United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number:  333-114564

CHINA CARBON GRAPHITE GROUP, INC.

(Exact Name of Registrant as specified in its charter)

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

c/o XingheYongle Carbon Co., Ltd.

787 XichengWai

Chengguantown

Xinghe County

Inner Mongolia, China

(Address of principal executive offices)

(86) 474-7209723

(Registrant’s telephone number, including area code)

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 26,282,518 shares of common stock are issued and outstanding as of May 14, 2013.

CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

March 31, 2013

TABLE OF CONTENTS

	PART I - FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements:	1
	Consolidated Balance Sheets at March 31, 2013 (unaudited) and December 31, 2012	1
	Unaudited Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2013 and 2012	2
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012	3
	Notes to Unaudited Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51
	Signatures	52

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements.

China Carbon Graphite Group, Inc. and Subsidiaries

Consolidated Balance Sheets

	March 31, 2013		December 31, 2012
	(Unaudited )		(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,680,254	$	129,746
Restricted cash		22,379,000		22,149,000
Accounts receivable, Net		7,142,892		11,239,002
Notes receivable		7,401,165		—
Advance to suppliers		12,503,217		1,177,462
Inventories		48,181,039		48,417,875
Prepaid expenses		785,438		280,779
Other receivables, net of allowance of $221,026 and $220,339, respectively		104,639		35,655
Total current assets		100,177,644		83,429,519
Property And Equipment, Net		40,481,778		40,964,363
Construction In Progress		18,943,945		7,324,379
Land Use Rights, Net		9,643,328		9,657,419
Total Assets	$	169,246,695	$	141,375,680
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,431,323	$	2,250,745
Advance from customers		1,740,402		1,368,525
Short term bank loans		45,241,000		38,680,500
Notes payable		40,733,000		40,606,500
Other payables		1,489,655		630,179
Loan from unrelated parties		11,351,604		338,002
Dividends payable		51,353		46,816
Total current liabilities		102,038,337		83,921,267
Amounts Due To Related Parties		4,637,132		4,795,593
Long Term Bank Loans		16,067,800		4,782,900
Warrant Liabilities		179,994		224,362
Total Liabilities		122,923,263		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 March 31, 2013 and December 31, 2012, respectively.		360,000		360,000
Stockholders' Equity
Common stock, $0.001 par value; 100,000,000 shares authorized
25,137,518 and 25,077,518 shares issued and outstanding at
March 31, 2013 and December 31, 2012, respectively		25,137		25,077
Additional paid-in capital		18,256,121		18,223,781
Accumulated other comprehensive income		9,129,202		8,982,925
Retained earnings		18,552,972		20,059,775
Total stockholders' equity		45, 963,432		47,291,558
Total Liabilities and Stockholders' Equity	$	169,246,695	$	141,375,680

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

1

China Carbon Graphite Group, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

For the Three Months Ended March 31, 2013 and 2012

(Unaudited)

	Three months ended March 31,
	2013			2012
Sales	$	3,060,918		$	10,061,210
Cost of Goods Sold		3,320,320			7,143,606
Gross Profit (loss)		(259,402	)		2,917,604
Operating Expenses
Selling expenses		17,941			46,798
General and administrative		384,582			851,399
Depreciation and amortization		67,888			57,004
Total operating expenses		470,411			955,201
Operating Income (Loss) Before Other Income (Expense)		(729,813	)		1,962,403
Other Income (Expense)
Interest expense		(862,448	)		(1,229,745	)
Interest income		45,304			22
Other income, net		321			-
Change in fair value of warrants		44,368			(479,563	)
Total other expense		(772,455	)		(1,709,286	)
Net Income (Loss)		(1,502,268	)		253,117
Preferred Stock Dividends		(4,537	)		(5,018	)
Net Income (Loss) Available To Common Shareholders		(1,506,805	)		248,099
Other Comprehensive Income
Foreign currency translation gain		146,277			423,897
Total Comprehensive Income	$	(1,355,991	)	$	677,014
Share Data
Basic earnings (loss) per share	$	(0.06	)	$	0.01
Diluted earnings (loss) per share	$	(0.06	)	$	0.01
Weighted average common shares outstanding,
Basic		25,103,518			23,315,645
Weighted average common shares outstanding,
Diluted		25,103,518			23,647,455

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

2

China Carbon Graphite Group, Inc and subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
	2013			2012
Cash Flows from Operating Activities
Net income (loss)	$	(1,502,268	)	$	253,117
Adjustments to reconcile net cash provided by
operating activities
Depreciation and Amortization		655,449			567,584
Stock compensation		60,345			-
Change in fair value of warrants		(44,368	)		479,563
Recovery of bad debt expenses		(166,601)			-
Changes in operating assets and liabilities
Accounts receivable		4,290,026			(1,310,189	)
Notes receivable		(7,387,374	)		(142,124	)
Other receivables		(68,745	)		(44,531	)
Advance to suppliers		(11,300,990	)		(5,197,009	)
Inventory		386,948			(4,075,391	)
Prepaid expenses		(530,927	)		169,188
Accounts payable and accrued liabilities		(824,186	)		594,274
Advance from customers		366,928			592,123
Taxes payable		99,446			(110,310	)
Other payables		755,723			133,762
Net cash used in operating activities		(15,210,594	)		(8,089,943	)
Cash flows from investing activities
Acquisition of property, plant and equipment		(2,292	)		(15,831	)
Proceeds from land bureau against cost of land use rights					237,749
Addition of construction in progress		(11,575,140	)		(651,528	)
Net cash used in investing activities		(11,577,432	)		(429,610	)
Cash flows from financing activities
Proceeds from issuing common stock		-			50,000
Proceeds from short term loans		11,249,000			4,755,000
Repayments for short term loans		(4,821,000	)		(4,755,000	)
Proceeds from long term loans		11,249,000			-
Proceeds from loan from unrelated parties		10,992,029			9,313,808
Proceeds from loan from related parties		448,994			79,727
Repayments to related parties		(622,072	)		-
Proceeds from stock not yet issued		-			77,500
Restricted cash		(160,700	)		4,945,200
Proceeds from notes payable		17,677,000			10,778,000
Repayments to notes payable		(17,677,000	)		(16,880,250	)
Net cash provided by financing activities		28,335,251			8,363,985
Effect of exchange rate fluctuation		3,283			3,819
Net increase (decrease) in cash		1,550,508			(151,749	)
Cash and cash equivalents at beginning of period		129,746			521,450
Cash and cash equivalents at end of period	$	1,680,254		$	369,701
Supplemental disclosure of cash flow information
Interest paid	$	1,040,625		$	984,830
Income taxes paid	$	-		$	-
Non-cash activities:
Preferred stock conversion to common stock	$	-		$	94
The accompanying notes are an integral part of these consolidated financial statements.

