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
(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.) |
20955 Pathfinder Road, Suite 200 Diamond Bar CA, USA | 91765 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Title of each class: | Name of each exchange on which registered: | |
| None | None |
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share.None
(Title of class)
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
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.
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’sregistrant���s knowledge, in definitive proxy or information statements incorporated by reference inPart IIIIII 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 | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| (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
State the aggregate market value of shares ofthe voting and non-voting common stockequity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was 16,499,346. The aggregate market valuequarter: $546,874.72 based on 13,476,868 non-affiliates shares 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, 2014March 30, 2017 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
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’sPeople's Republic of China (“China”("China" or the “PRC”"PRC"). “RMB”"RMB" refers to Renminbiyuan,Renminbi, or the Yuan, 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.
Business Overview of Our Business
We are engaged in the manufacturemanufacturing of graphite-basedgraphene, graphene oxide and graphite bipolar plates 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:
Our business scope includes manufacturing and consumer (household) commodities to both business and consumers throughselling primarily the website by paying a fee for each transaction conducted through the website.
| ● | graphene; | |
| ● | graphene oxide; and | |
| ● | graphite bipolar plates |
Our Growth Strategy
Some of our future business plans, including the expansion ofpromoting our product offerings to include nuclear, solaronline portal and semiconductor productspotential acquisition and pursuing an acquisition,merger, 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, 2007.2007 (“Talent”). Following the reverse merger, our name was changed to China“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 operateoperated our businesses in the PRC through Xingyong. Xingyong has the licenses and approvals necessary to operate in the PRC. We havehad contractual agreements with Xingyong and its stockholders pursuant to which we havehad 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 arewere able to control Xingyong. Consequently, we consolidate Xingyong’s financial statements
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Sale of Xingyong.On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together 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.”
The Company’s results of operations related to Xingyong have since been reclassified as discontinued operations on a quarterlyretrospective 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.
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.
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 issueissued 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 becomebecame a wholly owned subsidiary of the Company. The shares were issued on January 16, 2014.
BVI Co. currently has twoone business operationsoperation as follows (collectively the(the “Business”):
| ● | A business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. |
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.
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Organizational Structure Chart
The following chart sets forth our organizational structure:
Our Products
Through our newly acquired subsidiary we now manufacture and sell the following products:
| ● | grapheme; | |
| ● | 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.
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.
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.mainly international customers.
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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.
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.
Competition and Competitive Advantages
We compete with a large number of domestic and international companies that manufacture graphitegraphene and grapheme related 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.
Government Regulations
Statutory Reserve
On December 31, 2013, the Company acquired new operations carried through BVI Co., and its subsidiaries Royal HK and Shanghai HK.Royal Shanghai. 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, XingyongRoyal Shanghai would have to transfer funds to our parent entity through our wholly-owned subsidiaries, TalentRoyal HK 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.
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The RMB is notcannot be freely convertibleexchanged 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.
Environmental Regulations
We believe that we are in compliance in all material respects with all applicable environmental protection laws and regulations.
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 subsidiarysubsidiaries Talent wasand BVI. Co. were not required to obtain SAFE’s approval to establish its offshore companycompanies Yongle and Royal HK as a “special purpose vehicle” for capital raising activities on behalf of XingyongRoyal Shanghai 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 2012,2016, we had 5707 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 Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended December 31, 2013,2016, the Company has incurred significant operating losses working capital deficit, and negative net cash flows from operating activities. The Company’s sales revenue declined significantly for the period ended December 31, 20132016 as compared to the same period prior year, and the 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.
We have incurred significant net losses in each of 2012the years in 2015 and 2013.2016. We have funded our operations through debt financings.equity financings and loans. 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 andwe further develop 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:
| ● | implement or execute its current business plan, or demonstrate that its business plan is sound; and/or |
| ● | raise sufficient funds in the capital markets or otherwise to effectuate its long-term business plan. |
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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 Business
If the downturn of the steel industry in China continues, we may have decreaseddifficulties increasing our 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 2013,2016, 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.
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.
Some of our expansion plans, including the expansionpromotion of our product offerings to include nuclear, solaron line portal and semiconductor productsthe potential acquisition and pursuing an acquisition,merger plan, 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.
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.
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.
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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.
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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 bandrange against a basketpool 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 revaluationdevaluation of the RMB, which we have seen signs of in the last couple of years, 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.
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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.
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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.
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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:
| we will be able to capitalize on economic reforms; |
| the Chinese government will continue its pursuit of economic reform policies; |
| the economic policies, even if pursued, will be successful; |
| economic policies will not be significantly altered from time to time; and |
| 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.
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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.
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Risks Related to our Common Stock
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, 2013,2016, 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 BoardMarkets under the symbol CHGI.OB.CHGI. 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.
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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:
| quarterly variations in our revenues and operating expenses; |
| developments in the financial markets and worldwide economies; |
| announcements of innovations or new products or services by us or our competitors; |
| announcements by the PRC government relating to regulations that govern our industry; |
| significant sales of our common stock or other securities in the open market; |
| variations in interest rates; |
| changes in the market valuations of other comparable companies; and |
| 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 primarily 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.
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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.
Not required
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.
Our principal executive office is located at 20955 Pathfinder Road, Suite 200, Diamond Bar, CA 91765, and our telephone number is (909) 843-6518. As of March 30, 2017, the Company uses, this land use right as collateralleases its corporate mailing address for its short-term bank loans. We believe that our facilities are sufficientan annual fee of $1,440.
Royal Shanghai leases an office in Shanghai China. The lease term of the office space is from January 1, 2015 to meet ourMarch 31, 2017. The current and near future requirements and that any additional space that we may require would be available on commercially reasonable terms.
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.
| Mine Safety Disclosures. |
Not Applicable.
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| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our
common stock is quoted on the OTCThe 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 | ||||
| High | Low | |||||||
| Fiscal Year Ended December 31, 2017 | ||||||||
| First Quarter | $ | 0.065 | $ | 0.0311 | ||||
| Second Quarter | $ | N/A | $ | N/A | ||||
| Third Quarter | $ | N/A | $ | N/A | ||||
| Four Quarter | $ | N/A | $ | N/A | ||||
| Fiscal Year Ended December 31, 2016 | ||||||||
| First Quarter | $ | 0.04 | $ | 0.01 | ||||
| Second Quarter | $ | 0.35 | $ | 0.013 | ||||
| Third Quarter | $ | 0.0495 | $ | 0.013 | ||||
| Fourth Quarter | $ | 0.065 | $ | 0.013 | ||||
| Fiscal Year Ended December 31, 2015 | ||||||||
| First Quarter | $ | 0.06 | $ | 0.03 | ||||
| Second Quarter | $ | 0.05 | $ | 0.02 | ||||
| Third Quarter | $ | 0.04 | $ | 0.03 | ||||
| Fourth Quarter | $ | 0.05 | $ | 0.01 | ||||
Number of Holders of Our Common Stock
As of March 30, 2017, there were
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, 2013,2016, there were no shares of our Series A Preferred Stock outstanding and 300,000 shares of ouror 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.
