13,467
Notes payable	$	68,553,116		-	$	68,553,116		-

	Carrying Value at December 31,		Fair Value Measurement at December 31, 2012
	2012		Level 1		Level 2		Level 3
Warrant liability	$	224,362		-		-	$	224,362
Notes payable	$	40,606,500		-	$	40,606,500		-

Please see Note 3 contained in the Notes to the Consolidated Financial Statements for a description of our warrant liability for the years ended December 31, 2013 and 2012.

The Company did not identify any other non-recurring assets and liabilities that are required to be presented on the balance sheet at fair value.

Stock-based Compensation

Stock-based compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB ASC 718, Compensation–Stock Compensation, and (ii) common stock awards granted to consultants which are accounted for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.

All grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge to additional paid-in capital.

Common stock awards are granted to directors for services provided.

Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service. The Company did not make significant grants to consultants for any of the periods presented.

The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.

Stock compensation expenses of $112,664 and $258,500 of were amortized and recognized as general and administrative expenses for the years ended December 31, 2013 and 2012, respectively.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.

FASB Accounting Standards Update No. 2013-02

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income 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 accumulated other comprehensive income 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. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.

FASB Accounting Standards Update No. 2013-04

The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.

FASB Accounting Standards Update No. 2013-11

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carry forward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carry forward in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s financial position and results of operations.

FASB Accounting Standards Update No. 2013-12

In December 2013, the FASB issued ASU 2013-12, “Definition of a Public Business Entity”. The Board has decided that it should proactively determine which entities would be within the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (Guide). This will aim to minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice as to what constitutes, a nonpublic entity and public entity within U.S. generally accepted accounting principles (GAAP) on a going-forward basis. This Update addresses those issues by defining public business entity. The Accounting Standards Codification includes multiple definitions of the terms nonpublic entity and public entity. The amendment in this Update improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance. The amendment does not affect existing requirements. There is no actual effective date for the amendment in this Update. However, the term public business entity will be used in Accounting Standards Updates which are the first Updates that will use the term public business entity. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk.

Not applicable to smaller reporting companies.

ITEM 8.

Financial Statements and Supplementary Data.

China Carbon Graphite Group, Inc.

Index to Consolidated Financial Statements

	Page

Report of Independent Registered Public Accounting Firms	F2
Consolidated Financial Statements
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations and Comprehensive Income	F-4
Consolidated Statements of Cash Flows	F-5
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity	F-6
Notes to Consolidated Financial Statements	F-7 – F-39

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of:

China Carbon Graphite Group, Inc.

We have audited the accompanying consolidated balance sheets of China Carbon Graphite Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income, changes in redeemable convertible preferred stock and stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Carbon Graphite Group, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 of the consolidated financial statements, the Company has incurred significant negative cash flows from operative activities, and continuing net losses and working capital deficits. The Company’s viability is dependent upon its ability to obtain future financing and the success of its future operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KCCW Accountancy Corp.

Diamond Bar, California

April 15, 2014

KCCW Accountancy Corp.

22632 Golden Springs Dr. #230, Diamond Bar, CA 91765, USA

Tel: +1 909 348 7228 • Fax: +1 626 529 1580 • info@kccwcpa.com

F-2

China Carbon Graphite Group, Inc.and subsidiaries
Consolidated Balance Sheets

	December 31, 2013			December 31, 2012
	(Audited)			(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	131,545		$	129,746
Restricted cash		35,643,666			22,149,000
Accounts receivable, Net		4,488,310			11,239,002
Advance to suppliers		532,178			1,177,462
Inventories		27,901,417			48,417,875
Prepaid expenses		528,464			280,779
Other receivables, net of allowance of $296,628 and $220,339, respectively		194,988			35,655
Total current assets		69,420,568			83,429,519

Goodwill		494,540			-

Property And Equipment, Net		20,027,083			40,964,363

Construction In Progress		31,747,010			7,324,379

Land Use Rights, Net		9,633,302			9,657,419
Total Assets	$	131,322,503		$	141,375,680

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	2,332,861		$	2,250,745
Advance from customers		2,133,458			1,368,525
Shares to be issued		370,000			-
Short term bank loans		40,636,305			38,680,500
Notes payable		68,553,116			40,606,500
Other payables		2,755,529			630,179
Loan from unrelated parties		268,738			338,002
Dividends payable		55,015			46,816
Total current liabilities		117,105,022			83,921,267

Amount due to related parties		5,157,112			4,795,593
Long Term Bank Loan		22,597,750			4,782,900
Accounts Payable - Long Term		-
Warrant Liabilities		13,467			224,362
Total Liabilities		144,873,351			93,724,122

Redeemable convertible series B preferred stock, $0.001 par value; 3,000,000 shares authorized; 300,000 and 300,000 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively.		270,000			360,000
Stockholders' Equity
Common stock, $0.001 par value; 100,000,000 shares authorized 26,342,518 and 25,077,518 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively		26,342			25,077
Additional paid-in capital		18,551,966			18,223,781
Accumulated other comprehensive income		9,428,149			8,982,925
Retained earnings		(41,827,304	)		20,059,775
Total stockholders' equity		(13,820,847	)		47,291,558
Total Liabilities and Stockholders' Equity	$	131,322,503		$	141,375,680

The accompanying notes are an integral part of these consolidated financial statements.

F-3

Consolidated Statements of Operations and Comprehensive Income
For the Years Ended December 31, 2013 and 2012

		Years ended December 31,
		2013			2012

Sales		$	9,526,709		$	31,482,852

Cost of Goods Sold			32,689,538			24,707,625

Gross (Loss) Profit			(23,162,829	)		6,775,227

Operating Expenses
	Selling expenses		59,626			253,604
	General and administrative		10,075,818			6,785,273
	Impairment of property and equipment and construction in progress		24,606,208			-
	Depreciation and amortization		636,087			237,082
Total operating expenses			35,377,739			7,275,959

Operating Loss Before Other Income (Expense)			(58,540,568	)		(500,732	)

Other Income (Expense)
	Interest expense		(5,246,606	)		(4,618,413	)
	Interest income		877,429			312,617
	Other expense		-			(357,070	)
	Other income (expense), net		819,970			1,651,640
	Change in fair value of warrants		210,895			(49,557	)
Total other expense (income), net			3,338,312			(3,060,783	)

Loss Before Income Tax Expense			(61,878,880	)		(3,561,515	)

Income Tax Expense			-			-

Net Loss			(61,878,880	)		(3,561,515	)

Preferred Stock Dividends			(8,199	)		(18,717	)

Net Loss Available To Common Shareholders			(61,887,079	)		(3,580,232	)

Other Comprehensive Income
	Foreign currency translation gain		445,224			1,039,383
Total Comprehensive Loss		$	(61,433,655	)	$	(2,522,132	)

Share Data
	Basic (loss) per share	$	(2.39	)	$	(0.15	)

	Diluted (loss) per share	$	(2.39	)	$	(0.15	)

	Weighted average common shares outstanding,
	basic		25,903,011			24,018,450

	Weighted average common shares outstanding,
	diluted		25,903,011			24,018,450

The accompanying notes are an integral part of these consolidated financial statements.

F-4

China Carbon Graphite Group, Inc and subsidiaries

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity

	Convertible series B						Common				Additional					Other		Total
	preferred Stock						Stock				Paid-In		Retained			Comprehensive		Stockholders'			Comprehensive
	Number			Amount			Number		Amount		Capital		Earnings			Income		Equity			Income

Balance at December 31, 2011		426,110		$	511,332			22,981,408	$	22,981	$	17,054,045	$	23,640,007		$	7,943,542	$	48,660,574		-

Conversion of series B stock to common stock		(126,110	)		(151,332	)		126,110		126		151,206		-			-		151,332		-

Issuance of common stock for directors and an employee		-			-			160,000		160		63,840		-			-		64,000		-

Issuance of common stock for consulting service		-			-			310,000		310		194,190		-			-		194,500		-

Issuance of common stock for cash		-			-			1,500,000		1,500		760,500		-			-		762,000		-

Net loss		-			-			-		-		-		(3,561,515	)		-		(3,561,515	)		(3,561,515	)

Related party interest expenses		-			-			-		-		-		-			-		-			-

Foreign currency translation adjustment		-			-			-		-		-		-			1,039,383		1,039,383			1,039,383

Dividend distribution		-			-			-		-		-		(18,717	)		-		(18,717	)		(18,717	)

Total comprehensive income		-			-			-		-		-		-			-		-			(2,540,849	)

Balance at December 31, 2012		300,000			360,000			25,077,518		25,077		18,223,781		20,059,775			8,982,925		47,291,558

Return of series B stock Principal		-			(90,000	)		-		-		-		-			-		-			-

Issuance of common stock for directors and an employee		-			-			1,025,000		1,025		255,225		-			-		256,250			-

Issuance of common stock for consulting service		-			-			240,000		240		72,960		-			-		73,200			-

Issuance of common stock for cash		-			-					-		-		-			-		-			-

Net loss available to common shareholders		-			-			-		-		-		(61,887,079	)		-		(61,887,079	)		(61,887,079	)

Foreign currency translation adjustment		-			-			-		-				-			445,224		445,224			445,224

Total comprehensive income																					$	(61,441,854	)

Balance at December 31, 2013		300,000		$	270,000			26,342,518	$	26,342	$	18,551,966	$	(41,827,304	)	$	9,428,149	$	(13,820,846	)

The accompanying notes are an integral part of these consolidated financial statements.