3

China Carbon Graphite Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 (Unaudited)

(1)  Organization and Business

China Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture of graphite-based products in the People’s Republic of China (“China” or the “PRC”).  The Company’s products are used in the manufacturing process of other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors.  The Company manufactures and sells three types of products throughout China and internationally: graphite electrodes; fine grain graphite; and high purity graphite.

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

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

Talent owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise organized under the laws of the PRC. Xingyong’s principal stockholder is Mr. Denyong Jin, the General Manager of the Company’s China operations. 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. 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.

4

The relationship among the above companies is as follows:

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

The consolidated financial statements presented herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries, Talent and Yongle, also consolidated are the financial statements of Xingyong. The financial statements of Xingyong are consolidated with our financial statements because Xingyong is a variable interest entity.  The entire operating business operations of the Company are located in the VIE, therefore the financial position and results of operations and cash flows are significantly influenced by the results of Xingyong, the VIE. Talent is party to 4 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.

5

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

Exclusive Technical Consulting and Services Agreement .  Technical consulting and services agreement entered into on December 7, 2007 between XingheYongle Carbon Co., Ltd. (also referred to as Yongle) and XingheXingyong Carbon Co., Ltd. (also referred to as 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.

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

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

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

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

6

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

Liquidity and Working Capital Deficit

Currently and for the last two fiscal years, the Company has managed to operate the business with a low net working capital. The Company’s low working capital is primarily due to substantial short-term loans from banks and borrowing from related parties. The Company is able to operate with a low net working capital because of local community and governmental support in Inner Mongolia. Additionally, due to the length of the time that it takes to complete purchase orders for customers, the Company is able to reasonably predict future operating cash flow needs. The Company believes, operating cash flows from accounts receivable and inventory and the ability to roll over short-term debt, taken together, provide adequate resources to fund ongoing operations in the foreseeable future. The Company believes that the increased market demand and expanded production capacity, together with management of our accounts receivable, will produce positive cash flows in future years. 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.

7

(2) Basis for Preparation of the Financial Statements

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2012. The consolidated balance sheet as of December 31, 2012 has been derived from the audited financial statements. The results of the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2013.

The accompanying unaudited consolidated financial statements for China Carbon Graphite Group, Inc. and its subsidiaries and variable interest entity, have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

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

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

(3) 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.

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.

8

Cash and cash equivalents

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

Restricted cash

Restricted cash represents amounts held by a bank as security for short-term bank notes payable and therefore is subject to withdrawal restrictions. As of March 31, 2013 and December 31, 2012, these amounts totaled $22,379,000 and $22,149,000, respectively. The restricted cash is expected to be released within the next twelve months after the bank notes have matured.

Accounts receivable

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

Inventory

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

As of March 31, 2013 and December 31, 2012, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

9

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

Property and equipment

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

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

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, there was no impairment recorded during the three months ended March 31, 2013 and 2012.

Construction in progress

Construction in progress represents the costs incurred in connection with the construction of buildings or additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service. The Company has capitalized  interest expenses $178,177 (RMB 1,108,753) and $0 for the three months ended at March 31, 2013 and 2012.

10

Land use rights

The Company has land use rights of 386,853 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 130,220 square meters expiring in 2052 and the land use right with respect to 256,633 square meters expiring in 2053. In addition, in 2011, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities. The Company was not required to sign a land use right agreement or pay a fee.  In exchange, the Company will allow public use of this 387,838 square meters of land, provide improvements to the land and keep the land in good condition. The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000. The Company has not accrued the liability or recorded the land use right asset for this property in accordance with ASC 450, Contingencies. Because of the relationship and agreement with the local government to keep provide improvements to the land and keep it in good condition, the Company believes that it is unlikely to have to pay for the land use right.  The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans.  

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.

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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 three months ended March 31, 2013 and 2012 were $146,277 and $423,897, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the three months ended March 31, 2013 and 2012 were $3,283 and $3,819, 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 6.21 RMB and 6.23 RMB to $1.00 at March 31, 2013 and December 31, 2012, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the three months ended March 31, 2013 and 2012 were 6.22 RMB and 6.31 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Revenue recognition

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

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

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

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

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Cost of goods sold

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

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 three months ended March 31, 2013 and 2012, shipping and handling costs were $3,877 and $24,587, respectively.

Segment reporting

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

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

Taxation

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

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

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

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

Enterprise income tax

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

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

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

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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 $(23,055) and $(79,346) as of March 31, 2013 and December 31, 2012, 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.

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.

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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.

The fair value of the 2007 Warrants to purchase 125,000 shares of common stock was $0 at March 31, 2013 and December 31, 2012, respectively. The Company recognized a gain of $0 from the change in fair value of these warrants for the three months ended March 31, 2013.

The fair value of the 2009 Warrants to purchase 200,000 shares of common stock was $23,706 and $31,717 at March 31, 2013 and December 31, 2012, respectively. The Company recognized a gain of $8,011 from the change in fair value of these warrants for the three months ended March 31, 2013.