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Recent Sales 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.
On March 8, 2016, the stockholders.
On March 8, 2016, the stockholders.
On December 23, 2016, the stockholders.
On December 23, 2016, the Company issued 50,000 and Rule 506 of Regulation D, based upon representations made by the stockholders.
On December 23, 2016, the stockholders.
On December 23, 2016, the Company sold 3,200,000 shares of common stock to Xiangxin Sun for a purchase price of $320,000, or $0.10 per share.The issuance of the shares has been determined to be exempt from registration under the Securities Act and Rule 506in reliance on Section 4(2) of Regulation D, based upon representations made by the stockholders.
| Selected Financial Data. |
Not required.
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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,“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 manufacturesale of graphite-basedgraphene, graphene oxide and graphite bipolar plates products in the PRC andPRC. We also operate 1a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Our products are used inVendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the manufacturing processwebsite by paying a fee for each transaction conducted through the website.
As 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:
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.
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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 | )% | ||||||
| Years ended December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Sales | $ | 809,909 | 100.00 | % | $ | 323,369 | 100.00 | % | ||||||||
| Cost of Goods Sold | 648,152 | 80.03 | % | 244,993 | 75.76 | % | ||||||||||
| Gross Profit | 161,757 | 19.97 | % | 78,376 | 24.24 | % | ||||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | 29,335 | 3.62 | % | 26,794 | 8.29 | % | ||||||||||
| General and administrative | 418,050 | 51.62 | % | 958,895 | 296.53 | % | ||||||||||
| Bad debt expense - related party | - | - | % | 1,543,734 | 477.39 | % | ||||||||||
| Total operating expenses | 447,385 | 55.24 | % | 2,529,423 | 782.21 | % | ||||||||||
| Loss from continuing operations before other income (expense) and income taxes | (285,628 | ) | -35.27 | % | (2,451,047 | ) | -757.97 | % | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | (2,686 | ) | -0.33 | % | (2,117 | ) | -0.65 | % | ||||||||
| Interest income | - | - | - | - | ||||||||||||
| Other income (expense), net | 80,452 | 9.93 | % | 82,699 | 25.57 | % | ||||||||||
| Total other expense (income), net | 77,767 | 9.60 | % | 80,582 | 24.92 | % | ||||||||||
| Loss from continuing operations before income taxes | (207,862 | ) | -25.66 | % | (2,370,465 | ) | -733.05 | % | ||||||||
| Income Tax Expense | - | 0.00 | % | - | 0.00 | % | ||||||||||
| Net loss | (207,862 | ) | -25.66 | % | (2,370,465 | ) | -733.05 | % | ||||||||
| Preferred Stock Dividends | - | 0.00 | % | - | 0.00 | % | ||||||||||
| Net Loss Available To Common Shareholders | (207,862 | ) | -25.66 | % | (2,370,465 | ) | -733.05 | % | ||||||||
Fiscal Years Ended December 31, 2016 and 2015
SalesSales..
During the year ended December 31, 2013,2016, we had sales of $
| 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 | % | ||||||||
Cost of goods sold; gross marginsold..
Our cost of goods sold consists of the cost of raw materials, utilities, labor, depreciation expenses in our manufacturing facilities, and inventory impairmentpurchase cost. During the year ended December 31, 2013,2016, our cost of goods sold was $32,689,538,$648,152, compared to $24,707,625$244,993 for the cost of goods sold for the year ended December 31, 2012,2015, an increase of $7,981,913,$403,159 or approximately 32.3%164.56%. The increase in the cost of sales was primarily attributable to the significant increase in sales volume.
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Gross profit.
Our gross profit increased from $78,376 for the year ended December 31, 2013 compared2015 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.
Gross profit Margin.
Our gross loss of (243.1)%profit margin decreased from 24.2% for the year ended December 31, 2013.
Operating expenses.
Operating expenses totaled $447,385 for the year ended December 31, 2012, an increase of $28,101,780, or approximately 386.2%.
On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable conditions to closing, purchase all of the rights and obligations of Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement is $1,543,734 (RMB 10 million), including $575,813 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $967,921 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on June 30, 2014 after approved by a decreasespecial meeting of $193,978, or 76.5%. The decrease was shareholders. $1,543,734 is receivable from Mr. Jin for disposal of Xingyong. As of December 31, 2015, $1,543,734 has been recorded as bad debt expenses.
mainly due to decreased sales commissionSelling, general and lower shipping and handlingadministrative expenses.
Selling expenses duringincreased from $26,794 for the year ended December 31, 2013 as compared2015 to $29,335 for the year ended December 31, 2012, which resulted from lower2016, an increase of $2,541, or 9.48%. The increase is mainly attributed to increased shipping and handling costs because increased 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 relationsaccounting expenses) and stock compensation. General and administrative expenses were $10,075,818$418,050 for the year ended December 31, 2013,2016, compared to $6,785,273$958,895 for the year ended December 31, 2012, an increase2015, a decrease of $3,290,545,$540,845 or 48.5%56.40%.
Bad debt expenses of $3,372,295 for the year ended December 31, 2013 compared to the year ended December 31, 2012.
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 .
As a result of the factors described above, operating loss was $(58,540,568)$285,628 for the year ended December 31, 2013,2016, compared to operating loss of $(500,733)$2,451,047 for the year ended December 31, 2012, an increase2015, a decrease of approximately $58,039,835,$2,165,419, or 11,591.0%88.35%.
Other income and expenses.
Our interest expense was $5,246,606$2,686 for the year ended December 31, 2013,2016, compared to $4,618,413$2,117 for the year ended December 31, 2012, reflecting increased interest payments on loans from banks. Other2015.
Rental income which consisted of government grants, was $819,970$80,452 and $82,699 were recorded as other income for the yearyears 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 $
Income tax.
During the years ended December 31, 20132016 and 2012,2015, we benefited from a 100% tax holiday from the PRC enterprise tax. As a result, we had nodid not incur any 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, 20132016 was $(61,878,880),$207,862, compared to net loss of $(3,561,515)$2,370,465 for the year ended December 31, 2012, an increase2015, a decrease of $58,317,365,$2,162,603, or 1,637.4% for the reasons stated above.91.23%.
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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, 20132016 was $445,224,$12,791, compared to $1,039,383a translation loss of $60,107 for the year ended December 31, 2012, a decrease2015, an increase of $594,159, or 57.2%.
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 loss available to our common stockholders was $(61,887,079),$207,862, or $(2.39) and $(2.39)$(0.01) per share (basic and diluted), for the yearyears ended December 31, 2013,2016, compared to net loss of $(3,580,232),$2,370,465, or $(0.15) and $(0.15)net loss of $(0.07) per share (basic and diluted), for the yearyears ended December 31, 2012.