F-5

China Carbon Graphite Group, Inc and subsidiaries
Consolidated Statements of Cash Flows

	Years ended December 31,
	2013			2012
Cash Flows from Operating Activities
Net Loss	$	(61,878,880	)	$	(3,561,515	)
Adjustments to reconcile net cash used in operating activities
Depreciation and Amortization		2,897,885			3,298,709
Related party interest expenses contribution		-			-
Stock compensation		222,650			258,500
Change in fair value of warrants		(210,895	)		49,557
Bad debt expenses		4,930,938			1,558,643
Impairment of property and equipment and construction in progress		24,606,208			-
Inventory impairment		21,089,248			-
Changes in operating assets and liabilities
Accounts receivable		4,001,817			1,530,015
Notes receivable		-			(443,800	)
Other receivables		(59,001	)		481,374
Advance to suppliers		(1,215,623	)		3,241,924
Inventory		504,162			(10,122,706	)
Prepaid expenses		(222,954	)		174,686
Accounts payable and accrued liabilities		(210,099	)		1,036,477
Advance from customers		713,792			(19,028	)
Loan from unrelated parties		-			333,790
Taxes payable		249,000			(1,118,582	)
Other payables		1,840,804			(1,632,950	)
Net cash used in operating activities		(2,740,948	)		(4,934,906	)

Cash flows from investing activities
Acquisition of property, plant and equipment		(65,005	)		(65,945	)
Cash received in acquisition of business		12,816			-
Increase of land use rights		(116,974	)		(15,850	)
Addition of construction in progress		(29,015,295	)		(5,597,285	)
Net cash used in investing activities		(29,184,458	)		(5,679,080	)

Cash flows from financing activities
Proceeds from issuing common stock		-			762,000
Proceeds from short term loans		40,010,409			42,921,800
Repayments for short term loans		(39,197,190	)		(50,529,800	)
Proceeds from long term loans		17,890,833			4,723,300
Repayments of long term loans		(487,932	)		-
Proceeds from loan from unrelated parties		9,113,242			11,413,937
Repayment of loans to unrelated parties		(9,191,161	)		(11,186,898	)
Proceeds from loan from related parties		143,215			827,370
Repayments to related parties		(55,948	)		(1,673,126	)
Proceeds from stock not yet issued		-			(160,000	)
Restrict cash		(12,649,805	)		(10,096,450	)
Proceeds from notes payable		118,404,788			58,011,000
Repayments to notes payable		(92,056,470	)		(34,790,750	)
Net cash provided by financing activities		31,923,981			10,222,383

Effect of exchange rate fluctuation		3,224			(101	)

Net increase (decrease) in cash		1,799			(391,704	)

Cash and cash equivalents at beginning of period		129,746			521,450

Cash and cash equivalents at ending of period	$	131,545		$	129,746

Supplemental disclosure of cash flow information

Interest paid	$	5,835,427		$	4,199,529
Income taxes paid	$	-		$	-

Non-cash activities:

Preferred stock conversion to common stock	$	-		$	151

Issuance of common stock for compensation	$	329,450		$	258,500

Reclassification from construction in progress to property and equipment	$	-		$	5,457,854

Reclassification from notes payable to construction in progress	$	-		$	634,000

The accompanying notes are an integral part of these consolidated financial statements.

F-6

China Carbon Graphite Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2013 and 2012

(1) Organization and Business

China Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture of graphite-based products and in operating a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) in the People’s Republic of China (“China” or the “PRC”). The Company’s 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. The Company manufactures and sells three types of products throughout China and internationally: graphite electrodes; fine grain graphite; and high purity graphite.

The Company was incorporated on February 13, 2003 in Nevada under the name Achievers Magazine Inc. In connection with the reverse merger transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January 30, 2008.

On December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement with Sincere Investment (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation. Sincere was the sole stockholder of Talent International Investment Limited (“Talent”), a British Virgin Islands corporation, which is the sole stockholder of XingheYongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the PRC. Pursuant to the share exchange agreement, the Company issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding on stock of Talent, and Talent became a wholly-owned subsidiary of the Company. Upon completion of the reverse merger, the Company’s business became the business of Talent, its subsidiaries and its affiliated variable interest entities.

Talent owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise organized under the laws of the PRC. Yongle is party to a series of contractual agreements with XingheXingyong Carbon Co., Ltd. (“Xingyong”), a corporation organized under the laws of the PRC. These agreements allow the Company to operate its business in the PRC and to control the management of Xingyong and receive economic remuneration from Xingyong’s business. Xingyong’s principal stockholder is Mr. Denyong Jin, the General Manager of the Company’s China operations. As a result, Xingyong is a variable interest entity and the operations of Xingyong are consolidated with those of the Company for financial reporting purposes.

Acquisition in December 2013

On December 23, 2013, the Company acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”) by entering into an agreement. Per the agreement, the Company is obligated to issue 5,000,000 of common stock, par value $0.001 per share, to shareholders of BVI Co. in the aggregate in exchange for 500 ordinary shares of BVI Co. held by them, representing 100% of BVI Co.’s issued and outstanding share capital. BVI Co. then becomes a wholly owned subsidiary of the Company.

F-7

BVI Co. currently has two business operations, as follows (collectively the “Business”):

●

Manufacture of graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin films and chips. Graphite bipolar plates are primarily used in solar power storage.

●

A business-to-business and business-to-consumers Internet portal ( http:// www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

The Business and the facilities related thereto are all located in the People’s Republic of China. The Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited, a Hong Kong company, (“Royal HK”), which is wholly owned by BVI Co. The Business currently generates minimal sales.

The relationship among the above companies is as follows:

Variable Interest Entity

Accounting Standard Codification (“ASC”) 810-10-45-25 calls for balance sheet disclosure of (a) assets of a consolidated variable interest entity (VIE) that can be used only to settle obligations of the consolidated VIE, and (b) liabilities of a consolidated VIE for which creditors (or beneficial interest owners) do not have recourse to the general credit of the primary beneficiary. The entire operating business of the Company is conducted by Xingyong and the consolidated balance sheet of the Company reflects Xingyong’s balance sheet. There are no such assets or liabilities on the balance sheet of Xingyong. The Operating Agreement dated December 7, 2007 provides that Yongle is a full-recourse guarantor of all obligations of Xingyong, and Xingyong has pledged all of its assets to Yongle. The Consulting Agreement of that date includes an assignment of all of the revenues of Xingyong to Yongle. Yongle is 100% owned by Talent and Talent is 100% owned by the Company. Accordingly, there are no assets or liabilities of Xingyong that in which the Company does not share.

F-8

The consolidated financial statements presented herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries, Talent, Yongle, BVI Co., Royal Hongkong and Royal Shanghai. Also consolidated are the financial statements of Xingyong. The financial statements of Xingyong are consolidated with our financial statements because Xingyong is a variable interest entity. Before December 23, 2013, the entire operating business operations of the Company were located in Xingyong. The Company acquired BVI Co., and its subsidiaries of RoalHongkong and Royal Shanghai on December 23, 2013. BVI Co. and its subsidiaries have had minimal operations from acquisition date to December 31, 2013. Therefore the financial position and results of operations and cash flows of the Company are significantly influenced by the results of Xingyong, the VIE. Talent is a party to four agreements dated December 7, 2007 with the owners of the registered equity of Xingyong. The agreements transfer to Talent benefits and all of the risk arising from the operations of Xingyong, as well as complete managerial authority over the operations of Xingyong.

The following paragraphs briefly describe the key provisions of each contractual agreement that prescribes the Company’s relationship with Xingyong:

Exclusive Technical Consulting and Services Agreement . Technical consulting and services agreement entered into on December 7, 2007 between Yongle and Xingyong, pursuant to which Yongle has agreed to provide technical and consulting services related to the business operations of Xingyong. As consideration for such services, Xingyong has agreed to pay to Yongle a service fee equal to 80% to 100% of the profits of Xingyong. The exact fee is calculated and paid on a quarterly basis, and is determined based on a number of factors, including but not limited to the complexity of the services provided and the commercial value of the services provided. The exclusive technical consulting and services agreement has a 10 year term. Yongle may extend the term of such agreement. The parties may terminate the agreement, prior to its expiration, upon the mutual consent of Yongle and Xingyong.

Option Agreement . Yongle entered into an option agreement on December 7, 2007 with Xingyong and each of the shareholders of Xingyong, pursuant to which Yongle has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Xingyong owned by the shareholders of Xingyong. To the extent permitted by the PRC laws, the purchase price for the entire equity interest shall equal the actual price designated by Yongle to the extent permitted by relevant laws and regulations. The option agreement has a 10 year term. Upon the request of Yongle, the parties shall extend the term of the option agreement.

F-9

Because the relationship between Xingyong and Yongle is entirely contractual, the Company’s interest in Xingyong depends on the enforceability of those agreements under the laws of the PRC. The Company is not aware of any judicial decision as to the enforceability of similar agreements under PRC law. However, since the owner of the registered equity of Xingyong is Mr. Jin, the Company’s major shareholder and General Manager, the Company does not believe that there is a significant risk that Xingyong will seek to terminate the relationship or otherwise breach the agreements. Accordingly, the Company believes that consolidation of the financial statements of Xingyong with those of the Company is appropriate. The shareholders of Xingyong do not have any kick-back rights.

Recently, with consideration of going concern of Xingyong, management has been contemplating an exit from Xingyong. As of the date of this report, however, no definitive agreement has been entered into in connection therewith.