The fair value of the 2009 Series B Warrants to purchase 804,200 shares of common stock was $138,585 and $170,947 at March 31, 2013, and December 31, 2012, respectively. The Company recognized a gain of $32,362 from the change in fair value of these warrants for the three months ended March 31, 2013.

The fair value of 2010 Series B warrants to purchase 100,000 shares of common stock was $17,702 and $21,698 at March 31, 2013 and December 31, 2012, respectively. The Company recognized a gain of $3,996 from the change in fair value of these warrants for the three months ended March 31, 2013.

In summary, the Company recorded a total amount of $44,368 of changes in fair value of warrants in the Consolidate statement of income and comprehensive income for the three months ended March 31, 2013. Each reporting period, the change in fair value is recorded into other income (expense).

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

	March 31, 2013			December 31, 2012
2007 Warrants
Annual dividend yield		-			-
Expected life (years)		0.00			0.04
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		143	%		146	%

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	March 31, 2013			December 31, 2012
2009 Warrants
Annual dividend yield		-			-
Expected life (years)		1.46			1.71
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		143	%		146	%

	March 31, 2013			December 31, 2012
2009 Series B Warrants
Annual dividend yield		-			-
Expected life (years)		1.73			1.98
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		143	%		146	%

	March 31, 2013			December 31, 2012
2010 Series B Warrants
Annual dividend yield		-			-
Expected life (years)		1.78			2.03
Risk-free interest rate		0.18	%		0.18	%
Expected volatility		143	%		146	%

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

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

	Carrying Value at March 31,		Fair Value Measurement at March 31, 2013
	2013		Level 1		Level 2		Level 3
Warrant liability	$	179,994	$			-	$	179,994
Notes receivables	$	7,401,165			$	7,401,165		-
Notes payable	$	40,733,000	$	-	$	40,733,000		-

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

Summary of warrants outstanding:

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

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

	March 31, 2013			March 31, 2012
Weighted average shares of common stock outstanding (basic)		25,103,518			23,315,645
Shares issuable upon conversion of Series B Preferred Stock		-			331,810
Weighted average shares of common stock outstanding (diluted)		25,103,518			23,647,455
Net income (loss) available to common shareholders	$	(1,506,805	)	$	248,099
Net income (loss) per shares of common stock (basic)	$	(0.06	)	$	0.01
Net income (loss) per shares of common stock (diluted)	$	(0.06	)	$	0.01

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

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

Accumulated other comprehensive income

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

Related parties

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

Recent accounting pronouncements

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.

(4) 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.

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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 three months ended March 31, 2013, three customers accounted for 10% or more of sales revenues, representing 36%, 23% and 23%, respectively of the total sales. For the three months ended March 31, 2012, three customers accounted for 10% or more of sales revenues, representing 43.2%, 15.0% and 14.3%, respectively of the total sales. As of March 31, 2013, there were two customers that constituted 58% and 25% 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.

For the quarter ended Mar 31, 2013, two suppliers accounted for 10% or more of our total purchases, representing 59.7% and 22.6%, respectively. For the three months ended March 31, 2012, three suppliers accounted for 10% or more of our total purchases, representing 33.2%, 22.4%, and 17.0%, respectively..

For the three months ended March 31, 2013 and 2012, the Company had insurance expense of $0 and $187 respectively. Accrual for losses is not recognized until such time as a loss has occurred.

(5)  Income Taxes

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

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

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

	Three Months Ended March 31,
	2013		2012
Computed tax at the PRC statutory rate of 15%	$	-	$	165,203
Benefit of tax holiday		-		(165,203	)
Income tax expenses per books	$	-	$	-

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(6)  Accounts Receivable, net

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

	March 31, 2013			December 31, 2012
Amount outstanding	$	10,860,124		$	15,111,084
Less: Allowance for doubtful accounts, net		(3,717,232	)		( 3,872,082	)
Net amount	$	7,142,892		$	11,239,002

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

	March 31, 2013			December 31, 2012
Beginning balance	$	3,872,082		$	2,790,662
Provision for (recovery of) doubtful accounts		(154,850	)		1,081,420
Ending balance	$	3,717,232		$	3,872,082

(7)  Advances to Suppliers

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

	March 31, 2013		December 31, 2012
Advances to suppliers	$	12,503,217	$	1,177,462

Advances to suppliers increased from $1,177,462 at December 31, 2012 to $12,503,217 at March 31, 2013, an increase of $11,325,755. The increase is due to the Company advancing more money to suppliers to acquire raw materials during the three months ended March 31, 2013

(8)  Inventories

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

	March 31, 2013		December 31, 2012
Raw materials	$	6,912,618	$	5,863,406
Work in process		39,314,341		40,387,355
Finished goods		1,954,080		2,167,114
	$	48,181,039	$	48,417,875

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As of March 31, 2013 and December 31, 2012, the Company did not have any provision for inventory in regards to slow moving or obsolete items.

(9)  Property and Equipment, net

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

	March 31, 2013		December 31, 2012
Building	$	26,860,029	$	26,776,613
Machinery and equipment		28,783,960		28,692,280
Motor vehicles		33,810		33,705
		55,677,799		55,502,598
Less: accumulated depreciation		(15,196,021)		(14,538,235)
	$	40,481,778	$	40,964,363

For the three months ended March 31, 2013 and 2012, depreciation expenses amounted to $671,458 and $510,579, respectively. As of March 31, 2013 and December 31, 2012, a net book value of $16,682,467 and $35,193,170 of property and equipment were pledged as collateral for the Company’s short-term loans, respectively.