All of our business operations wereare carried out by Xingyong. On December 23, 2013, the Company acquired new operations carried through BVI Co.,Royal Shanghai, and its subsidiaries Royal HK and Shanghai HK, whose operations have generated nominal revenues between December 23, 2013 to December 31, 2013. Allall of the cash generated by our operations has been held by our China entities.
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 notcannot be freely convertibleexchanged 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 Xingyong,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 XingyongRoyal Shanghai to our parent entity and may delay any such transfer. In addition, upon repatriation of earnings of XingyongRoyal 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 and to fund our construction in progress.requirements. Our primary sources of financing outside of revenues generated by sales of our products, have beenwill be cash generated from short-term and long-term loans from banks, in China, loansequity investment from investors, and borrowings 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.”
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 | |||||
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 | |||||
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 | |||
The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended December 31, 2013,2016, the Company has incurred significant operating losses and working capital deficit and negative net cash flows from operating activities. The Company’s sales revenue declined significantlyis not sufficient to cover the company’s expenses for the periodyear ended December 31, 2013 as compared to the same period prior year, and the demand for the Company’s products remains highly uncertain.2016.
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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.
Our long-term goal is to continue to roll over short-term and long-term loans and obtain positive cash flows from collectingdevelop 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.Royal Shanghai business. During the interim, we expect that anticipated cash flows from future operations, short-term and long-term bank loans and loansequity investment from unrelated or related parties, will be sufficient to fund our operations through at least the next twelve months, provided that:
| ● | we generate sufficient business so that we are able to generate substantial profits, which cannot be assured; |
| ● | 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,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 December 31, 2013,2016, cash and cash equivalents were $131,545,$50,300, compared to $129,746$35,523 at December 31, 2012,2015, 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.$14,777. Our working capital deficit increaseddecreased by $47,192,707$155,231 to a deficit of $47,684,454$1,687,659 at December 31, 20132016 from a deficit of $491,747$1,842,890 at December 31, 2012.
Accounts receivable, net of allowance, was $4,488,310, compared to $11,239,002 atwere $50,156 and $25,718 for the fiscal year ended December 31, 2012, a decrease of $6,750,692, or 60.06%.2016 and 2015, respectively. The decreaseincrease was mainly due to decreasedincreased sales during the year ended December 31, 2013.2016. 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, 2013,2016, inventories were $27,901,417,$24,175, compared to $48,417,875$2,386 at December 31, 2012, a decrease2015, an increase of $20,516,458,$21,789, or 42.37%913.2%. As of December 31, 20132016 and December 31, 2012,2015, the Company has not made provision for inventory in regards to slow moving or obsolete items of $21,089,248 and $0, respectively.
As of December 31, 2013,2016, prepaid expenses were $528,464,$0, compared to $280,779$211 at December 31, 2012, an increase2015, a decrease of $247,685,$211, or 88.21%100%. The increasedecrease in prepaid expenses is attributableattributed to increased prepaid services during the quarter ended December 31, 2013 offset by the amortization of various prepaid consulting fees paid from stock issuances.
Advances to suppliers decreasedincreased from $1,177,462$0 at December 31, 20122015 to $532,178$158,010 at December 31, 2013, a decrease2016, an increase of $645,284.$158,010. The decreaseincrease of advanceadvances to suppliers is mainly due to the Company decreased purchases caused by decreased sales, and due to thatbecause the Company made more allowances for advanceadvanced payments to suppliers induring the year ended December 31, 2013 than the year ended December 31, 2012. $3,548,068 and $1,578,310 of2016. No allowance for doubtful accounts for the balance of advanceadvances to suppliers werewas reserved as of December 31, 20132016 and December 31, 2012,2015, 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 fromFiscal Year ended 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.
The following table sets forth information about our
net cash flow for the years indicated: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 | ||||
| For Years Ended December 31 | ||||||||
| 2016 | 2015 | |||||||
| Net cash flows provided by (used in) operating activities | $ | (301,396 | ) | $ | 82,776 | |||
| Net cash flows used in investing activities | $ | (1,152 | ) | $ | (1,625 | ) | ||
| Net cash flows provided by (used in) financing activities | $ | 320,122 | $ | (75,127 | ) | |||
Net cash flow used in operating activities was $2,740,948$301,396 for the year ended December 31, 2013,2016, compared to $4,934,906$82,776 provided by operating activities for the year ended December 31, 2012,2015, a decrease of $2,193,958, or 44.5%.$384,172. The decrease in net cash flow used in operating activities was mainly due to increased impairmentdecrease of property and equipment and construction$2,162,603 in progress of $24.6 million, increased impairment of inventory of $21.1 million, morenet loss, offset by increase of other payables of $3.5 million，increased bad debt expenses of $3.4 million, more decrease$195,922 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, decrease of $4.5 million,$1,543,734 in bad debt expense for related parties receivable and increased accounts payable and accrued liabilitiesdecrease of $1.2 million.
Net cash flow used in investing activities
wasNet cash flow provided by financing activities w
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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, 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 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 manufacturesell 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, 20132016 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.
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Income Taxes
We account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation of this law gradually become subject to the new tax rate within five years after the implementation of this law.
Accounts Receivable and Allowance For Doubtful Accounts
Accounts receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical
collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted toInventories
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. 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. For the years ended December 31, 20132016 and 20122015, the Company has not made 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 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,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, 20132016 and 2012 has2015 were 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.
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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 | - | ||||||||||
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.
No 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, 20132016 and 2012,2015, respectively.
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
In February 2013,2016, the FASB issued ASU No. 2013-02, which amends2016-02, “Leases (Topic 842)”, to increase the authoritative accountingtransparency and comparability about leases among entities. The new guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirementsrequires lessees to recognize a lease liability and a corresponding lease asset for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide informationvirtually all lease contracts. It also requires additional disclosures about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entityleasing arrangements. ASU 2016-02 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 reportinginterim and annual periods beginning after December 15, 2013.2018, and requires a modified retrospective approach to adoption. 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.
| 26 |
In July 2013,August 2016, the FASB issued ASU 2013-11, Income TaxesNo. 2016-15, “Statement of Cash Flows (Topic 740)230): PresentationClassification of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carry forward Exists (A ConsensusCertain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the FASB Emerging Issues Task Force)statement of cash flows”. ASU 2013-11 providesThe amendments provide guidance on financial statement presentationthe following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of unrecognized tax benefit when a net operating loss carry forward, a similar tax loss,Zero-Coupon Debt Instruments or a tax credit carry forward exists. The FASB’s objectiveOther Debt Instruments with Coupon Interest Rates That Are Insignificant in issuing this ASU isRelation 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 asEffective Interest Rate of the reporting date. This amendment isBorrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 20132017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The companyamendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect that the adoption of this standard toguidance will have a material impact on the Company’sits consolidated financial position and results of operations.