Liquidity and Working Capital Deficit

Currently and for the last two fiscal years, the Company has managed to operate the business with a low working capital. The Company’s low working capital is primarily due to substantial short-term and long-term loans from banks and borrowing from a related party. The Company is able to operate with a low working capital because of local community and governmental support in Inner Mongolia. If the Company’s short-term cash flows decrease significantly and the Company is unable to pay its short-term liabilities, the Company’s business, financial condition and results of operations could be materially affected.

The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:

1.	10% of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.

2.	If the cumulative balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.

3.	Allocation can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.

Therefore, the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The maximum amount of the shareholders has not been reached. The Company has never distributed earnings to shareholders and has no intentions to do so.

F-10

(2) Going Concern

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the year ended December 31, 2013, the Company has incurred significant operating losses, working capital deficit, and negative net cash flows from operating activities. T he Company’s sales revenue declined significantly for the period ended December 31, 2013 as compared to the prior year, and demand for the Company’s products remains highly uncertain. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s Plan to Continue as a Going Concern

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.

(3) Basis for Preparation of the Financial Statements

The Company maintains its books and accounting records in Renminbi (“RMB”), but its reporting currency is U.S. dollars.

The consolidated financial statements have been prepared in order to present the financial position and results of operations of the Company, its subsidiaries and Xingyong, a variable interest entity whose financial condition is consolidated with the Company pursuant to ASC Topic 810-10, Consolidation, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated.

F-11

(4) Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.

Business Combinations

The Company uses the acquisition method of accounting for business combinations which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective fair values. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of acquired business are reflected in the acquirer’s consolidated financial statements and results of operations after the date of the acquisition.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.

Use of estimates

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting period. Some of the significant estimates include values and lives assigned to acquired property, equipment and intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and stock warrant valuation. Actual results may differ from these estimates.

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with maturity periods of three months or less to be cash equivalents. The carrying amounts reported in the accompanying balance sheet for cash and cash equivalents approximate their fair value. Most of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. The Company’s bank account in the United States is protected by FDIC insurance.

F-12

Restricted cash

Restricted cash represents amounts held by a bank as security for short-term bank notes payable and therefore is subject to withdrawal restrictions. As of December 31, 2013 and December 31, 2012, these amounts totaled $35,643,666 and $22,149 ,000, respectively. The restricted cash is expected to be released within the next twelve months after the bank notes have matured. Upon release the restricted cash will be used to repay the liabilities or as security for new debt.

Accounts receivable

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the weighted average method. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.

For the year ended December 31, 2013, the Company recorded impairment loss of inventory $21,089,248. For the year ended December 31, 2012, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion.

Property and equipment

Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:

Buildings	25 - 40 years
Machinery and equipment	10 - 20 years
Motor vehicles	5 years

F-13

Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $19,426,726 and $0 of impairment expenses for property, plant, and equipment were recorded in operating expenses for the years ended December 31, 2013 and 2012, respectively.

Construction in progress

Construction in progress represents the costs incurred in connection with the construction of buildings or additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service. The Company capitalized interest expenses of $1,108,403 and $0 for the years ended at December 31, 2013 and 2012, respectively.

The Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $5,179,481 and $0 of impairment expenses for construction in progress were recorded in operating expenses for the years ended December 31, 2013 and 2012, respectively.

Land use rights

The Company has land use rights of 368,804 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 112,171 square meters expiring in 2052 and the land use right with respect to 256,634 square meters expiring in 2053. In addition, in 2010, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities. The Company was not required to sign a land use right agreement or pay a fee. In exchange, the Company will allow public use of this 387,838 square meters of land, provide improvements to the land and keep the land in good condition. The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000. The Company has not accrued the liability or recorded the land use right asset for this property in accordance with ASC 450, Contingencies. Because of the relationship and agreement with the local government to keep provide improvements to the land and keep it in good condition, the Company believes that it is unlikely to have to pay for the land use right. The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans.

The Company reviews the carrying value of land use rights for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment of land use rights was deemed necessary for the years ended December 31, 2013 and 2012, respectively.

F-14

Stock-based compensation

Stock-based compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB ASC 718, Compensation–Stock Compensation” and (ii) common stock awards granted to consultants which are accounted for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.

Common stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued are recorded in common stock to be issued.

The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.

Foreign currency translation

The reporting currency of the Company is the U.S. dollars. The Company uses RMB as its functional currency. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the years ended December 31, 2013 and 2012 were $445,224 and $1,039,383, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the years ended December 31, 2013 and 2012 were $3,224 and $(101), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

F-15

Assets and liabilities were translated at 6.05 RMB and 6.23 RMB to $1.00 at December 31, 2013 and December 31, 2012, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the years ended December 31, 2013 and 2012 were 6.15 RMB and 6.31 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Revenue recognition

The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced returns of $79,961 and $0 for the years ended December 31, 2013 and 2012.

Cost of goods sold

Cost of goods sold consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead associated with the manufacturing process and commission expenses.

F-16

Shipping and handling costs

The Company follows ASC 605-45, Handling Costs, and Shipping Costs, formerly known as Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company classifies shipping and handling costs paid on behalf of its customers in selling expenses. For the years ended December 31, 2013 and 2012, shipping and handling costs were $11,381 and $164,220 , respectively.

Segment reporting

ASC 280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company.

Because the Company sells only carbon graphite products to Chinese distributors and end users, it has only one business segment.

Taxation

Taxation on profits earned in the PRC has been calculated based on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed in the county of operations.

The Company does not accrue U.S. income tax since it has no operations in the United States. Its operating subsidiaries are organized and located in the PRC and do not conduct any business in the United States.

In 2006, the Financial Accounting Standards Board (“FASB”) issued ASC, 740 Income Tax, formerly known as FIN 48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.

The Company recognizes that virtually all tax positions in the PRC are not free from some degree of uncertainty due to tax law and policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2013 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of December 31, 2013, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions, including the Enterprise Income Tax holiday from Xing He District Local Tax Authority, for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

F-17

Enterprise income tax

The Company has been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. Therefore, Xing He District Local Tax Authority in the Nei Mongol province granted the Company a 100% tax holiday from the enterprise income tax for 10 years from 2008 through 2017. When the tax holiday ends, based on the present tax law and the Company’s status as a high technology and science company, the Company will be subject to a corporate income tax rate of 15% effective in 2018.

The enterprise income tax is calculated on the basis of the statutory profit as defined in the PRC tax laws. This statutory profit is computed differently than the Company’s net income under U.S. GAAP.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Value added tax

The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. VAT payable (recoverable), which is included in other payables, was $124,097 and $(79,346) as of December 31, 2013 and 2012, respectively.

F-18

Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company will incur it.

A contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit. When the benefit is virtually certain, the asset is recognized.

Retirement benefit costs

According to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal government in the province in which the Company is registered and all qualified employees are eligible to participate in the program. Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for the payment of retirement benefits beyond the annual contributions under this program.

Fair value of financial instruments

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

●

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

●

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

●

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

F-19

The fair value of the 2009 Warrants to purchase 200,000 shares of common stock was $808 and $31,717 at December 31, 2013 and December 31, 2012, respectively. The Company recognized a gain of $8,011 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $14,868 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $6,675 from the change in fair value of these warrants for the three months ended September 30, 2013and a gain of $1,355 from the change in fair value of these warrants for the three months ended December 31, 2013.

The fair value of the 2009 Series B Warrants to purchase 804,200 shares of common stock was $11,106 and $170,947 at December 31, 2013, and December 31, 2012, respectively. The Company recognized a gain of $32,362 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $76,800 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $41,075 from the change in fair value of these warrants for the three months ended September 30, 2013and a gain of $9,604from the change in fair value of these warrants for the three months ended December 31, 2013.

The fair value of 2010 Series B warrants to purchase 100,000 shares of common stock was $1,553 and $21,698 at December 31, 2013 and December 31, 2012, respectively. The Company recognized a gain of $3,996 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $9,672 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $5,247 from the change in fair value of these warrants for the three months ended September 30, 2013and a gain of $1,231 from the change in fair value of these warrants for the three months ended December 31, 2013.

In summary, the Company recorded a total amount of $210,895 of changes in fair value of warrants in the Consolidate statement of income and comprehensive income for the year ended December 31, 2013. Each reporting period, the change in fair value is recorded into other income (expense).

F-20

Warrants referred to in the preceding paragraphs do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	December 31, 2013			December 31, 2012
2007 Warrants
Annual dividend yield		-			-
Expected life (years)		-			0.04
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		152	%		146	%

	December 31, 2013			December 31, 2012
2009 Warrants
Annual dividend yield		-			-
Expected life (years)		0.71			1.71
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		152	%		146	%

	December 31, 2013			December 31, 2012
2009 Series B Warrants
Annual dividend yield		-			-
Expected life (years)		0.98			1.98
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		152	%		146	%

	December 31, 2013			December 31, 2012
2010 Series B Warrants
Annual dividend yield		-			-
Expected life (years)		1.03			2.03
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		152	%		146	%

The carrying amount of restricted cash, other receivables, advance to vendors, advances from customers, other payables, accrued liabilities and short-term loans are reasonable estimates of their fair value because of the short term nature of these items.