Construction in progress consists of two projects as follows:

	March 31, 2013		December 31, 2012		Estimated completion time	Expected capital needed to complete
Production facility	$	17,759,845	$	-	2014	$	6,299,225
Land improvements		1,184,100		7,324,379	2013		1,368,500
	$	18,943,945	$	7,324,379		$	7,667,725

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

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(10) Land Use Rights

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

	March 31, 2013		December 31, 2012
Land Use Rights	$	11,643,273	$	11,610,103
Less: Accumulated amortization		(1,999,945)		(1,852,684)
	$	9,643,328	$	9,657,419

During the year ended December 31, 2012, the Company increased $14,091 to land use right by paying additional fee. For the three months ended March 31, 2013 and 2012, amortization expenses were $58,598 and $57,004, respectively.

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

Twelve-month period ended March 31,
2014	$	234,391
2015		234,391
2016		234,391
2017		234,391
2018		234,391
2019 and thereafter		8,471,373
Total	$	9,643,328

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

(11) 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 Preferred Stock

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

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(b) Conversion of Series B Preferred Stock

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

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

(c) Exercise of Warrants

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

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

(d) Stock Issuances for Cash

On January 12, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On March 8, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On April 10, 2012, the Company issued 200,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On May 9, 2012, the Company issued 200,000 shares of common stock at a price of $0.56 per share to unrelated parties to raise money for the Company’s operations.

On May 9, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On October 4, 2012, the Company issued 260,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

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On December 20, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

(e) Stock Issuances to Consultants

During the first quarter of 2011, the Company issued an aggregate of 620,000 shares of common stock pursuant to three consulting agreements in exchange for consulting and investor relations services. A fair value of $1,240,100 was recorded for the consulting expenses relating to all three agreements, with the consulting expenses being amortized over one year for two agreements and one and a half years for the third agreement. The amount of $0 and $87,850 was amortized and recognized as a general and administrative expense for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, these consulting expenses were fully amortized.

During the second quarter of 2011, the Company issued 365,000 shares of common stock pursuant to a consulting agreement in exchange for consulting and investor relations services. A fair value of $547,500 was recorded for the consulting expenses and amortized over one and a half years. The amount of $0 and $91,250 was amortized and recognized as a general and administrative expense for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, these consulting expenses were fully amortized.

In April 2012, the Company issued an aggregate of 110,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $96,800 was recorded for the expenses and amortized over one year. The amount of $24,200 and $0 was amortized and recognized as a general and administrative expense for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, $8,067 remained to be amortized and was recorded as a prepaid expense.

In June 2012, the Company issued an aggregate of 100,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $57,000 was recorded for the consulting expenses and amortized over four months. In September 2012, these 100,000 shares of common stock had been canceled due to early termination of the consulting agreement.

In July 2012, the Company issued an aggregate of 45,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $24,750 was recorded for the expenses and amortized over six months. The amount of $24,750 was amortized and recognized as a general and administrative expense for the year ended December 31, 2012. As of March 31, 2013, these consulting expenses were fully amortized.

In September 2012, the Company issued an aggregate of 30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. The agreement was signed on August 30, 2012 and was for services performed beginning on April 22, 2012 through December 31, 2012.  This agreement extended a previous consulting agreement with the same investor relations firm. The fair value of the agreement was calculated to be $13,800. The Company expensed $13,800 as a general and administrative expense for the year ended December 31, 2012. As of March 31, 2013, these consulting expenses were fully amortized.

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In December 2012, the Company issued an aggregate of 65,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $27,950 was recorded for the expenses and amortized over six months. The amount of $13,975 and $0 was amortized and recognized as a general and administrative expense for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, $12,422 remained to be amortized and was recorded as a prepaid expense.

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

In January 2013, the Company issued 30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $20,400 was recorded for the expenses and amortized over six months. The amount of $10,200 was amortized and recognized as a general and administrative expense for the three months ended March 31, 2013. As of March 31, 2013, $10,200 remained to be amortized and was recorded as a prepaid expense.

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

(f) Other Stock Issuances

On December 13, 2012, we issued an aggregate of 100,000 shares of common stock to four directors as compensation for services provided in 2012. On December 13, 2012, we issued 60,000 shares of common stock to an employee for services provided in 2012. The issuance of these shares was recorded at fair market value, or $104,000.

(g) Shares Held in Escrow

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

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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 March 31, 2013, no Escrow shares have been transferred to investors or returned to the Company.

Dividend Distribution for Series B Preferred Stock

Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010.

As a result, we declared a dividend for the Series B Preferred Stock in the amount of $51,353 as of March 31, 2013, compared to $46,816 as of December 31, 2012. For the three months ended March 31, 2013 and 2012, no payment was made for dividends declared.

(12) Amount Due to Related Parties

As of March 31, 2013 and December 31, 2012, we had related parties payable in the amount of $4,637,132 and $4,795,593, respectively. As of March, 2012, $4,380,500 is due to Mr. Dengyong Jin, who is General Manager of our China operations and chief executive officer and principal shareholder of Xingyong . These amounts are not due prior to September 30, 2014 and are made to the Company by Mr. Jin for business operating purposes. The advances are interest free.

(13) Loan from Unrelated Parties

During the quarter ended March 31, 2013, the Company obtained short term borrowings of $11,351,604 from four unrelated parties. The loans are dated from February 28, 2013 and mature from one to three months. The loans are unsecured and interest free.

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(14) Short-term Bank Loans

As of March 31, 2013 and December 31, 2012, short-term loans in the amount of $ 45,241,000 and $ 38,680,500, respectively, consisted of the following:

	March 31, 2013		December 31, 2012
Bank loan from China Construction Bank, dated August 23, 2012, due August 22, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights	$	6,440,000	$	6,420,000
Bank loan from China Construction Bank, dated August 3, 2012, due August 2, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights		6,440,000		6,420,000
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		6,440,000		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		6,440,000		-
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		5,635,000		5,617,500
Bank loan from China Construction Bank, dated September 7, 2012, due September 6, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights		4,830,000		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		4,830,000		-
Bank loan from China Construction Bank, dated September 17, 2012, due September 16, 2013, with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights		4,186,000		4,173,000
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
	$	45,241,000	$	38,680,500

In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $149 million (or RMB 930 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights.  Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter.  As of March 31, 2013, the unpaid principal balance drawn from the secured line of credit was $51.4 million, including $39.6 million of short-term bank loans as disclosed above and $11.8 million of notes payable.