In December 2013,October 2016, the FASB issued ASU 2013-12, “Definition2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for the Company in its first quarter of 2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”. The amendments affect reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the primary beneficiary of a Public Business Entity”variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The Board has decidedamendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 requires an entity to recognize the amount of revenue to which it should proactively determine which entities wouldexpects to be withinentitled for the scopetransfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (Guide). This will aim to minimizeEffective Date”, which defers 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 ASU 2014-09 by one year. For public entities, the amendmentguidance in this Update. However, the term public business entityASU 2014-09 will be usedeffective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which means it will be effective for the Company’s fiscal year beginning January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)”, which clarifies the implementation guidance on principal versus agent considerations in Accounting Standards Updatesthe new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing”, which arereduces the first Updatescomplexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients”, which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”, which makes minor corrections or minor improvements to the Codification that will use the term public business entity. The adoption of this standard isare not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue standard. Preliminarily, we plan to adopt Topic 606 in the first quarter of our fiscal 2018 using the retrospective transition method, and are continuing to evaluate the impact our pending adoption of Topic 606 will have on our consolidated financial statements. The Company’s current revenue recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments to input measures are not expected to be pervasive to the majority of the Company’s contracts. While no significant impact is expected upon adoption of the new guidance, the Company will not be able to make that determination until the time of adoption based upon outstanding contracts at that time.
| 27 |
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financialstatements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
| a. | Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans) | |
| b. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations | |
| c. | Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
| a. | Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern |
| b. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations | |
| c. | Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. |
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material impacteffect on the Company’s consolidatedaccompanying financial position and results of operations.
| Quantitative and Qualitative Disclosures about Market Risk. |
Not applicable to smaller reporting companies.
| 28 |
| Financial Statements and Supplementary Data. |
China Carbon Graphite Group, Inc.
Index to Consolidated Financial Statements
| Page | ||
| Fiscal Years Ended December 31, 2016 and 2015 | ||
| Report of Independent Registered Public Accounting Firms | F-2 | |
| Consolidated Financial Statements | ||
| Consolidated Balance Sheets | F-3 | |
| Consolidated Statements of Operations and Comprehensive Income | F-4 | |
| Consolidated Statements of Changes in | F-5 | |
| Consolidated Statements of Cash Flows | F-6 | |
| Notes to Consolidated Financial Statements | F-7 |
| 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 sheetssheet of China Carbon Graphite Group, Inc. and Subsidiaries (the “Company”) as of December 31, 20132016 and 2012,2015 and the related consolidated statementsstatement of operations and comprehensive income,loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for the years then ended. The Company’s management is responsible for theseended December 31, 2016 and 2015. These consolidated financial statements.statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our auditaudits 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 consolidated 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 includedaudits include 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’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesOur audits include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,statements. Our audits also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statementstatements presentation. We believe that our auditaudits 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 Subsidiariesthe Company as of December 31, 20132016 and 2012,2015, and the consolidated resultsresult of theirits operations and theirits cash flows for the years then ended in conformity with accounting principlesU.S. 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 describeddiscussed in Note 2 ofto the consolidated financial statements, the Company has incurred significant negative cash flowslosses from operative activities,operations and continuing net losses and working capital deficits. The Company’s viability is dependent upon its ability to obtain future financing and the successhas an accumulated deficit of its future operations.$50,521,857as of December 31, 2016. These mattersconditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard toManagement's plans concerning these matters isare also described in Note 2, to the consolidated financial statements.which includes raising additional capitals. 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
March 30, 2017
| 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 | ||||
| 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 | |||||||
| 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 | ) | ||||||||||||||||||||
China Carbon Graphite Group, Inc. and subsidiaries
Consolidated Balance Sheets
| December 31, 2016 | December 31, 2015 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 50,300 | $ | 35,523 | ||||
| Account Receivable | 50,156 | 25,718 | ||||||
| Inventories | 24,175 | 2,386 | ||||||
| Advance to suppliers | 158,010 | - | ||||||
| Prepaid expenses | - | 211 | ||||||
| Other receivables, net | 42,543 | 42,695 | ||||||
| Total current assets | 325,184 | 106,533 | ||||||
| Property And Equipment, Net | 21,464 | 30,646 | ||||||
| Total Assets | $ | 346,648 | $ | 137,179 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 199,740 | $ | 193,448 | ||||
| Accrued payroll - related party | 506,883 | 532,623 | ||||||
| Advance from customers | 27,536 | 7,260 | ||||||
| Other payables | 1,086,325 | 1,013,994 | ||||||
| Due to related parties | 137,345 | 147,083 | ||||||
| Dividends payable | 55,015 | 55,015 | ||||||
| Total current liabilities | 2,012,843 | 1,949,423 | ||||||
| Total Liabilities | 2,012,843 | 1,949,423 | ||||||
| Stockholders' Equity (Deficit) | ||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized 37,398,518 and 33,670,518 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | 37,398 | 33,670 | ||||||
| Additional paid-in capital | 48,728,495 | 48,391,103 | ||||||
| Accumulated other comprehensive income | 89,770 | 76,978 | ||||||
| Accumulated loss | (50,521,857 | ) | (50,313,995 | ) | ||||
| Total stockholders' equity (deficit) | (1,666,195 | ) | (1,812,244 | ) | ||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 346,648 | $ | 137,179 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
| 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 | ||||
China Carbon Graphite Group, Inc and subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 2016 and 2015
| Years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Sales | $ | 809,909 | $ | 323,369 | ||||
| Cost of Goods Sold | 648,152 | 244,993 | ||||||
| Gross Profit | 161,757 | 78,376 | ||||||
| Operating Expenses | ||||||||
| Selling expenses | 29,335 | 26,794 | ||||||
| General and administrative | 418,050 | 958,895 | ||||||
| Bad debt expense - related party | - | 1,543,734 | ||||||
| Total operating expenses | 447,385 | 2,529,423 | ||||||
| Loss before other income (expense) and income taxes | (285,628 | ) | (2,451,047 | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | (2,686 | ) | (2,117 | ) | ||||
| Other income (expense), net | 80,452 | 82,699 | ||||||
| Total other expense (income), net | 77,767 | 80,582 | ||||||
| Loss before income taxes | (207,862 | ) | (2,370,465 | ) | ||||
| Income Tax Expense | - | - | ||||||
| Net loss | (207,862 | ) | (2,370,465 | ) | ||||
| Other Comprehensive Income | ||||||||
| Foreign currency translation gain (loss) | 12,792 | (60,107 | ) | |||||
| Total Comprehensive Loss | $ | (195,070 | ) | $ | (2,430,572 | ) | ||
| Share Data | ||||||||
| Basic and diluted loss per share | ||||||||
| Net loss per share – basic and diluted | $ | (0.01 | ) | $ | (0.07 | ) | ||
| Weighted average common shares outstanding, basic | 33,999,043 | 33,670,518 | ||||||
| Weighted average common shares outstanding, diluted | 33,999,043 | 33,670,518 | ||||||
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 Stockholders' Equity