The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was accounted for at fair value on a recurring basis or for purposes of disclosures as of December 31, 2013:

	Carrying Value at December		Fair Value Measurement at December 31, 2013
	31, 2013		Level 1		Level 2		Level 3
Warrant liability	$	13,467		-		-	$	13,467
Notes payable	$	68,553,116		-	$	68,553,116		-

F-21

	Carrying Value at December 31,		Fair Value Measurement at December 31, 2012
	2012		Level 1		Level 2		Level 3
Warrant liability	$	224,362		-		-	$	224,362
Notes payable	$	40,606,500		-	$	40,606,500		-

The Company uses the black-scholes valuation method approach when determining fair values of its Level 3 recurring fair value measurements. Certain unobservable units for these assets are offered quotes, lack of marketability and volatility. For Level 3 measurements, significant increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair value measurement. In general, a significant change in the calculated volatility of the Company’s stock price could negatively affect the fair value of the warrant liability.

Summary of warrants outstanding:

	Warrants		Weighted Average Exercise Price
Outstanding as of December 31, 2012		1,229,200	$	1.51
Granted		-		-
Exercised		-		-
Cancelled		-		-
Outstanding as of December 31, 2013		1,229,200	$	1.51

Earnings (loss) per share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants. The Company has outstanding warrants to purchase 1,229,200 shares of common stock at an exercise price in the range of $1.30 - $2.00 per share. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.

F-22

The following table sets forth the computation of the number of net income per share for the years ended December 31, 2013 and 2012:

	December 31, 2013			December 31, 2012
Weighted average shares of common stock outstanding (basic)		25,903,011			24,018,450
Shares issuable upon conversion of Series B Preferred Stock		-			-
Weighted average shares of common stock outstanding (diluted)		25,903,011			24,018,450
Net loss available to common shareholders	$	(61,887,079	)	$	( 3,580,232	)
Net loss per shares of common stock (basic)	$	(2.39	)	$	(0.15	)
Net loss per shares of common stock (diluted)	$	(2.39	)	$	(0.15	)

For the year ended December 31, 2013, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.

For the year ended December 31, 2013, the Company excluded 1,229,200 shares of common stock issuable upon exercise of warrants, because such issuance would be anti-dilutive.

Accumulated other comprehensive income

The Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the years ended December 31, 2013 and 2012 included net income and foreign currency translation adjustments.

Related parties

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions with related parties are disclosed in the financial statements.

Recent accounting pronouncements

F-23

FASB Accounting Standards Update No. 2013-02

FASB Accounting Standards Update No. 2013-04

FASB Accounting Standards Update No. 2013-11

FASB Accounting Standards Update No. 2013-12

F-24

(5) Concentration of Business and Credit Risk

For the years ended December 31, 2013 and 2012, the Company had insurance expense of $20,652 and $47,515 respectively. Accrual for losses is not recognized until such time as a loss has occurred.

(6) Income Taxes

Under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC, which took effect on January 1, 2008, domestic and foreign companies pay a unified corporate income tax of 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises.

The Company has been granted a 100% tax holiday from enterprise income tax from the Xing He District Local Tax Authority for 10 years from 2008 through 2017.

F-25

A reconciliation of the provision for income taxes with amounts determined by the PRC statutory income tax rate to income before income taxes is as follows:

	December 31,
	2013		2012
Computed tax at the PRC statutory rate of 25%	$	-	$	-
Benefit of tax holiday		-		-
Income tax expenses per books	$	-	$	-

(7) Accounts Receivable, net

The Company establishes an individualized credit and collection policy based on each individual customer’s credit history. The Company does not have a uniform policy that applies equally to all customers. The collection period usually ranges from three months to twelve months. The Company grants extended payment terms only when the Company believes that the payment will be collectible at the end of the term. The Company grants extended payment terms to customers if based on the following factors: (a) whether or not the Company views a real need, from the customer’s perspective, for the extension and (b) how critical the Company’s relationship with the customer and is the customer the Company’s long-term business. The Company grants extended payment terms only when the Company believes that the payment will be collectible at the end of the term. This meets the criteria of revenue recognition under U.S. GAAP, which requires that collection of the resulting receivable be reasonably assured.

As of December 31, 2013 and 2012, accounts receivable consisted of the following:

	December 31, 2013			December 31, 2012
Amount outstanding	$	11,488,063		$	15,111,084
Less: Allowance for doubtful accounts, net		(6,999,753	)		(3,872,082	)
Net amount	$	4,488,310		$	11,239,002

As of December 31, 2013 and 2012, allowance for doubtful accounts consisted of the following:

	December 31, 2013		December 31, 2012
Beginning balance	$	3,872,082	$	2,790,662
Provision for doubtful accounts		3,127,671		1,081,420
Ending balance	$	6,999,753	$	3,872,082

F-26

(8) Advances to Suppliers

As of December 31, 2013 and 2012, advances to suppliers consisted of the following:

	December 31, 2013			December 31, 2012
Advances for raw material	$	4,080,246		$	2,240,039
Advances for construction		-			515,733
Allowance for advances		(3,548,068	)		(1,578,310	)
Advances to suppliers, net	$	532,178		$	1,177,462

Advances to suppliers represent interest-free cash paid in advance to suppliers for purchases of raw materials.

(9) Inventories

As of December 31, 2013 and 2012, inventories consisted of the following:

	December 31, 2013		December 31, 2012
Raw materials	$	6,801,043	$	5,863,406
Work in process		40,557,526		40,387,355
Finished goods		1,962,002		2,167,114
Reserve for slow moving and obsolete inventory		21,419,154		-
	$	27,901,417	$	48,417,875

F or the years ended December 31, 2013 and 2012, the Company has provision for impairment of inventory in regards to slow moving or obsolete items of $21,089,248 and $0, respectively. Impairment of inventories is recorded in cost of goods sold.

(10) Property and Equipment, net

As of December 31, 2013 and 2012, property and equipment consisted of the following:

	December 31, 2013			December 31, 2012
Building	$	27,558,762		$	26,776,613
Machinery and equipment		29,600,169			28,692,280
Motor vehicles		80,836			33,705
Impairment of property, plant and equipment		(19,730,625	)		-
		37,509,142			55,502,598
Less: accumulated depreciation		(17,482,059	)		(14,538,235	)
	$	20,027,083		$	40,964,363

For the years ended December 31, 2013 and 2012, depreciation expenses amounted to $2,479,416 and $2,046,107. As of December 31, 2013 and 2012, a net book value of $30,620,214 and $35,193,170, respectively, of property and equipment were used as collateral for the Company’s short-term loans.

F-27

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $19,426,726 and $0 of impairment for property, plant, and equipment was recorded for the years ended December 31, 2013 and 2012, respectively. Impairment of property, plant, and equipment is recorded in operating expenses.

Construction in progress consists of two projects as follows:

	December 31, 2013		December 31, 2012		Estimated completion time	Expected capital needed to complete

Production facility	$	21,042 ,023	$	-	June 2014	$	825,941
Land improvements		10,704,987		7,324,379	May 2014		82,594
	$	31,747,010	$	7,324,379		$	908,535

Construction in progress represents the costs incurred in connection with the construction of buildings or additions to the Company’s plant facilities and land improvements to the property adjacent to our plant. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service. Construction in progress in the amount of $0 was transferred to fixed assets during the year ended December 31, 2013.

Production facility refers to a new manufacturing facility that the Company started building in the first quarter of 2013. We expect the facility to be completed around June 2014. Addition of the project during the year ended December 31, 2013 includes construction cost and machine and equipment used in the construction.

Land improvement refers to a project to improve the green coverage of a piece of land. We expect it to be completed around May 2014. Addition of the project during the year ended December 31, 2013 includes construction cost and plants used in the construction.

The Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $5,179,481 and $0 impairment losses were recorded for construction in progress during the years ended December 31, 2013 and 2012, respectively.

F-28

(11) Land Use Rights

As of December 31, 2013 and 2012, land use rights consisted of the following:

	December 31, 2013			December 31, 2012
Land Use Rights	$	12,064,963		$	11,607,114
Less: Accumulated amortization		(2,431,661	)		(1,949,695	)
	$	9,633,302		$	9,657,419

During the year ended December 31, 2012, the Company increased $14,091 to land use right by paying additional fee. During the year ended December 31, 2013, the Company increased $116,974 to land use right by paying additional fee. For the years ended December 31, 2013 and 2012, amortization expenses were $418,469 and $230,786, respectively.

Land use rights are amortized over 50 years. Future amortization of the land use rights is as follows:

Twelve-month period ended December 31,
2014	$	239,859
2015		239,859
2016		239,859
2017		239,859
2018		239,859
2019 and thereafter		8,434,007
Total	$	9,633,302

As of December 31, 2013 and 2012, all land use rights were pledged as collateral for short-term bank loans.

(12) Stockholders’ equity

Restated Articles of Incorporation

On January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value $0.001 per share. The restated articles of incorporation authorizes the board of directors of the Company to issue one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such preferred stock. The board of directors has authorized the issuance of two series of preferred stock, Series A Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”).

F-29

Issuance of Common Stock

(a) Conversion of Series A Preferred Stock

As of December 31, 2013 and 2012, no shares of Series A Preferred Stock are issued or outstanding.

(b) Conversion of Series B Preferred Stock

During the year ended December 31, 2012, the Company issued an aggregate of 126,110 shares of common stock to holders of Series B Preferred Stock upon the conversion of an aggregate of 126,110 shares of Series B Preferred Stock.

During the year ended December 31, 2013, the Company issued an aggregate of 0 shares of common stock to holders of Series B Preferred Stock upon the conversion of an aggregate of 0 shares of Series B Preferred Stock. The remaining 300,000 shares of Series B Preferred Stock are redeemable by the holder as of December 31, 2013. The Company has reclassified these shares into Temporary Equity as of December 31, 2012 and were booked in Temporary Equity as of December 31, 2013.

