UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
[_] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
______________
(Name of Small Business Issuer in Its Charter)
NEVADA Commission File No: 58-1667944
(State or other jurisdiction of 0-29015 (I.R.S. Employer
incorporation or organization) Identification No.)
B-27C, Construction Plaza, No. 26, Guang Ming Road, Urumqi, Xinjiang, China
(Address of principal executive offices)
86-991-883 8589
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of each of the issuer's class of equity as of
the latest practicable date is stated below:
Title of each class of Common Stock Outstanding as March 31, 2005
- --------------------------------------------------------------------------------
Common Stock, $0.12 par value 8,013,687
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
1
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
FORM 10-QSB
INDEX
PART I. Financial Information PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2005 3
(Unaudited) and December 31, 2004
Condensed Consolidated Statements of Income and Comprehensive 4
Income (Unaudited) for the Three Months Ended March 31, 2005
(Consolidated) and 2004
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
for the Three Months Ended March 31, 2005 (Consolidated) and
2004
Notes to Condensed Consolidated Financial Statements 7
(Unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Item 3. Controls and Procedures 17
PART II. Other Information
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 20
SIGNATURES 22
2
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
(FORMERLY HUAYANG INTERNATIONAL HOLDINGS, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 DECEMBER 31,
(UNAUDITED) 2004
-------------- --------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 343,695 $ 172,616
Accounts receivable, net of allowance
for doubtful accounts of $56,690 and
$50,750, respectively 2,203,891 1,822,115
Inventories 373,490 361,628
Notes receivable 275,952 213,204
Other receivables and prepayments 18,089 11,684
Advances to suppliers 87,903 30,460
Due from employees 28,288 --
-------------- --------------
Total Current Assets 3,331,308 2,611,707
PLANT AND EQUIPMENT, NET 2,729,380 2,814,296
-------------- --------------
TOTAL ASSETS $ 6,060,688 $ 5,426,003
------------ ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 769,861 $ 602,687
Bank loans 102,408 --
Notes payable 66,453 66,453
Customer deposits 60,700 10,060
Other taxes payable 120,263 130,370
Income taxes payable 61,765 --
Payroll and welfare payable 73,042 61,909
Due to related parties 84,640 72,456
-------------- --------------
Total Current Liabilities 1,339,132 943,935
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock, $0.12 par value, 50,000,000 shares
authorized, 8,013,687 and 7,013,687 shares
issued and outstanding, respectively 961,642 841,642
Additional paid-in capital 4,813,981 4,621,981
Deferred consulting expenses (388,372) (278,341)
Reserve fund 146,447 146,447
Due from related parties (238,864) (214,699)
Accumulated deficit (573,588) (635,274)
Accumulated other comprehensive income 310 312
-------------- --------------
Total Shareholders' Equity 4,721,556 4,482,068
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,060,688 $ 5,426,003
- ------------------------------------------ ============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
(FORMERLY HUAYANG INTERNATIONAL HOLDINGS, INC.) AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005
(CONSOLIDATED) 2004
-------------- --------------
REVENUES $ 792,876 $ 767,421
COST OF GOODS SOLD (357,781) (515,519)
-------------- --------------
GROSS PROFIT 435,095 251,902
General and administrative expenses (133,045) (39,984)
Amortization of deferred consulting expenses (99,969) --
Selling and distribution expenses (85,484) (61,845)
-------------- --------------
INCOME FROM OPERATIONS 116,597 150,073
Interest (expense) income, net (7,877) 266
Other (expense) income, net (115) 45,562
-------------- --------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN 108,605 195,901
Income taxes (61,765) --
-------------- --------------
INCOME BEFORE EXTRAORDINARY GAIN 46,840 195,901