| Convertible series B | Common | Additional | Other | Total | ||||||||||||||||||||||||||||
| preferred Stock | Stock | Paid-In | Retained | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Earnings | Income | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2014 | 300,000 | $ | - | 33,670,518 | $ | 33,670 | $ | 48,391,103 | $ | (47,943,530 | ) | $ | 137,085 | $ | 618,328 | |||||||||||||||||
| Net loss | - | - | - | - | - | (2,370,465 | ) | - | (2,370,465 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | (60,107 | ) | (60,107 | ) | ||||||||||||||||||||||
| Cancellation of preferred stock | (300,000 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
| Balance at December 31, 2015 | - | $ | - | 33,670,518 | $ | 33,670 | $ | 48,391,103 | $ | (50,313,995 | ) | $ | 76,978 | $ | (1,812,244 | ) | ||||||||||||||||
| Issuance of common stock for directors and employees | - | - | 528,000 | 528 | 20,592 | - | - | 21,120 | ||||||||||||||||||||||||
| Share issuance for cash | - | - | 3,200,000 | 3,200 | 316,800 | - | - | 320,000 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (207,862 | ) | - | (207,862 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | 12,792 | 12,792 | ||||||||||||||||||||||||
| Balance at December 31, 2016 | - | $ | - | 37,398,518 | $ | 37,398 | $ | 48,728,495 | $ | (50,521,857 | ) | $ | 89,770 | $ | (1,666,194 | ) | ||||||||||||||||
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, | ||||||||
| 2016 | 2015 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss available to common shareholders | $ | (207,862 | ) | $ | (2,370,465 | ) | ||
| Adjustments to reconcile net cash provided by operating activities | ||||||||
| Depreciation and Amortization | 8,606 | 8,926 | ||||||
| Impairment of Goodwill | - | 494,540 | ||||||
| Bad debt expense for related parties receivable | - | 1,543,734 | ||||||
| Stock compensation | 21,120 | - | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | (27,355 | ) | (26,517 | ) | ||||
| Other receivables | (2,435 | ) | (19,002 | ) | ||||
| Advance to suppliers | (165,223 | ) | 16,687 | |||||
| Inventory | (22,950 | ) | (1,337 | ) | ||||
| Accounts payable and accrued liabilities | (11,653 | ) | 274,950 | |||||
| Advance from customers | 21,709 | 954 | ||||||
| Taxes payable | 4,309 | 7,402 | ||||||
| Other payables | 80,338 | 152,904 | ||||||
| Net cash provided by (used in) operating activities | (301,396 | ) | 82,776 | |||||
| Cash flows from investing activities | ||||||||
| Acquisition of plant and equipment | (1,152 | ) | (1,625 | ) | ||||
| Net cash used in investing activities | (1,152 | ) | (1,625 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from share issuance | 320,000 | - | ||||||
| Proceeds from loan from related parties | 1,192 | - | ||||||
| Payments to loan from related parties | (1,071 | ) | (75,127 | ) | ||||
| Net cash provided by (used in) financing activities | 320,122 | (75,127 | ) | |||||
| Effect of exchange rate fluctuation on cash and cash equivalents | (2,797 | ) | (1,364 | ) | ||||
| Net increase in cash | 14,777 | 4,660 | ||||||
| Cash and cash equivalents at beginning of period | 35,523 | 30,863 | ||||||
| Cash and cash equivalents at ending of period | $ | 50,300 | $ | 35,523 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest paid | $ | 2,686 | $ | 2,117 | ||||
| Income taxes paid | $ | - | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
(1) Organization and Business
China Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacturesales of graphite-based productsgraphene and in operating a business-to-businessgraphene oxide and business-to-consumers Internet portal (www.roycarbon.com) graphite bipolar plates 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 metalsWe also operate a business-to-business and steel, and are incorporated in various types of products or processes, such as atomic reactors.business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. The Company manufactures and sells three typessupplies end-users in graphite application zones including industries of products throughout China and internationally:steel, metallurgy, non-ferrous, PV, energy storage, optical fiber, semiconductor, chemicals. In addition, through its sales channels, the Company supplies special 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.
On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant to the Agreement, the Purchasers purchased all of the rights and obligations of Yongle with relating to Xingyong under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement was $1,543,734 (RMB 10 million), including $575,813 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $967,921 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The Purchasers agreed to return all shares held individually and under Sincere Investment (PTC) Limited totaling 10,388,172 shares. The disposal of Xingyong became effective on June 30, 2014 after approved by majority of shareholders at a special meeting of shareholders held on such date. In connection with this transaction and as of December 31, 2016,Company has not received the $1,543,734 of the total purchase price and adjusted the note receivable as a bad debt expense. As of March 10, 2017, 9,388,172 shares of common stock previously held by Sincere were cancelled.
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. Pursuant to the terms of the acquisition, we issued an agreement. Per the agreement, the Company is obligated to issueaggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former shareholders of BVI Co. in the aggregate in exchange for 500 ordinary shares100% of the issued and outstanding equity of BVI Co. held by them, representing 100% of BVI Co.’sThe shares were issued and outstanding share capital.on January 16, 2014. BVI Co. then becomesbecame a wholly owned subsidiary of the Company.
BVI Co. currently has twoone business operations,operation as follows (collectively the(the “Business”):
| ● | TheCompany supplies end-users in graphite application zones including industries of |
The Business and the facilities related thereto are all located in the People’s Republic of China.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.
| F-7 |
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 arein 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.
Organizational Structure Chart
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.
As of December 31, 2016 and foras of December 31, 2015, the last two fiscal years, the Company has managed to operate theits business with a lownegative 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.
(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 yearperiod ended December 31, 2013,2016, the Company has incurred significant operating losses and working capital deficit, and negative net cash flows from operating activities. The 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.deficit. 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.
| F-8 |
(3) Basis for Preparation of the Consolidated 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”).subsidiaries. All significant intercompany accounts and transactions have been eliminated.
(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 threesix 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. MostSubstantially 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.
| F-9 |
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.
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. 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. 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 yearyears ended December 31, 2013,2016 and 2015, the Company has not made provision for inventory in regards to slow moving or obsolete items.
Goodwill
The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company recorded an impairment lossexpense of inventory $21,089,248. For$0 and $494,540 for the yearyears ended December 31, 2012, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
Property and equipment
Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:
| Machinery and equipment | 5 years | |
| Motor | 5 years |
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $19,426,726 and $0 ofno impairment expenses for property, plant, and equipment werewas recorded in operating expenses forduring the years ended December 31, 20132016 and 2012, respectively. 2015.
| F-10 |
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 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, 20132016 and 20122015 were $445,224$12,792 and $1,039,383,$(60,107), respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the years ended December 31, 20132016 and 20122015 were $3,224$(2,797) and $(101)$(1,364), 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 6.056.94 RMB and 6.236.48 RMB to $1.00 at December 31, 20132016 and December 31, 2012,2015, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the years ended December 31, 20132016 and 20122015 were 6.156.64 RMB and 6.316.28 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
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.
| F-11 |
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 manufacturesell 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 of $79,961 and $0 for the years ended December 31, 20132016 and 2012.