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

Interest expenses were $862,448 and $1,229,745 for the three months ended March 31, 2013 and 2012, respectively.

The weighted average interest rates for these loans were 7.08% and 6.92% as of March 31, 2013 and December 31, 2012, respectively.

Capitalized interest were $178,177 and $0 for the three months ended March 31, 2013 and 2012, respectively.

Long term bank loans:

	March 31, 2013		December 31, 2012
Bank loan from China Construction Bank, dated January 22, 2013, originally due in January 21, 2016, with an annual interest rate of 6.15%, payable monthly, secured by machinery.	$	11,270,000	$	-
Bank loan from Credit Union, dated April, 2012, originally due in April 2015, with an annual interest rate of 15.295% payable monthly, secured by machinery.		4,797,800		4,782,900
	$	16,067,800	$	4,782,900

(15) Other Payable

Other payable amounted $1,489,655 and $630,179 as of March 31, 2013 and December 31, 2012, respectively. For the three months ended March 31, 2013, other payable mainly included amounts payable to the local bureau of finance of $919,310 for VAT. For the year ended December 31, 2012, other payable mainly included amounts payable to the local bureau of finance of $434,955 for VAT.

 (16) Subsequent events

In accordance with ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before consolidated financial statements are issued, the Company has evaluated events and transactions for potential recognition or disclosure through the reporting date, the date the consolidated financial statements were available to be issued and disclose the following.  

In May 2013, the Company issued 1,000,000 shares of restricted common stock to Mr. Dengyong Jin as a reward to his services provided. The 1,000,000 shares were valued at fair market value and were recorded as general and administration expense. Mr. Dengyong Jin is the CEO of Xinghe Xingyong Carbon Co., Ltd., which is the Company’s Subsidiary.

On May 7, 2013, the Company elected Dong Jin as directors.  Mr. Dong Jin is the son of Dengyong Jin.

In May 2013, the Company issued 25,000 shares of restricted common stock to Mr. Dong Jin for service as director. The 25,000 shares were valued at fair market value and were recorded as general and administration expense.

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

This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.

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

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

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

Overview

We are engaged in the manufacture of graphite-based products in the PRC.  Our products are used in the manufacturing process of other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors.  We currently manufacture and sell primarily the following types of graphite products:

o graphite electrodes;

o fine grain graphite; and

o high purity graphite.

Based on information we receive about our industry in the course of our business, we believe that we are the largest wholesale supplier of fine grain graphite and high purity graphite in China and one of China’s largest producers and suppliers of graphite products overall.  Approximately 40% of our products are sold directly to end users in China, primarily consisting of steel manufacturers.  All other sales are made to over 200 distributors located throughout 22 provinces in China. Our distributors then sell our products to end users both in China and in foreign countries, including, among others, Japan, the United States, Spain, England, South Korea and India. In 2012, our revenues and profits decreased from 2011 due to a decrease in demand for our products, which resulted from more competitive market conditions, as discussed in greater detail below under the heading “Results of Operations.” This trend continues into 2013.

The steel industry started to recover in 2010, in particular since the third quarter of 2010. Our revenues, gross profits and gross margins improved significantly during the second half of 2010, which continued into the end of 2011. In 2012, our revenues decreased due to slowdown of steel. Our gross margin for the three months ended March 31, 2013 was (8.5)%, compared to 29.0% for the three months ended March 31, 2012 due to the strong competition, and increased deprecation and amortization expenses in the cost of goods sold due to the increased property and equipment used in the manufacturing process.  

Our cash increased and our accounts receivables decreased during the three months ended March 31, 2013 compared to the three months ended March 31, 2012, while collectability of our receivables remained highly probable. We believe that our allowance for doubtful accounts as of March 31, 2013 was adequate. We plan to continue to focus on increasing the percentage of our high margin products including large size ultra-high power graphite electrodes, high purity graphite and fine gain graphite.

The current budgeted investment for the construction of our new production facility was approximately $17.7 million in the aggregate. Approximately $11.4 million had been spent as of March 31, 2013.

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

At March 31, 2013, we had short-term bank loans of approximately $45.2 million.  These bank loans, which are secured by liens on our fixed assets and land use rights, are due between June 2013 and March 2014, including approximately $40 million owed to the Construction Bank of China. During the three months ended March 31, 2013, pursuant to a secured line of credit obtained from China Construction Bank in January 2012, the Company rolled over all of its short-term bank loans from the China Construction Bank.  In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $149 million (or RMB 930 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights.  Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter.  As of March 31, 2013, the unpaid principal balance drawn from the secured line of credit was $51.4 million, including $39.6 million of short-term bank loans and $11.8 million of notes payable.  Historically, we have rolled over our short-term loans when they became due. However, we cannot assure investors that our lenders, including the Construction Bank of China, will not demand repayment when these loans mature. If our lenders demand repayment  when due, we may be unable to obtain the necessary funds to pay off these loans, which could result in the imposition of penalties, including a 50% increase in interest rates and a request from the banks for additional security for the loans. At March 31, 2013, our cash reserves, including restricted cash, were $24.0 million and are insufficient to pay off all of our loans when due.

We purchase all of our raw materials from domestic Chinese suppliers. Because we do not have any long-term contracts with our suppliers, any increase in the prices of our raw materials would affect the price at which we can sell our products. If we are unable to pass on increased costs to our customers, we may be unable to maintain our profit margins. Raw material prices increased significantly in 2010 and 2011, but decreased during the year ended December 31, 2012. This trend continues into 2013. Selling price of our products also decreased in 2012 and in the first quarter of 2013, resulting in decreases in our gross margin. As of March 31, 2013 and December 31, 2012, advances to suppliers amounted to $12,503,217 and $1,177,462, respectively. The increase is because the Company advances $11,308,798 for a new construction project as of March 31, 2013.