Extraordinary gain from allocation of negative goodwill 14,846 --
-------------- --------------
NET INCOME 61,686 195,901
-------------- --------------
FOREIGN CURRENCY TRANSLATION LOSS (2) (191)
-------------- --------------
COMPREHENSIVE INCOME $ 61,684 $ 195,710
- -------------------- ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 7,804,798 6,000,000
============== ==============
Income per common share from operations, basic and diluted $ 0.01 $ 0.03
============== ==============
Income per common share from extraordinary gain, basic and diluted $ 0.00 $ --
============== ==============
Net income per common share, basic and diluted $ 0.01 $ 0.03
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
(FORMERLY HUAYANG INTERNATIONAL HOLDINGS, INC.) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
(CONSOLIDATED)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 61,686 $ 195,901
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts 5,940 --
Depreciation 89,229 89,046
Amortization of deferred consulting expenses 99,969 --
Allocation of negative goodwill (14,846) --
CHANGES IN OPERATING ASSETS AND LIABILITIES,
NET OF THE EFFECTS OF ACQUISITION
DECREASE (INCREASE) IN
Accounts receivable (66,783) (447,622)
Inventories (11,862) 267,191
Other receivables and prepayments (5,145) 23,698
Advances to suppliers (57,443) (1,299)
INCREASE (DECREASE) IN
Accounts payable and accrued expenses 94,218 21,776
Customer deposits 9,398 5,355
Other taxes payable (10,107) (13,458)
Payroll and welfare payable 11,133 229
Income taxes payable 61,765 --
-------------- --------------
Net Cash Provided By Operating Activities 267,152 140,817
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from acquisition of subsidiary 4,906 --
Purchases of land use right (4,313) --
Purchases of plant and equipment -- (160,008)
Notes receivable (62,748) (145,581)
Due from related parties (24,165) --
Due from employees (21,724) --
-------------- --------------
Net Cash Used In Investing Activities (108,044) (305,589)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Due to related parties 12,184 21,909
Repayment of bank loan (211) --
-------------- --------------
Net Cash Provided By Financing Activities 11,973 21,909
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 171,081 (142,863)
Effect of exchange rate changes on cash (2) (191)
Cash and cash equivalents, beginning of period 172,616 183,208
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 343,695 $ 40,154
- ---------------------------------------- ============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
(FORMERLY HUAYANG INTERNATIONAL HOLDINGS, INC.) AND SUBSIDIARIES
CONDENSED STATEMENT OF CASHFLOW
(UNAUDITED)
SUPPLEMENTARY CASH FLOW INFORMATION
For the Three Months Ended
March 31,
------------------------------
2005 2004
(Consolidated)
1. Interest paid $ 7,877 $ --
2. Income taxes paid $ -- $ --
3. On January 10, 2005, the Company completed the acquisition of AT Group, Ltd.
for $135,282 by the issuance of 300,000 shares of common stock at the price of
$0.34. The following represents the assets purchased and liabilities assumed at
the acquisition date:
Fixed assets $ 18,436
Cash and cash equivalents 4,906
Accounts receivable 320,933
Other receivable and prepayments 1,260
Due from employees 6,565
--------
Total assets purchased 352,100
--------
Short-term loan $102,619
Accounts payable 65,719
Advance from customers 41,242
Due to employees 7,238
--------
Total liabilities assumed 216,818
--------
Net assets acquired 135,282
Total consideration paid $102,000
Negative goodwill $ 33,282
--------
Negative goodwill of $18,436 was allocated to the fixed assets acquired.
The remaining balance of $14,846 is being amortized over 10 years, and $371
was recognized as other income for three months ended March 31, 2005.
4. The Company issued 700,000 shares of common stock valued at $210,000 for
consulting services in 2005.
5. During the three months ended March 31, 2004, the Company had the following
non-monetary transactions and no gain or loss was recognized:
- Received inventories valued at $206,263 in settlement of outstanding
accounts receivable of $206,263.