In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares and the parties settled out of court for $320,000. As of December 31, 2013, the Company has paid $90,000 and accrued additional $230,000 in connection with the redemption of the Series B Preferred Stock. The $230,000 will be paid in installments payments of $40,000 per month for 5 months from January 2014 and $30,000 for the last month. The preferred stock will be canceled after all payments are made.

On January 19, 2011, the Company issued 45,833 shares of common stock to First Trust Group, Inc. upon the cashless exercise of 100,000 warrants at an exercise price of $2.34 per share. On January 24, 2011, the Company issued 124,025 shares of common stock to Maxim Group LLC upon exercise of warrants at an exercise price of $1.32 per share. On February 7, 2011, the Company issued 160,000 shares of common stock to Silver Rock II, Ltd. upon exercise of warrants at an exercise price of $1.30 per share.

As of December 31, 2013, there are total 1,229,200 shares warrants outstanding.

F-30

(d) Stock Issuances for Cash

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.

On October 4, 2012, the Company issued 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.

On December 20, 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.

(e) Stock Issuances to Consultants

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 $175,700 was amortized and recognized as a general and administrative expense for the years ended December 31, 2013 and 2012, respectively. As of June 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 $0 and $273,750 was amortized and recognized as a general and administrative expense for the years ended December 31, 2013 and 2012, 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 $32,267 and $64,533 was amortized and recognized as a general and administrative expense for the years ended December 31, 2013and 2012, respectively. As of June 30, 2013, these consulting expenses were fully amortized.

F-31

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 $24,750 was amortized and recognized as a general and administrative expense for the year ended December 31, 2012. As of December 31, 2012, these consulting expenses were fully amortized.

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 $13,800 as a general and administrative expense for the year ended December 31, 2012. As of December 31, 2012, these consulting expenses were fully amortized.

In December 2012, the Company issued an aggregate of 65,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $27,950 was recorded for the expenses and amortized over six months. The amount of$26,397 was amortized and recognized as a general and administrative expense for the year ended December 31, 2013, respectively. As of June 30, 2013, these consulting expenses were fully amortized.

In December 2012, the Company issued an aggregate of 60,000 shares of common stock pursuant to a consulting agreement in exchange for consulting services provided in 2012. A fair value of $31,200 was recorded as general and administrative expense for the year ended December 31, 2012.

In January 2013, the Company issued 30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relation’s services. A fair value of $20,400 was recorded for the expenses and amortized over six months. The amount of $20,400 was amortized and recognized as a general and administrative expense for the year ended December 31, 2013, respectively. As of June 30, 2013, these consulting expenses were fully amortized.

On March 28, 2013, the Company issued 30,000 shares of common stock to a consultant for services provided. The issuance of these shares was recorded at fair market value, or $12,000 and fully amortized during the three months ended March 31, 2013.

In May 2013, the Company issued 120,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $28,800 was recorded for the expenses and amortized over six months. The amount of $28,800 was amortized and recognized as a general and administrative expense for the year ended December 31, 2013, respectively. As of December 31, 2013, these consulting expenses were fully amortized.

F-32

In July 2013, the Company issued 60,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $12,000 was recorded for the expenses and amortized over six months. The amount of $12,000was amortized and recognized as a general and administrative expense for the year ended December 31, 2013, respectively. As of December 31, 2013, these consulting expenses were fully amortized.

(f) Other Stock Issuances

On December 13, 2012, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services provided in 2012. On December 13, 2012, the Company issued 60,000 shares of common stock to an employee for services provided in 2012. The issuance of these shares was recorded at fair market value, or $64,000.

On May 8, 2013, the Company issued 1,000,000 shares of restricted common stock to an employee for services provided in 2013. On May 8, 2013, the Company issued 25,000 shares of common stock to a director as compensation for services provided in 2013. The issuance of these shares was recorded at fair market value, or $256,250 and were recorded as general and administration expense.

(g) Shares Held in Escrow

In a private placement that closed on December 22, 2009 and January 13, 2010, the Company sold an aggregate of 2,480,500 shares of Series B Preferred Stock and five-year warrants to purchase 992,000 shares of common stock at an exercise price of $1.30 per share, for an aggregate purchase price of $2,976,600. The Company also paid the private placement agent an aggregate of $298,000 and issued five-year warrants to purchase 124,025 shares of common stock at an exercise price of $1.32 per share. In connection with the private placement and pursuant to the transaction agreements, the Company deposited into escrow an aggregate of 1,240,250 shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and 2011.

The Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year 2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company for cancellation. As of December 31, 2013, no Escrow shares have been transferred to investors or returned to the Company.

F-33

Dividend Distribution for Series B Preferred Stock

Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010 until December 31, 2011. The expenses incurred in 2012 and 2013 reflect adjustments for under booked preferred dividend expenses.

For the years ended December 31, 2013 and 2012, no payment was made for dividends declared.

(13) Amount Due to Related Parties

As of December 31, 2013 and 2012, the Company had related parties payable in the amount of $5,157,112 and $4,795,593, respectively.

As of December 31, 2013 and 2012 , $4,614,469 and $4,795,593 are due to Mr. Dengyong Jin, who is General Manager of the Company’s China operations and chief executive officer and principal shareholder of Xingyong. These amounts are due on December 31, 2014 and are made to the Company by Mr. Jin for business operating purposes. The advances are interest free.

As of December 31, 2013 and 2012, $404,711 and $0 are due to Inner Mongolia Xingyong Real Estate Development Ltd. Inc., which is owned by Dong Jin, the son of Mr. Dengyong Jin. These amounts are due on December 31, 2014 and are made to the Company by Inner Mongolia Xingyong Real Estate Development Ltd. for business operating purposes. The advances are interest free.

As of December 31, 2013 and 2012 , $137,932 and $0 are due to Mr. Donghai Yu, who is CEO of the Company. These amounts are due on December 31, 2014 and are made to the Company by Mr. Yu for business operating purposes. The advances are interest free.

(14) Loan from Unrelated Parties

Short term borrowings of were $268,738 and $338,002 as of December 31, 2013 and 2012, respectively. The borrowings are from unrelated parties, interest free, and due on demand.

(15) Bank Loans

Short-term bank loans:

As of December 31, 2013 and 2012, short-term loans in the amount of $40,636,305 and $38,680,500, respectively, consisted of the following:

	December 31, 2013		December 31, 2012

Bank loan from China Construction Bank, dated June 8, 2013, due June 8, 2014 with an annual interest rate of 6.6% payable monthly, secured by property, equipment, building and land use rights	$	6,607,529	$	-

Bank loan from China Construction Bank, dated August 6, 2013, due August 5, 2014 with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by property, equipment, building and land use rights.		6,607,529		6,420,000

Bank loan from China Construction Bank, dated August 22, 2013, due August 21, 2014 with an annual interest rate of 6.0%plus 10% floating rate and interst payable monthly, secured by property, equipment, building and land use rights.		6,607,529		6,420,000

Bank loan from China Construction Bank, dated March 20, 2013, due March 19, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on March 20, 2014, due March 20, 2015, with an annual interest rate of 6.0% plus 10% floating rate.		6,607,529		-

Bank loan from Huaxia Bank, dated November 16, 2012, due on November 15, 2013, with an annual interest rate of 7.80% payable quarterly, secured by building and land use rights. This loan was paid on November 15, 2013.		-		5,617,500

Bank loan from China Construction Bank, dated September 10, 2013, due September 9, 2014 with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by property, equipment, building and land use rights.		4,955,647		4,815,000

Bank loan from China Construction Bank, dated January 11, 2013, due January 10, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on January 10, 2014, due January 10, 2015, with an annual interest rate of 6.0% plus 10% floating rate.		4,955,647		-

Bank loan from China Construction Bank, dated September 17, 2013, due September 16, 2014, with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by property, equipment, building and land use rights.		4,294,894		4,173,000

Bank loan from China Construction Bank, dated June 6, 2012, due June 5, 2013 with an annual interest rate of 8.834% payable monthly, secured by property, equipment, building and land use rights		-		6,420,000

Bank loan from China Construction Bank, dated January 13, 2012, due January 12, 2013 and repaid, with an annual interest rate of 6.56% payable monthly, secured by property, equipment, building and land use rights		-		4,815,000
	$	40,636,305	$	38,680,500

F-34

In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $71 million (or RMB 430 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter. As of December 31, 2013, the unpaid principal balance drawn from the secured line of credit was $58.8 million, including $40.6 million of short-term bank loans as disclosed above and $18.2 million of long-term bank loans as disclosed below.

Interest expenses were $5,246,606 and $4,618,413 for the years ended December 31, 2013 and 2012, respectively.

The weighted average interest rates for these loans were 6.79% and 6.92% as of December 31, 2013 and 2012, respectively.

Capitalized interest were $1,108,403 and $0 for the years ended December 31, 2013 and 2012.