Cost of goods sold
Cost of goods sold consists primarily of the purchase costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead associated with the manufacturing process and commission expenses.
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, 20132016 and 2012,2015, shipping and handling costs
, 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.
| F-12 |
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, 20132016 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, 2013,2016, 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.
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. VAT payable (recoverable), which is included in other payables, was $124,097prepaid expenses of $0 and $(79,346)is included in prepaid expenses of $211 as of December 31, 20132016 and 2012,December 31, 2015, respectively.
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.such liability or obligation.
| F-13 |
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. |
| 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 termshort-term nature of these items.
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 | - | ||||||||||
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 | - | ||||||||||
| 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-14 |
The following table sets forth the computation of the number of net income per share for the years ended December 31, 20132016 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 | ) | ||
December 31, 2016 | December 31, 2015 | |||||||
| Weighted average shares of common stock outstanding (basic) | 33,999,043 | 33,670,518 | ||||||
| Shares issuable upon conversion of Series B Preferred Stock | - | - | ||||||
| Weighted average shares of common stock outstanding (diluted) | 33,999,043 | 33,670,518 | ||||||
| Net (loss) available to common shareholders | $ | (207,862 | ) | $ | (2,370,465 | ) | ||
| Net (loss) per shares of common stock (basic) | $ | (0.01 | ) | $ | (0.07 | ) | ||
| Net (loss) per shares of common stock (diluted) | $ | (0.01 | ) | $ | (0.07 | ) | ||
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.
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, 20132016 and 20122015 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 2013,2016, the FASB issued ASU No. 2013-02, which amends2016-02, “Leases (Topic 842)”, to increase the authoritative accountingtransparency and comparability about leases among entities. The new guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirementsrequires lessees to recognize a lease liability and a corresponding lease asset for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide informationvirtually all lease contracts. It also requires additional disclosures about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entityleasing arrangements. ASU 2016-02 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 reportinginterim and annual periods beginning after December 15, 2013.2018, and requires a modified retrospective approach to adoption. 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.
In July 2013,August 2016, the FASB issued ASU 2013-11, Income TaxesNo. 2016-15, “Statement of Cash Flows (Topic 740)230): PresentationClassification of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carry forward Exists (A ConsensusCertain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the FASB Emerging Issues Task Force)statement of cash flows”. ASU 2013-11 providesThe amendments provide guidance on financial statement presentationthe following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of unrecognized tax benefit when a net operating loss carry forward, a similar tax loss,Zero-Coupon Debt Instruments or a tax credit carry forward exists. The FASB’s objectiveOther Debt Instruments with Coupon Interest Rates That Are Insignificant in issuing this ASU isRelation 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 asEffective Interest Rate of the reporting date. This amendment isBorrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 20132017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The companyamendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect that the adoption of this standard toguidance will have a material impact on the Company’sits consolidated financial position and results of operations.statements.
| F-15 |
In December 2013,October 2016, the FASB issued ASU 2013-12, “Definition2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for the Company in its first quarter of 2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”. The amendments affect reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the primary beneficiary of a Public Business Entity”variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The Board has decidedamendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 requires an entity to recognize the amount of revenue to which it should proactively determine which entities wouldexpects to be withinentitled for the scopetransfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (Guide). This will aim to minimizeEffective Date”, which defers 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 ASU 2014-09 by one year. For public entities, the amendmentguidance in this Update. However, the term public business entityASU 2014-09 will be usedeffective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which means it will be effective for the Company’s fiscal year beginning January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)”, which clarifies the implementation guidance on principal versus agent considerations in Accounting Standards Updatesthe new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing”, which arereduces the first Updatescomplexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients”, which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”, which makes minor corrections or minor improvements to the Codification that will use the term public business entity. The adoption of this standard isare not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue standard. Preliminarily, we plan to adopt Topic 606 in the first quarter of our fiscal 2018 using the retrospective transition method, and are continuing to evaluate the impact our pending adoption of Topic 606 will have on our consolidated financial statements. The Company’s current revenue recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments to input measures are not expected to be pervasive to the majority of the Company’s contracts. While no significant impact is expected upon adoption of the new guidance, the Company will not be able to make that determination until the time of adoption based upon outstanding contracts at that time.
| F-16 |
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financialstatements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probableis used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
| a. | Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans) | |
| b. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations | |
| c. | Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
| a. | Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern |
| b. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations | |
| c. | Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. |
| F-17 |
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material impacteffect on the Company’s consolidatedaccompanying financial position and results of operations.
(5) Concentration of Business and Credit Risk
Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.
Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.
Sales to certain customers generated over 10% of the Company’s total net sales. Sales to Jinko Solar Technology SDN. BHD, for the year ended December 31, 2016 were approximately 32% of the Company’s net sales. Sales to Honglang Carbon Industry Co., Ltd for the year ended December 31, 2016 were approximately 27% of the Company’s net sales. Sales to NurolTeknolojiSanayiVeMadenci for the year ended December 31, 2016 were approximately 33% of the Company’s net sales.
Sales to certain customers generated over 10% of the Company’s total net sales. Sales to Jinko Solar Technology SDN. BHD for the year ended December 31, 2015 were approximately 55% of the Company’s net sales. Sales to NurolTeknolojiSanayiVeMadenci for the year ended December 31, 2015 were approximately 23% of the Company’s net sales.
For the year ended December 31, 2013, two customers2016, three suppliers accounted for 10% or moreapproximately 96% of sales revenues, representing 37.0% and 18.5%, respectively of the total sales. purchases.
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.
(6) Income Taxes
United States
The Company is incorporated in United States, and is subject to corporate income tax rate of 34%.
The People's Republic of China (PRC)
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 new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations.
| F-18 |
Loss before income taxes consists of:
| For the years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Non-PRC | $ | (213,423 | ) | $ | (55,632 | ) | ||
| PRC | $ | 5,561 | $ | (2,314,834 | ) | |||
| $ | (207,862 | ) | $ | (2,370,465 | ) | |||
The income tax expense in the consolidated statements of operations consisted of:
| For the years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Unites States Enterprise Income Tax | $ | - | $ | - | ||||
| PRC Enterprise Income Tax | - | - | ||||||
| Income taxes, net | $ | - | $ | - | ||||
The components of deferred taxes are as follows at December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||||||
| Deferred tax assets, current portion | ||||||||
| Amortization of fair value of stock for services | $ | - | $ | - | ||||
| Total deferred tax assets, current portion | $ | - | $ | - | ||||
| Valuation allowance | $ | - | $ | - | ||||
| Deferred tax assets, current portion, net | $ | - | $ | - | ||||
| Deferred tax assets, non-current portion | ||||||||
| Fixed assets | $ | - | $ | - | ||||
| Net operating losses | $ | 17,177,431 | $ | 17,106,759 | ||||
| Total deferred tax assets, non-current portion | $ | 17,177,431 | $ | 17,106,759 | ||||
| Valuation allowance | $ | (17,177,431 | ) | $ | (17,106,759 | ) | ||
| Deferred tax assets, non-current portion, net | $ | - | $ | - | ||||
As of December 31, 2016, Royal Shanghai had a net operating loss of $662,059 that can be carried forward to offset future net profit for income tax purposes under the PR China tax law. The net operating loss carry forwards as of December 31, 2016 will expire in years 2016 to 2020 if not utilized.