- Received vehicles and machinery valued at $62,223 in settlement of
outstanding others receivable of $62,223
6
CHINA ENERGY & CARBON BLACK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of China Energy &
Carbon Black Holdings, Inc. (the "Company", "we", "us", "our" or "CHEY")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the
requirements for reporting on Form 10-QSB and Item 310(b) of Regulation
S-B. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in United States of
America for complete financial statements. However, such information
reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for the
fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are
not necessarily indicative of the results to be obtained for a full fiscal
year. The condensed consolidated balance sheet information as of December
31, 2004 was derived from the audited consolidated financial statements
included in the Company's Annual Report Form 10-KSB. These interim
financial statements should be read in conjunction with that report.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material inter-company balances and transactions
have been eliminated in consolidation.
NOTE 2 - NATURE OF COMPANY
Our company was incorporated under the laws of the State of Nevada and
trades on the Over the Counter ("OTC") Bulletin Board under the symbol
"CHEY". The Company was formerly known as Huayang International Holdings,
Inc. and before January 5, 1996 the Company was named as Power Capital
Corp. ("PCC")
On August 5, 2004, HIHI completed a share exchange (the "Exchange") with
the stockholders of China Carbon Black Holdings Company Limited, a Company
incorporated under the laws of Hong Kong SAR ("CCB"), pursuant to the terms
of an Agreement for Share Exchange, dated July 15, 2004. In the Exchange,
HIHI acquired all of the issued and outstanding stock of CCB in exchange
for the issuance of 6,000,000 (after 6:1 reverse split) shares of its
common stock. The Exchange resulted in a change of voting control of the
Company.
CCB owns 100% of Xin Jiang YaKeLa Carbon Black Limited ("YaKeLa"). From
2002 to 2004, YaKeLa mainly engaged in the business of sales and
manufacturing of carbon black, a black powder made partly from the burning
of stranded natural gas. The product is used for making rubber tires, road
building, steel manufacturing and other rubber products.
7
On September 17, 2004, the Board of Directors unanimously approved and
ratified an Amendment that resulted in the name of the Company being
changed from "Huayang International Holdings, Inc." to "China Energy and
Carbon Black Holdings, Inc."
On September 30, 2004, the Company entered into an Agreement for Sale of
Stock (the "Sales Stock Agreement") with Mr. Gao Wan Jun, a shareholder of
the Company and former Chief Executive Officer of the Company. Pursuant to
the Sales Stock Agreement, the Company agreed to sell the 95% ownership
interest in Shenyang Haitong House Properties Development Limited
("HAITONG") owned by the Company to Mr. Gao Wan Jun. The closing under the
Sale Stock Agreement was completed on September 30, 2004 and the Company
transferred the 95% ownership interest in HAITONG to Mr. Gao Wan Jun and on
this closing date and thereafter, HAITONG ceased to be a consolidated
subsidiary of the Company.
On January 1, 2005, we entered into an Agreement for Share Exchange (the
"Agreement") with AT Group Limited, a Hong Kong corporation ("AT Group")
and the individual shareholders of AT Group ("Shareholders"). Pursuant to
the Agreement, we agreed to issue 696,045 shares of restricted common stock
to the Shareholders in exchange for 100 shares of AT Group, representing
100% of the issued and outstanding shares of AT Group.
On January 10, 2005, the Agreement was amended to reduce the number of
shares of our common stock to be issued in the share exchange from 696,045
to 300,000. In all other respects, the terms of the original Agreement
remain valid and binding. We completed the share exchange process and
issued 300,000 shares of our common stock to the shareholders of AT Group
in exchange for 100 shares of AT Group representing 100% of the issued and
outstanding stock of AT Group. As consideration for the purchase of the
ownership interest in AT Group, CHEY issued 300,000 shares of restricted
stocks of CHEY to John C Y Chiu, the shareholder of AT Group. Following
completion of the share exchange transaction, AT Group became our
wholly-owned subsidiary.