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

Three months ended March 31, 2013 and 2012

The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):

	Three months ended March 31,
	2013					2012
Sales	$	3,061		100.0	%	$	10,061			100.0	%
Cost of goods sold		3,320		108.5	%		7,144			71.0	%
Gross profit (loss)		(259	)	(8.5	)%		2,917			29.0	%
Operating expenses
Selling expenses		18		0.6	%		47			0.5	%
General and administrative		385		12.6	%		851			8.5	%
Depreciation and amortization		68		2.2	%		57			0.6	%
Income (loss) from operations		(730	)	(23.8	)%		1,962			19.5	%
Other income		0.3		0.01	%		-			-	%
Other expense		-		-	%		-			-	%
Change in fair value of warrants		44		1.4	%		(479	)		(4.8	)%
Interest expense, net		(817	)	(26.7	)%		(1,230	)	(12.2		)%
Net income (loss)		(1,502	)	(49.1	)%		253			2.5	%
Preferred Stock Dividend		(5	)	(0.1	)%		(5	)		(0.1	)%
Net income (loss) available to common shareholders	$	(1,507	)	(49.2	)%	$	248			2.5	%

Sales.

During the three months ended March 31, 2013, we had sales of $3,060,918, compared to sales of $10,061,210 for the three months ended March 31, 2012, a decrease of $7,000,292, or approximately 69.6%. Sales decrease was mainly attributable to a significant decrease in the demand for our products during the three months ended March 31, 2013, which resulted from the struggle of steel companies.

The breakdown of revenues for each of graphite electrodes, fine grain graphite and high purity graphite, during the three months ended March 31, 2013 and 2012, respectively, was as follows:

	March 31, 2013  Sales		% of Total Sales			March 31, 2012  Sales		% of Total Sales
Graphite Electrodes	$	80,960		2.6	%	$	456,647		4.5	%
Fine Grain Graphite		1,394,956		45.6	%		4,467,350		44.4	%
High Purity Graphite		1,491,521		48.7	%		5,051,089		50.2	%
Others (1)		93,481		3.1	%		86,124		0.9	%
Total	$	3,060,918		100.0	%	$	10,061,210		100.0	%

(1) “Other” sales represent revenue generated by sales of semi-processed products and other types of products.

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Cost of goods sold; gross margin .

Our cost of goods sold consists of the cost of raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the three months ended March 31, 2013, our cost of goods sold was $3,320,320, compared to $7,143,606 for the cost of goods sold for the three months ended March 31, 2012, a decrease of $3,823,286, or approximately 53.5%. The decrease in the cost of sales was mainly due to decrease in sales volume.

Our gross margin decreased from 29.0% for the three months ended March 31, 2012 to (8.5)% for the three months ended March 31, 2013. This decrease is mainly due to decreased sales price due to competition and less demand and increased cost of goods sold due to increased depreciation allocated to the cost of goods sold due to the transfer of construction in progress to property and equipment since the end of 2012.

Operating expenses.

Operating expenses totaled $470,411 for the three months ended March 31, 2013, compared to $955,201 for the three months ended March 31, 2012, a decrease of $484,790, or approximately 50.8%.

Selling, general and administrative expenses

Selling expenses decreased from $46,798 for the three months ended March 31, 2012 to $17,941 for the three months ended March 31, 2013, a decrease of $28,857, or 61.7%. The decrease was mainly due to decreased sales commission and lower shipping and handling expenses during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, which resulted from lower sales.

Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $384,582 for the three months ended March 31, 2013, compared to $851,399 for the three months ended March 31, 2012, a decrease of $466,817, or 54.8%. The decrease in general and administrative expenses was mainly due to decreased consulting expenses, decreased bad debt expenses offset by increased salary expenses for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

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Depreciation and amortization expenses

Depreciation and amortization expenses totaled $655,449 for the three months ended March 31, 2013, compared to $567,584 for the three months ended March 31, 2012, an increase of $87,865, or approximately 15.48%. For the three months ended March 31, 2013, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts of $587,561 and $67,888, respectively.  For the three months ended March 31, 2012, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $510,580 and $57,004, respectively. The increase in depreciation and amortization expenses is due to additional fixed assets placed in service.

Income (Loss) from operations.

As a result of the factors described above, operating loss was $729,813 for the three months ended March 31, 2013, compared to operating income of $1,962,403 for the three months ended March 31, 2012, a decrease of approximately $2,692,216, or 137.2%.

Other income and expenses.

Our interest expense was $862,448 for the three months ended March 31, 2013, compared to $1,229,745 for the three months ended March 31, 2012, reflecting decreased interest expenses on loans from banks. Expenses from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $44,368 for the three months ended March 31, 2013, compared to $(479,563) for the three months ended March 31, 2012.

Income tax.

During the three months ended March 31, 2013 and 2012, we benefited from a 100% tax holiday from the PRC enterprise tax. As a result, we had no income tax due for these periods. The enterprise income tax at the statutory rates would have been approximately $0 and $165,203, respectively, for the three months ended March 31, 2013 and 2012 without consideration of adjustments on taxable income. The tax holiday is from 2008 through 2017.

Net income (loss).

As a result of the factors described above, our net loss for the three months ended March 31, 2013 was $1,502,268, compared to net income of $253,117 for the three months ended March 31, 2012, a decrease of $1,755,385, or 693.5%.

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 three months ended March 31, 2013 was $146,277, compared to $423,897 for the three months ended March 31, 2012, a decrease of $277,620, or 65.5%.

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Preferred Stock Dividend.

Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010. As a result, we incurred dividend expenses of $4,537 and $5,018 for the three months ended March 31, 2013 and 2012, respectively.

Net income (loss) available to common stockholders.

