CHGI China Carbon Graphite Group Inc (CE)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. This Annual Report should be read in its entirety and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Overview

We are engaged in the research and development, small production and sales of graphene and graphene oxide and graphite bipolar plates in the People’s Republic of China. We have developed our own graphene prototype and produces the products by orders only. We outsource the production of large orders to third parties as we have not commercialized our product prototype. We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products.  

As of and for the six months ended June 30, 2021, the Company has incurred operating losses. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (i) obtaining capital from the sale of its equity securities, (ii) sales of its products, and (iii) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with or acquire other graphite companies.

PRC regulations grant broad powers to the government to adjust the price of raw materials and manufactured products. Although the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be implemented in the future, thereby affecting our results of operations and financial condition.

Results of Operations

Comparison of the Three Months Ended June 30, 2021 and 2020

Sales.

During the three months ended June 30, 2021, we had sales of $63,214 compared to sales of $75,634 for the three months ended June 30, 2020, a decrease of $12,420 or approximately 16.42%. Significant sales decrease was mainly due to COVID-19 and revenue recognition principles. 

Cost of goods sold.

Our cost of goods sold consists of the purchase cost. During the three months ended June 30, 2021, our cost of goods sold was $42,404, compared to $44,480 for the cost of goods sold for the three months ended June 30, 2020, a decrease of $2,076 or approximately 4.67%. The decrease in the cost of sales was primarily attributable to decrease in sales volume.

Gross profit.

Our gross profit decreased from $31,154 for the three months ended June 30, 2020 to $20,810 for the three months ended June 30, 2021. The decrease of the gross profit is mainly attributed to decrease in the sales.

Gross profit Margin.

Our gross profit margin decreased from 41.19% for the three months ended June 30, 2020 to 32.92% for the three months ended June 30, 2021 due to increased less profitable products.

Operating expenses.

Operating expenses totaled $108,927 for the three months ended June 30, 2021, compared to $97,408 for the three months ended June 30, 2020, an increase of $11,519, or approximately 11.83%.

Selling, general and administrative expenses.

Selling expenses increased from $13,734 for the three months ended June 30, 2020 to $16,658 for the three months ended June 30, 2021, an increase of $2,924, or approximately 21.29%. The increase is mainly attributed to increase in sales force.

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 $92,269 for the three months ended June 30, 2021, compared to $83,674 for the three months ended June 30, 2020, an increase of $8,595 or 10.27%. The increase of general and administrative expenses is mainly due to increased payroll expense and increased stock compensation.

Loss from operations.

As a result of the factors described above, operating loss was $88,117 for the three months ended June 30, 2021, compared to operating loss of $66,254 for the three months ended June 30, 2020, an increase in loss of approximately $21,863, or 33.00%.  

Other income and expenses.

Our interest expense was $14,680 for the three months ended June 30, 2021, compared to interest expense of $14,487 for the three months ended June 30, 2020. The reason is due to a little more borrowings in the three months ended June 30, 2021 compared to the same period 2020.

Other income of $15 and $3,451 were recorded as other income for the three months ended June 30, 2021 and 2020, respectively. 

Income tax.

During the three months ended June 30, 2021 and 2020, we did not incur any income tax due for these periods. 

Net loss.

As a result of the factors described above, our net loss for the three months ended June 30, 2021 was $110,282, compared to net loss of $77,290 for the three months ended June 30, 2020, an increase in loss of $32,992, or approximately 42.69%.

Foreign currency translation.

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation loss for the three months ended June 30, 2021 was $6,228, compared a translation loss of $626 for the three months ended June 30, 2020, an increase in loss of $5,602.

Net loss available to common stockholders.

Net loss available to our common stockholders was $110,282, or $0.00 per share (basic and diluted), for the three months ended June 30, 2021, compared to net loss of $77,290, or net loss of $0.00 per share (basic and diluted), for the three months ended June 30, 2020. 

Comparison of the Six Months Ended June 30, 2021 and 2020

Sales.

During the six months ended June 30, 2021, we had sales of $69,419 compared to sales of $261,415 for the six months ended June 30, 2020, a decrease of $191,996 or approximately 73.44%. Significant sales decrease was mainly due to COVID-19 and revenue recognition principles. 

Cost of goods sold.

Our cost of goods sold consists of the purchase cost. During the six months ended June 30, 2021, our cost of goods sold was $42,506, compared to $139,252 for the cost of goods sold for the six months ended June 30, 2020, a decrease of $96,746 or approximately 69.48%. The decrease in the cost of sales was primarily attributable to decrease in sales volume.

Gross profit.

Our gross profit decreased from $122,163 for the six months ended June 30, 2020 to $26,913 for the six months ended June 30, 2021. The decrease of the gross profit is mainly attributed to decrease in the sales.

Gross profit Margin.