On January 14, 2005, we entered into an Agreement for Share Exchange (the
"South Xinjiang Agreement") with South Xinjiang Power Holdings Limited, a
Hong Kong corporation ("South Xinjiang"), and Mr. Wang Lei ("South Xinjiang
Shareholder"), the sole shareholder of South Xinjiang. Pursuant to the
Agreement, we agreed to acquire 100% of the issued and outstanding shares
of South Xinjiang in exchange for the issuance of 1,338,150 shares of our
common stock. South Xinjiang owns a power plant in Xinjiang, a northwestern
province in China, with an estimated asset net asset value of approximately
$1,000,000. As of March 31, 2005 and the date of this report, the
transaction was not completed.
NOTE 3 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of
8
revenue and expenses during the reporting period. Actual results when
ultimately realized could differ from those estimates.
NOTE 4 - EARNING PER SHARE
Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. There was no dilutive securities or
common stock equivalent outstanding as of March 31, 2005.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUTMENTS
The carrying value of financial instruments including cash and cash
equivalents, accounts receivable, notes receivable, other receivables and
prepayments, advance to suppliers, accounts payable and accrued expenses,
bank loans, notes payable, other payables, customers deposits and due
to/from related parties and employees, approximates their fair value at
March 31, 2005 and December 31, 2004 due to the relatively short-term
nature of these instruments.
NOTE 6 - FOREIGN CURRENCY CONVERSION
The Company's financial information is presented in US dollars. The
functional currency Renminbi (RMB) of the Company is translated into United
States dollars from RMB at quarter / year-end exchange rates as to assets
and liabilities and average exchange rates as to revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
2005 2004
---------- ----------
Quarter / Year end RMB : US$ exchange rate 8.2765 8.2765
Average yearly RMB : US$ exchange rate 8.2765 8.2766
The RMB is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US dollars at the rates used in translation.
NOTE 7 - REVENUE RECOGNITION
AT Group, a wholly owned subsidiary of the Company acquired on January 5,
2005 engages in computer applications and systems maintenance services.
Revenue is recognized based on service contracts ratably over the
applicable contract periods or as services are performed. Customers pay AT
Group for the services rendered either
9
in advance at the beginning of the servicing period or after the completion
of the service contract. The Company recognizes revenues as earned. Amounts
billed and collected before the services are performed are recorded as
deferred revenue.
NOTE 8 - NOTES RECEIVABLE
YaKeLa, a wholly owned Chinese subsidiary of the Company, accepted bank
notes from customers as a way to settle their trade receivables due. These
bank notes are recorded as notes receivable. The balance of notes
receivables amounted to $275,952 as of March 31, 2005, an increase of
$62,748 as compared to $213,204 as of December 31, 2004.
NOTE 9 - NOTES PAYABLE
YaKeLa, a wholly owned Chinese subsidiary of the Company, has a notes
payable balance of $66,453 as of March 31, 2005, among which $36,247 was
extended from the due date of March 31, 2005 to May 30, 2005. The remaining
$30,206 was settled on its due date of April 30, 2005. All the notes
payable bear no interest.
NOTE 10 - STOCK BASED COMPENSATION AND DEFERRED CONSULTING EXPENSES
On January 24, 2005, the Company filed a Form S-8 Registration Statement
under the Securities Act of 1933 to issue 700,000 shares of common stock to
three consultants for consulting services to be provided for a 12 month
period. The shares were valued based on the closing market price of the
Company's common stock on the date of the agreement ($0.30 per share) for a
total value of $210,000. The amount is being amortized over the term of the
contracts, resulting in $52,500 being included in consulting expense for
the quarter ended March 31, 2005 and deferred consulting expense of
$157,500 at March 31, 2005, which is included in shareholders' equity in
the accompanying condensed consolidated balance sheet.
There was no warrants or options outstanding as of March 31, 2005.
NOTE 11 - INCOME TAX
YaKeLa, a wholly owned Chinese subsidiary of the Company, was entitled to
an income tax exemption from 2002 to 2004. From 2005, the tax exemption
period expired and YaKeLa was subject to 33% income tax rate according to
its profit earned in China. As such, an income tax expense of $61.765 was
provided for the first quarter of 2005.
NOTE 12 - BANK LOANS
The Company, through its wholly owned Hong Kong subsidiary AT Group, has
two bank loans with an aggregate balance of $102,408 as of March 31, 2005.