Net loss available to our common stockholders was $1,506,805, or $(0.06) per share (basic and diluted), for the three months ended March 31, 2013, compared to net income of $248,099, or $0.01 per share (basic and diluted), for the three months ended March 31, 2012.

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

Our primary capital needs have been to fund our working capital requirements. Our primary sources of financing have been cash generated from short-term and long-term loans from banks in China, loans from 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 net working capital. The Company’s low working capital is primarily due to substantial short-term loans from banks and borrowing from related parties. The Company is able to operate with a low net working capital because of local community and governmental support in Inner Mongolia. For example, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities, as described below under the heading “Summary of Significant Accounting Policies—Land Use Rights.”

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At March 31, 2013, we had short-term loans in the aggregate amount of $45,241,000 outstanding, as described below.

	March 31, 2013		December 31, 2012
	(unaudited)
Bank loan from China Construction Bank, dated August 23, 2012, due August 22, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights	$	6,440,000	$	6,420,000
Bank loan from China Construction Bank, dated August 3, 2012, due August 2, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights		6,440,000		6,420,000
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		6,440,000		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		6,440,000		-
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		5,635,000		5,617,500
Bank loan from China Construction Bank, dated September 7, 2012, due September 6, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights		4,830,000		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		4,830,000		-
Bank loan from China Construction Bank, dated September 17, 2012, due September 16, 2013, with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights		4,186,000		4,173,000
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
	$	45,241,000	$	38,680,500

In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $149 million (or RMB 930 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights.  Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter.  As of March 31, 2013, the unpaid principal balance drawn from the secured line of credit was $51.4 million, including $39.6 million of short-term bank loans as disclosed above and $11.8 million of notes payable.

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

Interest expenses were $862,448 and $1,229,745 for the three months ended March 31, 2013 and 2012, respectively.

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The weighted average interest rates for these loans were 7.08% and 6.92% as of March 31, 2013 and December 31, 2012, respectively.

Capitalized interest were $178,177 and $0 for the three months ended March 31, 2013 and 2012, respectively.

Long term bank loans:

	March 31, 2013		December 31, 2012
	(Unaudited)
Bank loan from China Construction Bank, dated January 22, 2013, originally due in January 21, 2016, with an annual interest rate of 6.15%, payable monthly, secured by machinery.	$	11,270,000	$	-
Bank loan from Credit Union, dated April, 2012, originally due in April 2015, with an annual interest rate of 15.295% payable monthly, secured by machinery.		4,797,800		4,782,900
	$	16,067,800	$	4,782,900

Historically we have been able to renew our short-term loans on an annual basis. Although we believe that we will be able to obtain extensions of these loans when they mature, we cannot assure investors that such extensions will be granted. In the event repayment of the loans is not extended and we default on our obligations, the lenders could call the loans, foreclose on the collateral securing the loans or seek other remedies. If a lender foreclosed on our land, the lender would acquire the land use rights to such land, which rights are currently held by us. In addition, because we did not pay for the land use rights that were granted to us with respect to a portion of our facilities, we are required to keep such property in good condition and to allocate a portion of the land as a park that can be accessed by the public. In such an event, our operations and financial conditions would be materially adversely affected and we would be forced to cease operations if alternative funding is not obtained.

Despite a low amount of working capital, we are able to operate our business through bank financing, loans from related and unrelated parties and issuing equity in exchange for certain services provided. Our long-term goal is to continue to roll over short-term loans and obtain positive cash flows from collecting our outstanding accounts receivable and sales of inventory until our new facility is operating at full capacity. We have the ability to manage and predict our cash flow for inventory purchases and advances to suppliers because the length of the time it takes to complete purchase orders for customers, which on average is six months. Our customers must order products well in advance of productions, as a purchase order is fulfilled only six months after such order is placed, thereby allowing us to predict cash flow. During the interim, we expect that anticipated cash flows from future operations, short-term and long-term bank loans and loans from unrelated or related parties will be sufficient to fund our operations through at least the next twelve months, provided that :

o we generate sufficient business so that we are able to generate substantial profits, which cannot be assured;

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o our banks continue to provide us with the necessary working capital financing; and

o we are able to generate savings by improving the efficiency of our operations.

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

At March 31, 2013, cash and cash equivalents were $1,680,254, compared to $129,746 at December 31, 2012, an increase of $1,550,508. Restricted cash increased to $22,379,000 as of March 31, 2013 from $22,149,000 as of December 31, 2012, which was restricted as a requirement by our lenders. Our working capital deficit increased by $1,368,946 to a deficit of $1,860,693 at March 31, 2013 from a deficit of $491,747 at December 31, 2012.

As of March 31, 2013, accounts receivable, net of allowance, was $7,142,892, compared to $11,239,002 at December 31, 2012, a decrease of $4,096,110, or 36.45%. The decrease was mainly due to decreased sales during the three months ended March 31, 2013. Accounts receivable are recorded at the invoiced amount and do not bear interest. Our management reviews the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends and the aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The Company believes its allowance was sufficient as of March 31, 2013.

As of March 31, 2013, inventories were $48,181,039, compared to $48,417,875 at December 31, 2012, a decrease of $236,836, or 0.49%. The decrease in inventories is becausethe Company is keeping lower inventory due to slower sales.

As of March 31, 2013, prepaid expenses were $785,438, compared to $280,779 at December 31, 2012, an increase of $504,659, or 179.74%. The increase in prepaid expenses is attributable to increased prepaid services during the quarter ended March 31, 2013 offset by the amortization of various prepaid consulting fees paid from stock issuances.

Advances to suppliers increased from $1,177,462 at December 31, 2012 to $12,503,217 at March 31, 2013, an increase of $11,325,755. The increase is because the Company advances $11,308,798 for a new construction project as of March 31, 2013. No allowance for doubtful accounts was necessary for the balance of advances to suppliers.