Long term bank loan:

	December 31, 2013		December 31, 2012

Bank loan from China Construction Bank, dated January 22, 2013, due in January 21, 2016, with an annual interest rate of 6.15%, payable monthly, secured by machinery.	$	11,563,176	$	-

Bank loan from China Construction Bank, dated July 2, 2013, due in July 1, 2016, with an annual interest rate of 6.0% plus 10% floating rate and interest payable monthly, secured by machinery.		6,607,529		-

Bank loan from Credit Union, dated April, 2012, due in April 2015, with an annual interest rate of 15.3% payable monthly, secured by machinery.		4,427,045		4,782,900
	$	22,597,750	$	4,782,900

(16) Notes Payable

The Company’s notes payable represent payables vouchers in the form of notes issued by the Company with a term of 3 to 6 months. They are issued to suppliers in connection with their purchase contracts with the Company, and endorsed by banks to ensure that note holders will be paid upon maturity. Essentially, notes payable are the payables arising from transactions between the Company and suppliers in the normal course of business that are due within one year on customary trade terms. Therefore, the Company has determined that the notes payable meet the scope exception set forth in ASC 835-30-15-3a and the Company is not required to impute interest for the notes payable pursuant to ASC 835-30-25.

F-35

As of December 31, 2013 and 2012, notes payable consisted of the following:

	December 31, 2013

Notes payable from China Everbright Bank Co., Ltd, dated July 30, 2013, due January 30, 2014, and restricted cash required 50% of loan amount, paid back on January 30, 2014.	$	6,607,529

Notes payable from China Everbright Bank Co., Ltd, dated July 22, 2013, due January 22, 2014, and restricted cash required 50% of loan amount, paid back on January 22, 2014.		6,607,529

Notes payable from China Everbright Bank Co., Ltd, dated November 14, 2013, due May13, 2014, and restricted cash required 50% of loan amount		9,911,294

Notes payable from China Construction Bank, dated November 26, 2013, due May 26, 2014, and restricted cash required 50% of loan amount		7,103,094

Notes payable from China Construction Bank, dated September 03, 2013, due March 03, 2014, and restricted cash required 50% of loan amount, paid back on March 3, 2014.		4,955,647

Notes payable from Huaxia Bank, dated December 03, 2013, due June 03, 2014, and restricted cash required 60% of loan amount		8,589,788

Notes payable from Huaxia Bank, dated December 11, 2013, due June 11, 2014, and restricted cash required 0% of loan amount		4,129,706

Notes payable from Huaxia Bank, dated December 17, 2013, due June 17, 2014, and restricted cash required 60% of loan amount		4,129,706

Notes payable from Credit Union, dated December 27, 2013, due June 27, 2014, and restricted cash required 50% of loan amount		9,911,294

Notes payable from Bank of Inner Mongolia, dated August 16, 2013, due February 16, 2014, and restricted cash required 50% of loan amount, paid back on February 16, 2014.		6,607,529
	$	68,553,116

	December 31, 2012

Notes payable from China Everbright Bank Co., Ltd, dated July 30, 2012, due January 30, 2013, and restricted cash required 50% of loan amount	$	6,420,000

Notes payable from China Everbright Bank Co., Ltd, dated July 26, 2012, due January 26, 2013, and restricted cash required 50% of loan amount		6,420,000

Notes payable from China Everbright Bank Co., Ltd, dated September 30, 2012, due May 30, 2013, and restricted cash required 50% of loan amount		9,630,000

Notes payable from China Construction Bank, dated August 21, 2012, due February 20, 2013, and restricted cash required 60% of loan amount		4,815,000

Notes payable from China Construction Bank, dated November 23, 2012, due May 23, 2013, and restricted cash required 60% of loan amount		6,901,500

Notes payable from Huaxia Bank, dated November 27, 2012, due May 27, 2013, and restricted cash required 60% of loan amount		6,420,000
	$	40,606,500

F-36

The banks that issue notes payable to us charge a service fee in an amount 0.05% of the total outstanding notes payable amount for all the banks and additional 2.5% of the total outstanding notes payable amount minus security deposit. The service fee is recorded in general and administrative expense.

(17) Other Payable

Other payable amounted $2,755,529 and $630,179 as of December 31, 2013 and December 31, 2012, respectively. For the year ended December 31, 2013, other payable mainly included amounts payables to the local bureau of finance of $1,037,382 for VAT. For the year ended December 31, 2012, other payable mainly included amounts payable to the local bureau of finance of $434,955 for VAT.

(18) Accrued expenses

In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares. The Company has made $40,000 settlement payment and accrued additional $320,000 for a settlement payment to CNH. In addition, during the three months ended September 2013, the Company paid CNH $50,000 in connection with the redemption of the Series B Preferred Stock.

(19) Business Acquisition

BVI Co. currently has two business operations as follows (collectively the “Business”):

●

F-37

The Company accounted for its acquisitions of BVI Co. using the acquisition method of accounting. Accordingly, the results of operations for the year ended June 30, 2013, include the revenues and expenses of the acquired businesses since the effective control date of acquisition on December 31, 2013, which is the date the Company assumed control of BVI Co. pursuant to the terms of the share transfer agreement between the Company and the shareholders of BVI Co.

The fair value of the purchase consideration issued to the sellers of BVI Co. was allocated to fair value of the net tangible assets acquired, with the resulting excess allocated to and recorded as goodwill.

Goodwill recognized from the transactions mainly represented the expected operational synergies upon acquisition of the subsidiary and intangibles not qualifying for separate recognition. Goodwill is nondeductible for income tax purposes in the tax jurisdiction of the acquired business.

The purchase price was allocated as follows:

Stock to be issued to sellers	$	600,000
Less cash acquired		(12,816	)
Net purchase consideration		587,184

Net tangible assets acquired:
Advance to suppliers		9,338
Other receivable		168,070
Inventories		450
Property, plant and equipment		48,949
Advance to suppliers		9,938
Accrued payable		(318	)
Other payable		(920	)
Due to a related party		(137,932	)
Exchange loss		(4,931	)
Net tangible assets acquired		92,644

Purchase consideration in excess of fair value of net tangible assets		494,540

Allocated to:
Customer relationships
Goodwill		494,540
	$	-

F-38

The purchase price allocation was based, in part, on management’s knowledge of BVI Co. and its subsidiaries’ business. Amounts presented above were translated into US dollars using the exchange rate in effect at the date of the acquisition, which was 6.0537.

BVI Co’s results of operations are consolidated with the Company effective December 23, 2012.

(20) Subsequent events

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 consolidated financial statements are issued, the Company has evaluated events and transactions for potential recognition or disclosure through the reporting date, the date the consolidated financial statements were available to be issued and disclose the following.

The Company borrowed notes payable of $6,607,529 from China Everbright bank co., ltd, dated January 14, 2014, due July 13, 2014, and restricted cash required 50% of loan amount.

The Company borrowed notes payable of $6,607,529 from China Everbright bank co., ltd, dated January 27, 2014, due July 26, 2014, and restricted cash required 50% of loan amount.

The Company borrowed notes payable of $6,607,529 from Bank of Inner Mongolia dated February 18, 2014, due August 17, 2014, and restricted cash required 50% of loan amount.

The Company borrowed notes payable of $4,955,647 from China Construction bank, dated March 11, 2014, due September 12, 2014, and restricted cash required 50% of loan amount.

On January 14, 2014 , the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services provided in 2013. The issuance of these shares was recorded at fair market value.

On January 14, 2014, the Company issued 76,000 shares of common stock to two employees for services provided in 2013. The issuance of these shares was recorded at fair market value.

F-39

PART III

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

On March 31, 2013, the Company dismissed its independent registered public accounting firm, BDO China Dahua CPA Co., Ltd. (“ BDO China Dahua ”).

The reports of BDO China Dahua on the consolidated financial statements of the Company as of December 31, 2012 and 2010 and for the years then ended did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

The decision to change independent registered public accounting firm was approved by the Audit Committee of the Board of Directors of the Company.

(a) During the process of auditing of the Company’s consolidated statements for the year ended December 31, 2013, the Company and BDO China Dahua disagreed with the amount of adequate audit evidence needed to support the Company’s year-end accounts to meet the requirements of BDO China Dahua; (b) the Board of Directors of the Company discussed these disagreement with BDO China Dahua; and (c) the Board of Directors of the Company has authorized BDO China Dahua to respond fully to inquiries of the successor independent registered public accounting firm concerning this matter.

The disagreement between the Company and BDO were as follows:

1 BDO and the Company do not agree on the amount of allowance for accounts receivable. BDO suggested a reserve of $3.25 million bad debt allowance as of December 31, 2013. The Company believes that most of it is collectable. Due to lack of subsequent accounts receivable collections, the Company was not able to provide supportable evidence of the accounts receivable balance.

2 BDO considered all the $4.76 million interest as expense because BDO believes that the Company’s loans are for working capital purpose only. The Company was not able to provide agreements showing that the loans are used for construction. The Company believes that the Company is entitled to capitalize part of the interest expenses regardless of the purpose of the loans.

3 BDO and the Company did not agree on the Company's ability to continue as a going concern. BDO believed there were negative financial indicators showing that the Company has a going concern issue, the Company has enormous amount of liabilities, three consecutive years with substantial negative operating cash flows, significant reliance on short-term debt and inventory notes payable. And also, the Company has decreasing revenues, decreasing profits, which causing inability to make financing interest payments. The Company's management did not agree with this assessment, but did not provide adequate evidence to support the next twelve months of operations.

There were no “reportable events” as described in Item 304(a)(1)(v) of Regulation S-K other than: At December 31, 2012, the Company reported a material weakness in its internal control over financial reporting related to: (i) lack of entity level controls establishing a “tone at the top”, including but not limited to, communication between committee members and senior management regarding corporate decisions and planning; (ii) insufficient knowledge of accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines; (iii) an inadequate amount of review by management of the financial statement reporting process, including understanding and reporting all required disclosures necessary, by those in charge of corporate governance; (iv) lack of corporate governance policies in place, such as an internal audit function, fraud and risk assessment policies and a whistleblower policy; and (v) inadequate segregation of duties over certain information system access controls.