The bank loans are revolving credit facilities granted by Bank of East Asia
and Dao Heng Bank,
10
two registered retail banks in Hong Kong. These borrowings are short term
borrowings without specific pledge on any of AT Group's assets and bear
interest at a premium amount on the prevailing Hong Kong Interbank Offer
Rate.
NOTE 13 - BUSINESS COMBINATION
On January 1, 2005, the Company entered into an Agreement for Share
Exchange (the "Agreement") with AT Group Limited, a Hong Kong corporation
("AT Group") and the individual shareholders of AT Group ("Shareholders")
as described in NOTE 2 of this report.
The following summarizes the acquisition:
Issuance of 300,000 shares of common stock valued
at an average stock price of $0.34 per share $ 102,000
Assets acquired (352,100)
Liabilities assumed 216,818
Negative goodwill 33,282
---------
$ --
=========
Negative goodwill proportionally applied to long term assets $ 18,436
Negative goodwill recognized as an extraordinary gain in
the statement of income and comprehensive income 14,846
---------
Total $ 33,282
=========
The following unaudited pro forma combined condensed statements of income
for the quarter ended March 31, 2004 have been prepared as if the
acquisition had occurred on January 1, 2004. The pro forma information may
not be indicative of the results that actually would have occurred if the
merger had been in effect from and on the dates indicated or which may be
obtained in the future.
3 MONTHS ENDED
MARCH 31, 2004
PRO FORMA COMBINED
(UNAUDITED)
------------------
REVENUES $ 832,096
GROSS PROFIT 297,164
INCOME FROM OPERATIONS (73,207)
NET LOSS $ (27,379)
==================
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING,
BASIC AND DILUTED 6,300,000
11
NOTE 14 - SEGMENT INFORMATION
The Company's reportable segments for 2005 are YaKeLa and AT Group, which
represent the operations of the Company's significant business operations.
YaKeLa engages in carbon black sales and manufacturing in China and AT
Group engages in computer applications and systems maintenance services
primarily in Hong Kong. Summarized financial information concerning the
Company's reportable segments is shown in the following table. The "Other"
column includes the Company's corporate related items, and, as it relates
to segment income (loss), income and expense not allocated to reportable
segments:
YaKeLa AT GROUP OTHER TOTAL
---------- ---------- ---------- ----------
Revenue $ 668,611 $ 124,265 $ 0 $ 792,876
Income/(Loss) from 189,270 24,522 (97,195) 116,597
operations
Total asset $5,677,818 $ 382,870 $ 0 $6,060,688
No segment information is presented for 2004 since the Company operated in
one segment (carbon black) during that period.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the information
contained in the condensed consolidated financial statements of the Company and
the notes thereto appearing elsewhere herein and in conjunction with the
Management's Discussion and Analysis set forth in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2004 and Quarterly Report on Form
10-QSB for the quarter ended January 31, 2004.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------------
The following discussion of the financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. China Energy & Carbon Black Holdings, Inc. is referred to herein as
"the Company", "we" or "our." The words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements". Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) our attempt to enter into the technology sector and whether we
can successfully incorporate such business into our operations; (b) our low cash
balances which may impede our ability to grow our business and compete against
our competitors and other liquidity related risks discussed below under
"Liquidity and Capital Resources"; (c) any economic, political, regulatory,
legal and social conditions in China that may negatively affect our business;
and (d) our dependence upon funding from related companies. Statements made
herein are as of the date of the filing of this period report with the
Securities and Exchange Commission and should not be relied upon as of any
subsequent date. Unless otherwise required by applicable law, we do not
undertake, and we specifically disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
We have identified one policy area as critical to the understanding of our
consolidated financial statements. The preparation of our consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of sales and expenses during the reporting periods. With
respect to net realizable value of the Company's accounts receivable and
inventories, significant estimation judgments are made and actual results could
differ materially from these estimates.