Our gross profit margin decreased from 46.73% for the six months ended June 30, 2020 to 38.77% for the six months ended June 30, 2021 due to increased less profitable products.

Operating expenses.

Operating expenses totaled $246,806 for the six months ended June 30, 2021, compared to $206,812 for the six months ended June 30, 2020, an increase of $39,994, or approximately 19.34%.

Selling, general and administrative expenses.

Selling expenses decreased from $34,787 for the six months ended June 30, 2020 to $20,564 for the six months ended June 30, 2021, a decrease of $14,223, or approximately 40.89%. The decrease is mainly attributed to no year-end delivery delays and cost match.

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 $226,242 for the six months ended June 30, 2021, compared to $172,025 for the six months ended June 30, 2020, an increase of $54,217 or 31.52%. The increase of general and administrative expenses is mainly due to increased payroll expense and increased stock compensation.

Loss from operations.

As a result of the factors described above, operating loss was $219,893 for the six months ended June 30, 2021, compared to operating loss of $84,649 for the six months ended June 30, 2020, an increase in loss of approximately $135,244, or 159.77%.  

Other income and expenses.

Our interest expense was $31,699 for the six months ended June 30, 2021, compared to interest expense of $34,907 for the six months ended June 30, 2020. The reason is due to less borrowings.

Other income of $135 and $3,451 were recorded as other income for the six months ended June 30, 2021 and 2020, respectively. 

Income tax.

During the six months ended June 30, 2021 and 2020, we did not incur any income tax due for these periods. 

Net loss.

As a result of the factors described above, our net loss for the six months ended June 30, 2021 was $296,457, compared to net loss of $116,105 for the six months ended June 30, 2020, an increase in loss of $180,352, or approximately 155.34%.

Foreign currency translation.

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation loss for the six months ended June 30, 2021 was $4,224, compared a translation gain of $5,449 for the six months ended June 30, 2020, a decrease in gain of $9,673.

Net loss available to common stockholders.

Net loss available to our common stockholders was $296,457, or $0.01 per share (basic and diluted), for the six months ended June 30, 2021, compared to net loss of $116,105, or net loss of $0.00 per share (basic and diluted), for the six months ended June 30, 2020.

Liquidity and Capital Resources

All of our business operations are carried out by Royal Shanghai, and all of the cash generated by our operations has been held by that entity. In order to transfer such cash to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada corporation, we would need to rely on dividends, loans or advances made by our PRC subsidiaries. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, Royal Shanghai would have to transfer funds to our parent entity through our wholly-owned subsidiaries, Royal Hongkong and BVI. Co,

PRC regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:

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

The RMB cannot be freely exchanged into the Dollars. The State Administration of Foreign Exchange (“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment Enterprises, such as Royal Shanghai, may purchase foreign currency from designated financial institutions in connection with current account transactions, including profit repatriation.

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

Our primary capital needs have been to fund our working capital requirements. Our primary sources of financing will be cash generated from loans from banks, equity investment from investors, and borrowings from unrelated parties.

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. At this point, there can be no assurance that the Company is able to obtain such funding. 

Our long-term goal is to develop our Royal Shanghai business. During the interim, we expect that anticipated cash flows from future operations, loans and equity investment from unrelated or related parties, provided that:

We may require additional equity, debt or bank funding to finance acquisitions or to allow us to develop our Royal Shanghai business, which is one of our primary growth strategies. We can provide no assurances that we will be able to enter into any additional financing agreements on terms favorable to us, if at all, especially considering the current global instability of the capital markets.

At June 30, 2021, cash and cash equivalents were $61,285, compared to $8,129 at December 31, 2020, an increase of $53,156. Our working capital deficit decreased by $82,958 to a deficit of $2,690,538 at June 30, 2021 from $2,690,538 at December 31, 2020.

Accounts receivable, net of allowance, were $1,647 and $nil as of June 30, 2021 and December 31, 2020, respectively. Accounts receivable are recorded at the invoiced amount and do not bear interest. Our management reviews the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends and the aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary.

As of June 30, 2021, inventories were $90,418 compared to $nil at December 31, 2020, an increase of $90,418, or 100%. As of June 30, 2021 and December 31, 2020, the Company has not made provision for inventory in regards to slow moving or obsolete items.

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

Net cash flow provided by operating activities was $52,962 for the six months ended June 30, 2021, compared to $61,706 used in operating activities for the six months ended June 30, 2020, an increase of $114,668. The decrease in net cash flow provided by operating activities was mainly due to an increase of $404,914 in advance from customers, an increase of $269,078 in accounts payable and accrued liabilities, an increase of $43,200 in stock compensation and an increase of $45,000 in loss on debt settlement, offset by a decrease of $180,352 in net loss available to common shareholders and a decrease of $302,358 in other payable.