On March 31, 2013, concurrent with the dismissal of BDO China Dahua CPA Co., Ltd., China Carbon Graphite Group, Inc. (the “ Company ”), upon the approval of the Company’s audit committee, engaged KCCW Accountancy Corp. (“ KCCW ”) as its new independent registered public accounting firm to audit and review the Company’s consolidated financial statements effective immediately. During the years ended December 31, 2012 and 2012, and any subsequent period through the date hereof prior to the engagement of KCCW, neither the Company, nor someone on its behalf, has consulted KCCW regarding:

(i)

either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and either a written report was provided to the Company or oral advice was provided that KCCW concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or

(ii)	any matter that was either the subject of a disagreement or a reportable event, each as defined in Item 304 of Regulation S-K.

ITEM 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of December 31, 2013.

Management’s Report of Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that evaluation, our management has concluded that during the periods covered by this Annual Report, our internal control over financial reporting was not effective as of December 31, 2013. During our assessment of the effectiveness of internal control over financial reporting, management identified significant deficiencies related to: (i) lack of entity level controls establishing a “tone at the top”, including but not limited to, communication between committee members and senior management regarding corporate decisions and planning; (ii) insufficient knowledge of accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines; (iii) an inadequate amount of review by management of the financial statement reporting process, including understanding and reporting all required disclosures necessary, by those in charge of corporate governance; (iv) lack of corporate governance policies in place, such as an internal audit function, fraud and risk assessment policies and a whistleblower policy; and (v) inadequate segregation of duties over certain information system access controls.

Based on these facts, the Company determined that the aggregation of these significant deficiencies represents a material weakness.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.

Our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP methods. Management has determined that our internal audit function is also significantly deficient due to insufficient resources to perform internal audit functions.

In order to correct the foregoing deficiencies, we are seeking to engage an experienced accountant or firm to assist us in establishing procedures that will enable us to have, on an ongoing basis, personnel who understand U.S. GAAP and the disclosure obligations under the Exchange Act. We are committed to the establishment of effective internal audit functions; however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit personnel in order to enable us to have such procedures and controls established by the end of December 31, 2013.

We believe that the foregoing steps will remediate the deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. However, as a result of these material weaknesses and deficiencies in our disclosure controls and procedures, current and potential stockholders could lose confidence in our financial reporting and disclosures made in our public filings, which would harm our business and the trading price of our stock.

Changes in Internal Control over Financial Reporting

No changes in the internal control over our financial reporting have come to management’s attention during our last fiscal year that have materially affected, or are likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

ITEM 9B.

Other Information.

None.

ITEM 10.

Directors, Executive Officers and Corporate Governance.

The following table sets forth certain information with respect to our directors, executive officers and significant employees:

Name	Age	Position
Donghai Yu	48	Chief Executive Officer, President and Director
Zhenfang Yang	49	Interim Chief Financil Officer
Philip Yizhao Zhang	43	Director
John Chen	42	Director
Hongbo Liu	54	Director
Dong Jin	32	Director
Dengyong Jin	59	General Manager of China Operations
Grace King	58	Senior Vice President of Finance

Donghai Yu. Mr. Donghai Yu has been our Chief Executive Officer since November 2008 and a director since December 2007. Mr. Yu served as our Chief Financial Officer from December 2007 until November 2008. Since November 2007, he has also been Chief Financial Officer of Xingyong. Prior to joining the Company, Mr. Yu was a financial consultant in personal and business finance from 2002 to 2007. Mr. Yu received his Master of Business Administration from Oklahoma City University.

Zhenfang Yang. Mr. Zhenfang Yang has been employed as our Interim Chief Financial Officer since November 2010. Since 2007, he worked as a key manager of our operating company. Prior to joining the Company, Mr. Yang was a key manager at the Inner Mongolia Forestry Department. Mr. Yang has over 30 years of experience in the finance and accounting field. He received his degree from Inner Mongolia Finance and Economics College.

Philip Yizhao Zhang. Mr. Yizhao Zhang has been a director of the Company since 2009. He is currently assisting various Chinese companies in preparing to offer their securities overseas. He is also a director of Kaisa Group Holdings Ltd. (HK: 1638) and China Green Agriculture Inc. (NYSE: CGA). Mr. Zhang has over 18 years of experience in accounting and internal control, corporate finance, and portfolio management. Previously, Mr. Zhang held senior positions at China Education Alliance, Inc., Universal Travel Group, Energroups Holdings Corporation, Shengtai Pharmaceutical Inc, Chinawe Asset Management Corporation and China Natural Resources Incorporation. Mr. Zhang also held positions in portfolio management and asset trading at Guangdong South Financial Services Corporation from 1993 to 1999. He is a Certified Public Accountant of the State of Delaware, and a member of the American Institute of Certified Public Accountants (AICPA). He also has the Chartered Global Management Accountant (CGMA) designation. Mr. Zhang graduated with a bachelor’s degree in economics from Fudan University, Shanghai in 1992 and received a Master of Business Administration with concentrations in financial analysis and accounting from the State University of New York at Buffalo in 2003.

John Chen. Mr. John Chen has been a director of the Company since November 2009. Mr. Chen has also been a director of SGOCO Group, Ltd. (also known as SGOCO Technology, Ltd.) since November 2010 and General Steel Holdings, Inc., since March 2005. He has served as chief financial officer of General Steel Holdings, Inc. since May 2004. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun City, Jilin Province, China, in 1992. He obtained his Bachelor of Science in Business Administration with a concentration in accounting from California State Polytechnic University in July 1997.

Hongbo Liu. Dr. Hongbo Liu has been a director of the Company since November 2008. He is a professor at Hunan University in Hunan Province, where he has been the chair of the Department of Non-Metallic Materials since 2000. Dr. Liu is considered one of China’s top scholars in carbon graphite studies. He has been granted a special annual allowance for outstanding scholars in China by the PRC Department of State since 1997. Dr. Liu holds a doctorate degree in engineering from Hunan University.

Dong Jin . In 2006, Mr. Jin graduated from Massey University in New Zealand majored in Business. In the same year, Mr. Jin joined China Carbon Graphite as the production manager. In 2010, Mr. Jin started serving the company as the vice president of sales, leading 26 sales representatives and distributing the company’s products to over 200 customers in 22 provinces in China. Spending 6 years at China Carbon, Mr. Jin has been actively involved in each area of the Company’s daily operations, such as accounting, manufacturing, sales, financing and business development. By taking such a crucial role at the company, Mr. Jin has established significant leadership in the management team driving the company forward. He was appointed as our director in 2013.

Denyong Jin. Mr. Denyong Jin is a significant employee of the Company. He has been the General Manager of our China Operations since 2001 and has more than 20 years of experience in the carbon industry. He received his degree in economics from Inner Mongolia Television University of China. In 2004, Mr. Jin was named one of the “Top 10 Outstanding Mangers in Inner Mongolia”. In 2005, Mr. Jin was named the “Outstanding Entrepreneur in Inner Mongolia”. In 2006, Mr. Jin was named one of “China’s Top 100 Outstanding Entrepreneurs in Science and Technology”. Mr. Jin served as our chief executive officer from December 2007 to November 2008.

Grace King. Ms. Grace King is a significant employee of the Company. She has been our Senior Vice President of Finance since December 15, 2010. Ms. Grace has over 20 years of financial transaction experience with extensive contacts and expertise in China. Prior to joining the Company, Ms. King acted as the managing partner of APEC Investment, Inc., where she provided investment banking and advisory services to small and mid-sized Chinese companies. Prior to that, Ms. King was the managing director of China business development for Primary Capital, providing a full range of investment banking services to Chinese clients. From 1999 to 2007, Ms. King was a senior investment advisor for Great Eastern Securities, Inc., responsible for overseeing the development of the firm’s Asia business. From 1990 to 1998, Ms. King worked as a financial consultant and fund manager for Transpacific Exchange Corp, a private equity fund with a principal focus on China. From 1985 to 1989, Ms. King was employed with Merrill Lynch, as a member of their international corporate group, where she completed transactions including bond underwritings, private placements, privatizations, and mergers and acquisitions. She was one of two key investment bankers who successfully launched Taiwan Fund, Inc. (NYSE:TWN), and served as a key banker on Gulf Canada’s global offering of over $1 billion. Ms. King graduated with a Bachelor of Science and a Master of Business of Administration in Finance and International Business in May 1984 from Columbia University.

There are no agreements or understandings between any of our executive officers or directors and any other person pursuant to which such executive officer or director was selected to serve as a director or executive officer of our Company. Directors are elected until their successors are duly elected and qualified. There are no family relationships among our directors or officers.

Director Qualifications

We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our businesses. We seek directors who possess qualities such as integrity and candor, who have strong analytical skills and who are willing to engage management and each other in a constructive and collaborative fashion. We also seek directors who have the ability and commitment to devote significant time and energy to service on our board and its committees. We believe that all of our directors meet the foregoing qualifications.

Board Committees

Effective October 28, 2009, the Company created audit, compensation and corporate governance/nominating committees and adopted committee charters. Mr. John Chen, Mr. Philip Zhang, and Mr. Hongbo Liu, all independent directors, serve as members of each of these committees, with Mr. Zhang serving as chairman of the audit committee, Mr. Chen as chairman of the compensation committee and Mr. Liu as chairman of the corporate governance/nominating committee. Mr. Zhang is our audit committee financial expert.