The Company does not have any reserves against its inventories at quarter ended
March 31, 2005 and year ended December 31, 2004. Management's estimation that
there are no reserves is based on the current facts that the current inventory
turnover is sufficient to realize the current carrying value of the inventories.
In making their judgment, management has assumed that there will be continued
demand for their products in the future, thereby maintaining adequate turnover
of the inventories. Additionally, management has assumed
13
that customers will continue to pay their outstanding invoices timely, and that
their customers' financial position will not deteriorate significantly in the
future, which would result in their inability to pay their debts to the Company.
While the Company's management currently believes that there is little
likelihood that the actual results of their current estimates will differ
materially from its current estimates, if customer demand for its products
decreases significantly in the near future, the Company could realize
significant write downs for slow moving inventories.
We believe the following is among the most critical accounting policies that
impact our consolidated financial statements. We suggest that our significant
accounting policies, as described in our consolidated financial statements in
the Summary of Significant Accounting Policies, be read in conjunction with this
Management's discussion and Analysis of Financial Condition and Results of
Operations.
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
104. All of the following criteria must exist in order for us to recognize
revenue:
1. Persuasive evidence of an arrangement exists;
2. Delivery has occurred or services have been rendered;
3. The seller's price to the buyer is fixed or determinable and
4. Collectibility is reasonably assured.
The majority of the Company's revenue results from sales contracts with
distributors and revenue are generated upon the shipment of goods. The Company's
pricing structure is fixed and there are no rebate or discount programs.
Management conducts credit background checks for new customers as a means to
reduce the subjectivity of assuring collectibility. Based on these factors, the
Company believes that it can apply the provisions of SAB 104 with minimal
subjectivity.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED TO THREE
MONTHS ENDED MARCH 31, 2004
- ------------------------------------------------------------------------------
Revenues, Cost of Revenues and Gross Margin
- -------------------------------------------
Revenues for the quarter ended March 31, 2005 were $792,876 an increase of
$25,455 from $767,421 for the quarter ended March 31, 2004. The sales revenues
of different brands of our products in first quarter of 2005 compared to 2004
were as follows:
Quarter ended March 31,
----------------------
Increase /
2005 2004 (decrease)
---------- ---------- ----------
Revenue from YaKeLa
Half complement carbon black $ 606,166 $ 461,881 $ 144,285
Ultra pure carbon black 61,228 244,814 (183,586)
Auxiliary services and by products 1,217 60,726 (59,509)
---------- ---------- ----------
Total for YaKeLa 668,611 767,421 (98,810)
Service revenue from AT Group 124,265 -- 124,265
---------- ---------- ----------
TOTAL $ 792,876 $ 767,421 $ 25,455
========== ========== ==========
14
Our decreases in sales revenues from YaKeLa in the first quarter of 2005 were
mainly attributable to the decrease in our sales of ultra pure carbon. Compared
to same quarter in 2004, the sales of half complement carbon black increased by
31% while ultra pure carbon black sales decreased by 75%. Also, compared to the
same quarter in 2004, our sales revenue from auxiliary services and byproducts
decreased by 98% in the first quarter of 2005. The reduction in sales revenue
from ultra pure carbon black and byproducts contributed to the reduction of our
total sales revenue by 13%. However, the overall revenue increased by $25,455 in
the first quarter of 2005 compared to the same quarter last year, which was
mainly attributable to the revenue amounting to $124,265 from AT Group.