China Carbon is subject to United States of America tax law. As of December 31, 2016, the operations in the United States of America incurred $50,521,857 of cumulative net operating losses that can be carried forward to offset future taxable income. The net operating loss carry forwards as of December 31, 2016 will expire in the year of 2033 to 2035 if not utilized. The Company has been granted a 100%provided full valuation allowance for the deferred tax holidayassets on the expected future tax benefits from enterprisethe net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized in the future.
| F-19 |
A reconciliation between the income tax fromcomputed at the Xing He District Local Tax Authority for 10 years from 2008 through 2017.
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Computed tax at the PRC statutory rate of 25% | $ | - | $ | - | ||||
| Benefit of tax holiday | - | - | ||||||
| Income tax expenses per books | $ | - | $ | - | ||||
| December 31, 2016 | December 31, 2015 | |||||||
| Tax expense at statutory rate - US | 34 | % | 34 | % | ||||
| Foreign income not recognized in the U.S. | (34 | )% | (34 | )% | ||||
| PRC enterprise income tax rate | 25 | % | 25 | % | ||||
| Loss not subject to income tax | (25 | )% | (25 | )% | ||||
| Effective income tax rates | - | % | - | % | ||||
(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, 20132016 and 2012,2015, 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 | ||||
| December 31, 2016 | December 31, 2015 | |||||||
| Amount outstanding | $ | 50,156 | $ | 25,718 | ||||
| Less: Allowance for doubtful accounts, net | - | - | ||||||
| Net amount | $ | 50,156 | $ | 25,718 | ||||
(8) Advances to Suppliers
As of December 31, 20132016 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 | ||||
| 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, 20132016 and 2012,December 31, 2015, 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 | |||||
December 31, 2016 | December 31, 2015 | |||||||
| Inventory in transit | $ | 24,175 | $ | 2,386 | ||||
| Reserve for slow moving and obsolete inventory | - | - | ||||||
| $ | 24,175 | $ | 2,386 | |||||
For the years ended
December 31,(10) Other Receivables
Other receivables amounted $42,543 and $42,695 as of December 31, 2016 and December 31, 2015, respectively. Impairment of inventories is recorded in cost of goods sold.
| F-20 |
(11) Property and Equipment, net
As of December 31, 20132016 and 2012,December 31, 2015, property, plant 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 | |||||
December 31, 2016 | December 31, 2015 | |||||||
| Machinery and equipment | $ | 6,245 | $ | 5,513 | ||||
| Motor vehicles | 40,236 | 43,125 | ||||||
| Total | 46,481 | 48,638 | ||||||
| Less: accumulated depreciation | (25,017 | ) | (17,992 | ) | ||||
| Plant and Equipment, net | $ | 21,464 | $ | 30,646 | ||||
For the years ended December 31, 20132016 and 2012,2015, depreciation expenses amounted to $2,479,416$8,606 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.
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 ofno impairment expenses 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.
| 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 | ||||||||
| 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 | |||||
| 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 |
(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”).
Issuance of Common Stock
(a) Conversion of Series A and Series B Preferred Stock
As of December 31, 20132016 and 2012,2015, no shares of Series A and Series B Preferred Stock are issued or outstanding.
| F-21 |
(b) Conversion of Series B Preferred Stock
On December 19, 2016, the year ended December 31, 2012,Company issued 3,200,000 shares for cash at $0.10 per share to unrelated parties.
(c) Stock Issuances For Compensation
On March 8, 2016, 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.
On MayMarch 8, 2013,2016, 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 25,00064,000 shares of common stock to a director as compensation for services provided in 2013.the CFO andVP of Finance. The issuance of these shares was recorded at grant date fair market value or $256,250of $0.03 in 2016.
On December 19, 2016, the Company issued an aggregate of 200,000 shares of common stock to four directors as compensation for services provided in 2016. The issuance of these shares was recorded at grant date fair market value at $0.05 per share.
On December 19, 2016, the Company issued 64,000 shares of common stock to the CFO and wereVP of Finance. The issuance of these shares was recorded as general and administration expense.
(d) 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, 2013,2016, no Escrow sharesShares have been transferred to investors or returned to the Company.
Dividend Distribution for Series B Preferred Stock
Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010 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, 20132016 and 2012,2015, no payment was made for dividends declared.
| F-22 |
(13) Amount Due to Related Parties
As of December 31, 20132016 and 2012, the Company had related parties payable in the amount of $5,157,112 and $4,795,593, respectively.
As of December 31, 2016 and December 31, 2015, $458,105 and $487,529 are the salary owed to Mr. Donghai Yu, who is CEO of the Company. As of December 31, 2016 and December 31, 2015, $45,000 and $45,000 are the salary owed to Mr. Grace King, who is VP finance of the Company.
On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable conditions to closing, purchase all of the rights and obligations of Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement is $1,543,734 (RMB 10 million), including $575,813 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $967,921 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on June 30, 2014 after approved by a special meeting of shareholders. $1,543,734 is receivable from Unrelated Parties
(14) Other Payable
Other payable amounted $1,086,325 and $338,002$1,013,994 as of December 31, 20132016 and 2012,December 31, 2015, respectively. The borrowingsOther payables are money borrowed from unrelated parties for operating purpose. These payable are without collateral, interest free, and due on demand.
(15) Bank Loans
Our principal executive office is located in US. The Company leased its corporate address month to month for an annual fee of December$1,440.
Royal Shanghai leased an office space in China, the lease term ends on March 31, 2013 and 2012, 2017. The monthly rent is approximately $2,917 (RMB 18,329).
(16) Subsequent eventsshort-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 | |||||
On June 10, 2014, the Company entered into a secured line of creditan asset purchase agreement with China Construction Bank for borrowings up to $71 million (or RMB 430 million) between January 10, 2012(the “Agreement”) by and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit,among the Company is entitledand its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant to draw funds through sub-agreementsthe Agreement, the Purchasers purchased all 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.
| 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 | |||||
| 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 | |||
| 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-23 |
None.
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, 2013.2016.
| 29 |
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, 2013.2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(COSO – 2013 framework) 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, 2013.2016. 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, 2013.2016.
| 30 |
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.
None.
The following table sets forth certain information with respect to our directors, executive officers and significant employees:
| Age | Position | |||
| Donghai Yu | Chief Executive Officer, President and Director | |||
| Zhenfang Yang | Interim Chief | |||
| Philip Yizhao Zhang | Director | |||
| John Qiang Chen | Director | |||
| Hongbo Liu | Director | |||
| Grace King | Senior Vice President of Finance |
| 31 |
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 isJohn Qiang 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.
| 32 |
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.