Net cash flow used in investing activities was $0 for the six months ended June 30, 2021, compared to $1,649 for the six months ended June 30, 2020, a decrease of $1,649, or 100%. The decrease is mainly due to decrease acquisitions of plant and equipment in the six months ended June 30, 2021.

Net cash flow provided by financing activities was $0 and 93,900 for the six months ended June 30, 2021 and 2020. The decrease is mainly due to no more cash flow provided by financial activities.

Concentration of Business and Credit Risk

Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.

Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.

Sales to certain customers generated over 10% of the Company’s total net sales. Sales to one Company for the six months ended June 30, 2021 were approximately 73% of the Company’s net sales. Sales to another Company for the six months ended June 30, 2021 were approximately 11% of the Company’s net sales.

Sales to certain customers generated over 10% of the Company’s total net sales. Sales to one Company for the six months ended June 30, 2020 were approximately 60% of the Company’s net sales. Sales to other Company for the six months ended June 30, 2020 were approximately 14% of the Company’s net sales. Sales to another Company for the six months ended June 30, 2020 were approximately 11% of the Company’s net sales.

For the six months ended June 30, 2021, two suppliers accounted for approximately 92% of total purchases.

For the six months ended June 30, 2020, three suppliers accounted for approximately 99% of total purchases.

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.

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

Use of estimates

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

Cash and cash equivalents

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

Accounts receivable

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

Inventory

Inventory is stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchases, and other costs incurred in bringing the inventories to their present location and condition. Cost is determined using the weighted average method. Net realizable value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. Impairment of inventories is recorded in cost of goods sold.

For the six months ended June 30, 2021 and 2020, the Company has not made provision for inventory in regards to slow moving or obsolete items.

Lease

The Company used comparative method and adopted ASU 2018-20, Leases (Topic 842) to recognize leases assets and lease liabilities on the balance sheet and disclosing key information about lease transactions. All existing leases since January 1, 2018 are reported under this rule. After the adoption, $44,144 of operating lease right-of-use asset and $44,144 of operating lease liabilities were retroactively reflected to December 31, 2020 financial statements. After the adoption, $22,394 of operating lease right-of-use asset and $22,394 of operating lease liabilities were retroactively reflected to June 30, 2021 financial statements.

Property and equipment

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

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

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

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment were recorded in operating expenses during the six months ended June 30, 2021 and 2020.

Stock-based compensation

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

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

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

Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service.

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

Foreign currency translation

The reporting currency of the Company is U.S. dollars. The Company uses RMB as its functional currency. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the three months ended June 30, 2021 and 2020 were $(6,228) and $(626), respectively. Translation adjustments for the six months ended June 30, 2021 and 2020 were $(4,224) and $5,449, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the six months ended June 30, 2021 and 2020 were $194 and $(67), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Assets and liabilities were translated at 6.46 RMB and 6.53 RMB to $1.00 at June 30, 2021 and December 31, 2020, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the six months ended June 30, 2021 and 2020 were 6.47 RMB and 7.03 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Revenue recognition

The Company derives revenues from distribution of graphite-based products. We recognize revenue in accordance with ASC 606, Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. We enter into contracts that can include products, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title according to shipping terms.

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

The Company recognizes revenue upon transfer of control of promised products to customers according to shipping terms. The Company does not provide chargeback or price protection rights to the customers. The customer only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not sell the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not record an allowance for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the six months ended June 30, 2021 and 2020.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this ASU on January 1, 2018 for all revenue contracts with our customers using the modified retrospective approach.

There is no impact of applying this ASU.

Cost of goods sold

Cost of goods sold consists primarily of the purchase costs of products.

Shipping and handling costs

The Company follows ASC 606, as amended and clarified by ASU 2016-10, to record shipping and handling cost. The Company classifies shipping and handling costs paid on behalf of its customers in selling expenses. For the six months ended June 30, 2021 and 2020, shipping and handling costs were $15,415 and $13,088, respectively. For the six months ended June 30, 2021 and 2020, shipping and handling costs were $18,145 and $33,096, respectively.

Taxation

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

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

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

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

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of June 30, 2021 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of June 30, 2021, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

Enterprise income tax

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

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

Value added tax

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

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year.

Contingent liabilities and contingent assets

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

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

Fair value of financial instruments

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

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

Loss per share

Basic loss per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.

The following table sets forth the computation of the number of net loss per share for the six months ended June 30, 2021 and 2020:

The following table sets forth the computation of the number of net loss per share for the three months ended June 30, 2021 and 2020:

Accumulated other comprehensive income

The Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the six months ended June 30, 2021 and 2020 included net income and foreign currency translation adjustments.

Related parties

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

Recent Accounting Pronouncements 

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

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption. The Company adopted the policy on January 1, 2019 and the impact of the adoption of this guidance is listed in Note 15.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for the Company in its first quarter of 2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

Off-Balance Sheet Arrangements

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