Cost of revenues for the quarter ended March 31, 2005 were $357,781, a decrease
of $157,738 from $515,519 for the quarter ended March 30, 2004. The costs of
sales of different brands of our products in first quarter of 2005 compared to
the same quarter of 2004 were as follows:
Quarter ended March 31,
----------------------
Increase /
2005 2004 (decrease)
---------- ---------- ----------
Cost of sales from YaKeLa
Half complement carbon black $ 280,427 $ 264,953 $ 15,474
Ultra pure carbon black 46,002 208,695 (162,693)
Auxiliary services and by products 1,878 41,871 (39,993)
---------- ---------- ----------
Total for YaKeLa 328,307 515,519 (187,212)
Cost of sales from AT Group 29,474 -- 29,474
---------- ---------- ----------
TOTAL $ 357,781 $ 515,519 $ (157,738)
========== ========== ==========
The majority of increases in costs of sales in the first quarter of 2005 when
comparing the same quarter in 2004 related to increase of sales of our products
of half complement carbon black. Cost of sales of half complement carbon black
increased by $15,474 or 6% in first quarter of 2005 as compared to the same
quarter in 2004 as a result of increase in sales of half complement carbon
black. However, the increase is cost was not proportional to increase in revenue
due to unit cost of raw material in production of half complement carbon black
decreased in first quarter of 2005 compared to the same quarter in 2004. The
cost of ultra pure carbon black decreased by 78% in first quarter of 2005 as
compared to the same quarter in 2004 as a result of decrease in sales of ultra
pure carbon black in the same quarter. In the first quarter of 2005, AT Group
incurred an cost of sales of $29,474.
The cost of sales of our auxiliary services and byproducts decreased by $39,993
as a result of sales decreased by $59,509 in first quarter of 2005 against the
same quarter in 2004.
Our percentage profit margin for the first quarter of 2005 increased to 55% from
33% as compared to the same quarter last year. It was mainly attributable to the
increase in percentage profit margin for our half complement carbon black, which
was due to the decrease in the unit cost of our raw material for production of
half complement carbon black.
15
The overall profit margin increased to $435,095 in the first quarter of 2005
against $251,902 in the same quarter in 2004.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses amounted to $133,045 for the quarter ended
March 31, 2005, an increase of $93,061 from $39,984 for the same quarter in
2004. The increase in general and administrative expenses for the quarter ended
March 31, 2005 against the same quarter in 2004 was as follows:
Quarter ended March 31,
----------------------
Increase /
2005 2004 (decrease)
---------- ---------- ----------
General and Administrative Expenses
Staff salary $ 3,676 $ 5,776 $ (2,100)
Office expenses 56,315 34,208 22,107
Bad debt provisions 5,940 -- 5,940
Overhead of AT Group 67,114 -- 67,114
---------- ---------- ----------
TOTAL $ 133,045 $ 39,984 $ 93,061
========== ========== ==========
Although we reduced our staff salary expenses by $2,100 in the first quarter of
2005 compared to same quarter in 2004, we incurred additional office expenses
and bad debt provisions by $22,107 and $5,940, respectively. Also, there was an
increase in overhead cost incurred by AT Group amounted to $67,114, which did
not happened in the first quarter of 2004.
Amortization of Deferred Consulting Expenses
- --------------------------------------------
Amortization of deferred consulting expenses amounted to $99,969 for the quarter
ended March 31, 2005 as a result of the issuance of common stocks for consulting
services. There was no deferred consulting expense related to any stock issued
to consultants in the same period of 2004.
Selling and Distribution Expenses
- ---------------------------------
Selling and distribution expenses totaled $85,484 for the quarter ended March
31, 2005, an increase of $23,639 from $61,845 for the same quarter ended 2004.
The majority of this increase was due to higher selling activity in the first
quarter of 2005 over 2004 that resulted in an increase in transportation fees,
consumable and other overhead of $15,727, $5,829 and $2,083, respectively.
Other income (expense)
- ----------------------
Other expense for the quarter ended March 31, 2005 amounted to $115 against
other income of $45,562 for the same quarter ended 2004. The reason for the
change in other income (expense) was due to receiving car lease income in the
net amount of $15,155 in the first quarter of 2004, which we did not have in
2005. Also in the first quarter of 2004 we received
16
a subsequent receivable payment of $32,295, which was previously provided as a
bad debt provision in 2003. Such amount was recognized in other income in 2004,
which did not happen in the same quarter of 2005.