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.
| 33 |
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 2012,2016, each of our directors failed to file a Form 4 to reflect the grant of an equity award.
The following summary compensation table sets forth the compensation earned by our named executive officers during the years ended December 31, 2013, 20122016 and 2011.
| Name and principal position | Year | Salary | Stock Awards (1) | Total | ||||||||||||
| Donghai Yu | 2016 | $ | 78,000 | $ | - | $ | 78,000 | |||||||||
| Chief Executive Officer | 2015 | $ | 75,000 | $ | $ | 75,000 | ||||||||||
| Zhenfang Yang | 2016 | $ | - | $ | 1,600 | (2) | $ | 1,600 | ||||||||
| Interim Chief Financial Officer | 2015 | $ | 24,000 | $ | 960 | (2) | $ | 24,960 | ||||||||
| (1) | This column represents the fair value of the stock issuance on the grant date determined in accordance with the provisions of ASC 718. |
| (2) | Mr. Yang received 32,000 shares for his service as a director in 2016 and 2015. The shares were valued at $0.05 and $0.03 per share respectively. |
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| 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 | |||||||||
Director Compensation
In 2013 and 2012,2016 we issued 0 and 25,000100,000 shares of common stock to each ofto 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, weOut of the 100,000 that were issued 25,000 and 0 shares of common stock t Mr. Dong Jinto each director, 50,000 were issued for his service as a director and committee member.
The following table presents the compensation paid to our directors in respect of fiscal year 20132016 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 | ||||
| Name | Stock Awards (1) | Total | ||||||
| Donghai Yu | $ | 2,500 | $ | 2,500 | ||||
| Philip Yizhao Zhang | $ | 2,500 | $ | 2,500 | ||||
| John Chen | $ | 2,500 | $ | 2,500 | ||||
| Hongbo Liu | $ | 2,500 | $ | 2,500 | ||||
(1) This column represents the fair value of the stock issuance at $0.05 per share on the grant date determined in accordance with the provisions of ASC 718.
| 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,April 5, 2016, by:
| ● | each director; |
| ● | each named executive officer; |
| ● | each person known by us to beneficially own at least 5% of our common stock; and |
| ● | all directors and executive officers as a group. |
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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.
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 | % | |||||
| Name | Amount and Nature of Beneficial Ownership | Percent of Class (1) | ||||||
| Donghai Yu | 270,000 | 1.00 | % | |||||
| Zhenfang Yang | 112,000 | 0.41 | % | |||||
| Hongbo Liu | 275,000 | 1.02 | % | |||||
| Philip Yizhao Zhang | 275,000 | 1.02 | % | |||||
| John Qiang Chen | 175,000 | 0.65 | % | |||||
| All officers and directors as a group (5 persons) | 1,107,000 | 4.10 | % | |||||
| 5% shareholders: None | ||||||||
| Xiangxin Sun | 3,200,000 | 11.85 | % | |||||
(1) LizhongGao, our former president and a directorApplicable percentages are based on 27,010,346 shares outstanding as of March 30, 2017, adjusted as required by rules of the Company,SEC. Beneficial ownership is determined under the president and sole stockholder of Sincere and has the sole power to vote and disposerules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Unless otherwise indicated in the footnotes to this table, Company believes that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially 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.
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,Lizhong Gao, 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.
Hongbo Liu, Philip Yizhao Zhang and John Qiang Chen are independent as defined by NASDAQ Marketplace Rules.
As of December 31, 2016 and December 31, 2015, $137,345 and $147,083 are due to Mr. Donghai Yu, who is CEO of the Company. These amounts are advances made to the Company by unrelated parties through Mr. Donghai Yu for business operating purposes. The advances are interest free.
As of December 31, 2016 and December 31, 2015, $458,105 and $487,529 are the salary owed to Mr. Donghai Yu, who is CEO of the Company. As of December 31, 2016 and December 31, 2015, $45,000 and $45,000 are the salary owed to Mr. Grace King, who is VP finance of the Company.
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| Principal Accounting Fees and Services. |
Audit Fees
For the Company’s fiscal years ended December 31, 2016 and 2015, we were billed approximately $12,000 and $8,000, respectively from TAAD LLP for professional services rendered for the audit and reviews of our financial statements.
Audit Related Fees
For the Company’s fiscal years ended December 31, 2016 and 2015, we were not billed for any audit related fees from TAAD LLP.
Tax Fees
For the Company’s fiscal years ended December 31, 2016 and 2015, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning by our principal accountant.
All Other Fees
The following is a summary of theCompany did not incur any other fees billedrelated to usservices rendered by KCCW Accountancy Corp. (“KCCW”)our principal accountant for the fiscal years ended December 31, 20132016 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 | ||||
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.
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
| ● | approved by our audit committee; or |
| ● | entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management. |
We do not have an audit committee. Our entire board of directors pre-approves all services provided and fees charged by our independent registered accounting firmauditors. The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does not have records of what percentage of the above fees were pre-approved. However, all of the above services and fees were reviewed and approved by the entire board of directors and audit committee.
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| 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). |
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| 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). | |
| 10.14 | Asset Purchase Agreement by and among the Company, Yongle Carbon Dengyong Jin and Benhua Du, and dated as of June 10, 2014 (incorporated by reference to the Form 8-K filed by the Company on June 16, 2014). | |
| 10.15 | Installment Payment Agreement by and among the Company, Dengyong Jin and Benhua Du, dated as of July 3, 2014 (incorporated by reference to the Form 8-K filed by the Company on July 10, 2014). | |
| 10.16 | Indebtedness Cancellation Agreement by and between the Company and Dengyong Jin, dated as of July 3, 2014 (incorporated by reference to the Form 8-K filed by the Company on July 10, 2014). | |
| 14 | Code of Ethics (incorporated by reference to the Form 8-K filed by the Company on November 3, 2009). | |
| 21 | List of Subsidiaries. |
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101. SCH | XBRL Taxonomy Extension Schema Document. | |
| 101. CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101. LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101. PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101. DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
+ In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.
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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: | By: | /s/Donghai Yu | |
| Donghai Yu | |||
Chief Executive Officer (Principal Executive Officer) | |||
| Date: March 30, 2017 | By: | /s/ Zhenfang Yang |
Interim Chief Financial Officer (Principal Accounting 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 | |||
| Donghai Yu | (Principal Executive Officer) | |||
| /s/ Zhenfang Yang | Interim Chief Financial Officer | |||
| Zhenfang Yang | ( | |||
| /s/ Philip Yizhao Zhang | Director | |||
| Philip Yizhao Zhang | ||||
| /s/ John Qiang Chen | Director | |||
| John Qiang Chen | ||||
| /s/ Hongbo Liu | Director | |||
| Hongbo Liu |
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