Director Independence

Following the appointment of Mr. Chen and Mr. Zhang as directors on October 28, 2009, the board determined that a majority of the Company’s directors are independent under NASDAQ Marketplace Rules.

Code of Ethics

On October 28, 2009, our board adopted a Code of Business Conduct and Ethics, which applies to all directors, officers and employees. The purpose of the Code is to promote honest and ethical conduct.

Involvement in Certain Legal Proceedings

None.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Our executive officers and directors and persons who own more than ten percent of our common stock failed to file a Form 3 upon becoming a Section 16 filer. In addition, in 2012, each of our directors failed to file a Form 4 to reflect the grant of an equity award.

ITEM 11.

Executive Compensation.

The following summary compensation table sets forth the compensation earned by our named executive officers during the years ended December 31, 2013, 2012 and 2011. None of our executive officers received $100,000 or more compensation during these periods.

Summary Compensation Table

Name and principal position	Year		Salary		Stock Awards (1)		Total

Donghai Yu Chief Executive Officer		2013 2012 2011	$ $ $	80,000 80,000 83,500	$ $ $	- 10,000 12,000	$ $ $	80,000 90,000 95,500

Zhenfang Yang Interim Chief Financial Officer		2013 2012	$ $	24,000 24,000	$ $	- -	$ $	24,000 24,000
		2011	$	24,000	$	-	$	24,000

(1) This column represents the fair value of the stock issuance on the grant date determined in accordance with the provisions of ASC 718. These amounts represent grants of a stock awards to Mr. Yu in his capacity as a director of the Company.

Director Compensation

In 2013 and 2012, we issued 0 and 25,000 shares of common stock to each of Mr. Donghai Yu, Mr. Philip Yizaho Zhang, Mr. John Chen and Mr. Hongbo Liu for their services as directors and committee members. In 2013 and 2012, we issued 25,000 and 0 shares of common stock t Mr. Dong Jin for his service as a director and committee member.

Director Compensation Table

The following table presents the compensation paid to our directors in respect of fiscal year 2013 for their services as directors:

Name	Stock Awards (1)		Total
Donghai Yu	$	-	$	10,000
Philip Yizhao Zhang	$	-	$	10,000
Dong Jin	$	6,250	$	-
John Chen	$	-	$	10,000
Hongbo Liu	$	-	$	10,000

(1) This column represents the fair value of the stock issuance on the grant date determined in accordance with the provisions of ASC 718.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table provides information as to shares of common stock beneficially owned as of March 31, 2013, by:

o	each director;

o	each named executive officer;

o	each person known by us to beneficially own at least 5% of our common stock; and

o	all directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned (subject to community property laws where applicable). Unless otherwise indicated, the address of each beneficial owner listed below is c/o XingheXingyong Carbon Co., Ltd., 787 XichengWai, Chengguantown, Xinghe County, Inner Mongolia, China.

Name	Amount and Nature of Beneficial Ownership		Percent of C lass

Sincere Investment (PTC), Ltd. (1)		9,388,172		37.4	%
Donghai Yu		95,000		*
Zhenfang Yang		--		--
Hongbo Liu		100,000		*
Philip Yizhao Zhang		100,000		*
Dong Jin		25,000		*
John Chen		100,000		*
All officers and directors as a group (5 persons)		420,000		1.6	%

* Less than 1%.

(1) LizhongGao, our former president and a director of the Company, is the president and sole stockholder of Sincere and has the sole power to vote and dispose of the shares owned by Sincere. Mr. Gao is the brother-in-law of Mr. Jin, General Manager of our China operations, the chief executive officer of Xingyong and our former chief executive officer. Sincere holds the shares as trustee for Mr. Jin’s wife, ShulianGao and his sister-in-law Wenyi Li.

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence.

Dengyong Jin, General Manager of our China operations and our former chief executive officer, is the chief executive officer and principal shareholder of Xingyong. Our principal stockholder, Sincere, is owned by LizhongGao, the brother-in-law of Mr. Jin, who has the sole power to vote and dispose of the shares of our Company held by Sincere. Sincere holds the shares as trustee for Mr. Jin’s wife and sister-in-law.

Dong Jin, our director, is the son of Dengyong Jin.

Messrs. Liu, Zhang and Chen are independent as defined by NASDAQ Marketplace Rules.

ITEM 14.

Principal Accounting Fees and Services.

The following is a summary of the fees billed to us by KCCW Accountancy Corp. (“KCCW”) for the fiscal years ended December 31, 2013 and 2012.

	KCCW
Fee Category	2013		2012
Audit fees	$	155,500	$	121,872
Audit-related fees		-		-
Tax fees		-		-
Other fees		-		-
Total Fees	$	155,500	$	121,872

All of the services provided and fees charged by our independent registered accounting firm were approved by the board of directors and audit committee.

Services rendered by KCCW

The following is a summary of the fees for professional services rendered by KCCW for the years ended December 31, 2013 and 2012:

Audit fees. Audit fees for KCCW in 2013 and 2012 represent fees for professional services performed by KCCW for the audit of our 2013 and 2012 annual financial statements and review of each quarter for 2013 and 2012. Also included are services that are normally provided in connection with statutory and regulatory filings or engagements, including the audit of the financial statements of Talent, Yongle, Xingyong, BVI Co., Royal HK, and Royal Shanghai.

PART IV

ITEM 15.

Exhibits and Financial Statement Schedules.

(a)

1. The financial statements listed in the “Index to Consolidated Financial Statements.”

2. None.

3. Exhibits:

Exhibit Number		Description
2.1		Exchange Agreement, dated as of December 14, 2007, between the Registrant and Sincere Investment (PTC), Ltd. (incorporated by reference to the Form 8-K filed by the Company on December 31, 2007).
3.1		Amended and Restated Articles of Incorporation of the Company, including the Statement of Designation for Series A Convertible Preferred Stock, as filed with the State of Nevada (incorporated by reference to the Form 8-K filed by the Company on January 28, 2008).
3.2		Amended and Restated Articles of Incorporation of the Company, including the Statement of Designation for Series B Preferred Stock, as filed with the State of Nevada (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009).

3.3		Amended and Restated Bylaws of the Company (incorporated by reference to the Form 8-K filed by the Company on November 3, 2009).
4.1		Form of Warrant issued to the investors (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009).
4.2		Warrant issued to Maxim Group LLC (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009).
10.1		Business Operations Agreement, dated December 7, 2007, between XingheXingyong Carbon Co., Ltd. and XingheYongle Carbon Co., Ltd. (English Translation) (incorporated by reference to the Form 8-K filed by the Company on December 31, 2007).
10.2		Exclusive Technical and Consulting Services Agreement, dated December 7, 2007, between XingheXingyong Carbon Co., Ltd. and XingheYongle Carbon Co., Ltd. (English Translation) (incorporated by reference to the Form 8-K filed by the Company on December 31, 2007).
10.3		Option Agreement, dated December 7, 2007, between XingheXingyong Carbon Co., Ltd. and XingheYongle Carbon Co., Ltd. (English Translation) (incorporated by reference to the Form 8-K filed by the Company on December 31, 2007).
10.4		Equity Pledge Agreement, dated December 7, 2007, among XingheXingyong Carbon Co., Ltd., XingheYongle Carbon Co., Ltd. and Dengyong Jin (English Translation) (incorporated by reference to the Form 8-K filed by the Company on December 31, 2007).
10.5		Consulting Agreement, dated February 9, 2009, between the Company and Ventanta Capital Partners (incorporated by reference to the Form 8-K filed by the Company on February 13, 2009).
10.6		Amendment to Securities Purchase Agreement, dated April 8, 2009, between the Company and XingGuang Investment Corporation, Limited (incorporated by reference to the Form 8-K filed by the Company on April 13, 2009).
10.7		Form of Subscription Agreement, dated December 22, 2009, between the Registrant and the investors set forth therein (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009).
10.8		Registration Rights Agreement, dated December 22, 2009, between the Company, Maxim Group LLC, and the investors set forth therein (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009).
10.9		Securities Escrow Agreement, dated December 22, 2009, between the Company, Maxim Group LLC, and the investors set forth therein (incorporated by reference to the Form 8-K filed by the Company on December 28, 2009).
10.10		Loan Agreement, dated August 6, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010).

10.11		Loan Agreement, dated August 23, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010).
10.12		Loan Agreement, dated September 6, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010).
10.13		Loan Agreement, dated September 16, 2010, between the Company and China Construction Bank (incorporated by reference to the Form 10-Q filed by the Company on November 15, 2010).
14		Code of Ethics (incorporated by reference to the Form 8-K filed by the Company on November 3, 2009).
21		List of Subsidiaries.*

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101		Financial statements from the Annual Report on Form 10-K of the Company for the year ended December 31, 2012, filed on April 16, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in Stockholders’ Equity and (v) the Notes to the Consolidated Financial Statements.(**)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA CARBON GRAPHITE GROUP, INC.

Date: April 15, 2014	By:	/s/ Donghai Yu
		Donghai Yu
		Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Donghai Yu	Chief Executive Officer and Director	April 15, 2014
Donghai Yu	(Principal Executive Officer)

/s/ Zhenfang Yang	Chief Financial Officer	April 15, 2014
Zhenfang Yang	(Principal Financial Officer and Principal Accounting Officer)

/s/ Philip Yizhao Zhang	Director	April 15, 2014
Philip Yizhao Zhang

/s/ John Chen	Director	April 15, 2014
John Chen

/s/ Hongbo Liu	Director	April 15, 2014
Hongbo Liu