Income taxes
- ------------
Our income taxes expense amounted to $61,765, as compared to no income taxes for
the same quarter last year. YaKeLa, the wholly owned Chinese subsidiary of the
Company, was entitled to the income tax exemption from 2002 to 2004. From 2005,
the tax exemption period expired and YaKeLa was subject to 33% income tax rate
according to its profit earned in China.
Liquidity and Capital Resources
- -------------------------------
Cash
Our cash balance amounted to $343,695 as of March 31, 2005, an increase of
$171,079 as compared to $172,616 as of December 31, 2004.
In the first quarter of 2005, our cash flow from operating activities amounted
to $267,152, an increase of $126,335 from the same quarter in 2004. In the first
quarter of 2005 we had a net income of $61,686, a non cash amortization of
consultant expenses and depreciation amounted to $189,198 and increase in
account and tax payable of $155,983 that contributed to increase in cash flow
from operations, offset by increase in accounts receivable and advances to
suppliers amounted to $66,783 and $57,443, respectively.
CHEY is currently funding its operations from its cash flow generated from
operations. We believe that CHEY can operate substantially without constraint in
cash flow as long as it is profitable, as to which there can be no assurance.
Our existing cash balance of $343,695 as of March 31, 2005 should be able to
fund the operations for approximately eight months to one year to support our
cash expenditures in general and administrative activities without the need for
cash inflow from our normal operations.
Working Capital
Our working capital amounted to $1,992,176 as of March 31, 2005, of which our
current assets amounted to $3,331,308 while our current liabilities amounted to
$1,339,132.
ITEM 3 CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the "Evaluation Date"), we
carried out an evaluation in accordance with the requirements of the Chinese
auditing standards as well as the applicable rules in the United States. The
Company's audit group evaluated the effectiveness of the design and operation of
our disclosure controls and procedures of our Form 10KSB before it was filed
with the Commission. The audit group made their evaluation pursuant to Rule
13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") to the maximum possible extent and to the best knowledge of the audit
group. Based upon our evaluation, our Chief Executive Officer and our Chief
Financial
17
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective and basically sound in all material aspects under Rule
13a-15. However, given the fact that our major operations are located China, the
Company and the audit group consistently make efforts to coordinate the evolving
control and disclosure environment in China with the regulatory environment in
the United States. The Company has identified this aspect as an area for
improvement and is taking measures to train its staff for better performance.
The Company anticipates that it will be fully compliant with Section 404 of the
Sarbanes Oxley Act of 2002 by the required date for non-accelerated filers and
it is in the process of reviewing its internal control systems in order to be
compliant with Section 404 of the Sarbanes Oxley Act. However, at this time the
Company makes no representation that it's systems of internal control comply
with Section 404 of the Sarbanes Oxley Act.
18
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are not a party to, nor are any of our respective properties the subject of,
any material pending legal or arbitration proceeding.
ITEM 2 CHANGES IN SECURITIES
Common Stock Issued For Consulting Services
- -------------------------------------------
The shares were issued to the shareholders of AT Group Limited in exchange for
their shares in that company. The shares were issued in reliance upon an
exemption from registration provided by Regulation S.
Common Stock Issued for Acquisition of AT Group
- -----------------------------------------------
On January 1, 2005, the Company entered into an Agreement for Share Exchange
with AT Group Limited. See NOTE 2.
On January 10, 2005, the Agreement was amended to reduce the number of shares of
our common stock to be issued in the share exchange from 696,045 to 300,000 and
the Company issued 300,000 shares for the acquisition on the same date for
completion of transaction. See NOTE 9 - BUSINESS COMBINATION.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
19
ITEM 6 EXHIBITS
(a) Exhibits
Exhibit Number Description
-------------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).*
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA ENERGY & CARBON BLACK HOLDINGS, INC.
/s/ Guo Yuan Wang
-----------------------------------------------
Chairman, President and Chief Executive Officer
Date: May 23, 2005
/s/ Mei Qi Zhang
-----------------------------------------------
Chief Financial Officer
Date: May 23, 2005
21