Notes payable reflect our obligations to bank lenders who have guaranteed our future payment obligations as requested by certain of our suppliers. Notes payable increased from $40,606,500 to $40,733,000 from December 31, 2012 to March 31, 2013. The increase is due to the Company obtaining additional fund to secure its inventory. The notes payable were secured by $22,379,000 of restricted cash at March 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.

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Three months ended March 31, 2013 Compared to Three months ended March 31, 2012

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

Cash Flows Data:
	For Three Months Ended March 31
	2013			2012
Net cash flows used in operating activities	$	(15,210,594	)	$	(8,089,943	)
Net cash flows used in investing activities	$	(11,577,432	)	$	(429,610	)
Net cash flows provided by financing activities	$	28,335,251		$	8,363,985

Net cash flow used in operating activities was $15,210,594 for the three months ended March 31, 2013, compared to $8,089,945 for the three months ended March 31, 2012, an increase of $7,120,649, or 88.0%. The increase in net cash flow used in operating activities was mainly due to less increase in accounts receivable of $4.1 million, less payments made to acquire inventories of $4.5 million, which was offset by, increased net loss of $1.8 million, increased payments for advance to suppliers of $6.1 million and more payments made for other receivable of $7.2 million.

Net cash flow used in investing activities was $11,577,432 for the three months ended March 31, 2013, compared to $429,610 for the three months ended March 31, 2012, an increase of $11,147,822, or 2,594.9%. Approximately $0.11 million was spent on construction costs and $2 thousand was spent for property and equipment and $11.6 million was spent for construction in progress for our new construction during the three months ended March 31, 2013. Approximately $0.6 million was spent on construction costs and $0.02 million was spent for property and equipment for our new factory during the three months ended March 31, 2012.

Net cash flow provided by financing activities was $28,335,251 for the three months ended March 31, 2013, compared to $8,363,985 for the three months ended March 31, 2012, an increase of $19,971,266 or 238.8%.  The increase in net cash flow provided by financing activities was due to the increase in proceeds from unrelated parties, increase in additional notes payable, increase in short-term loans and long-term loans entered into during the three months ended March 31, 2013, which offset mainly by a decrease in the amount of restricted cash of $5.1 million required to secure our notes payable. The Company had borrowed approximately $17.7 million of notes payable for the three months ended March 31, 2013, compared to $10.8 million for the three months ended March 31, 2012. In addition, the aggregate amount of outstanding short-term loans borrowed and repaid increased for the three months ended March 31, 2013. The Company borrowed $11.2 million in short-term bank loans and repaid $4.8 million during the three months ended March 31, 2013, while the Company borrowed $4.8 million in short-term bank loans and repaid $4.8 million for the three months ended March 31, 2012.

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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 three months ended March 31, 2013, three customers accounted for 10% or more of sales revenues, representing 36%, 23% and 23%, respectively of the total sales. For the three months ended March 31, 2012, three customers accounted for 10% or more of sales revenues, representing 43.2%, 15.0% and 14.3%, respectively of the total sales. As of March 31, 2013, there were two customers that constituted 58% and 25% 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.

For the three months ended March 31, 2013, three suppliers accounted for 10% or more of our total purchases, representing 59.7%, 22.6%, respectively. For the three months ended March 31, 2012, three suppliers accounted for 10% or more of our total purchases, representing 33.2%, 22.4%, and 17.0%, respectively..

Off-Balance Sheet Arrangements

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

Significant Accounting Estimates and Policies

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

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Revenue Recognition

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

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

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

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

Comprehensive Income

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

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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.

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

Accounts Receivable and Allowance For Doubtful Accounts

Accounts receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted to $3,717,232 as of March 31, 2013. Management believes that this allowance is sufficient based on a review of customer credit history, historic payment records, aging, the market and other factors.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Management believes that there was no obsolete inventory as of March 31, 2013 or December 31, 2012 and therefore, no allowance for inventory was necessary.

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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, there was no impairment recorded during the years ended at March 31, 2013 and December 31, 2012.

Land Use Rights

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

The Company has land use rights of 386,853 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 130,220 square meters expiring in 2052 and the land use right with respect to 256,633 square meters expiring in 2053. In addition, in 2011, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities.  The Company was not required to sign a land use right agreement or pay a fee.  In exchange, the Company will allow public use of this 387,838 square meters of land and keep the land in good condition.   The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000.  The Company has not accrued the liability or recorded the land use right asset for this property in accordance with ASC 450, Contingencies.  Because of our current relationship and agreement with the local government to keep the land in good condition, we believe that it is unlikely that we will have to pay for the land use right.  The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans.  We believe that our facilities are sufficient to meet our current and near future requirements and that any additional space that we may require would be available on commercially reasonable terms.

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

Research and Development

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

Value Added Tax

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

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

Fair Value of Financial Instruments

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

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

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

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● 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 March 31, 2013:

	Carrying Value at March 31,		Fair Value Measurement at March 31, 2013
	2013		Level 1		Level 2		Level 3
Warrant liability	$	179,994	$	-	$	-	$	179,994

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, 2012:

	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

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

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

Stock-based Compensation

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

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

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Common stock awards are granted to directors for services provided.

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

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

Stock compensation expenses of $48,375 and $179,100 of were amortized and recognized as general and administrative expenses for the three months ended March 31, 2013 and 2012, respectively.

Recent Accounting Pronouncements

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable to smaller reporting companies.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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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 March 31, 2013.

Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2013, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and make changes that our management deems necessary.

Limitations on Controls

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

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any pending legal proceedings which involve us or any of our properties or subsidiaries.

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

On July 14, 2011, the Company issued an aggregate of 250,000 shares of common stock at a price of $0.64 per share to unrelated parties to raise money for the Company’s operations.

On January 12, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On March 8, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

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On April 10, 2012, the Company issued 200,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On April 24, 2012, the Company issued 110,000 shares of common stock as compensation for one service company.

On May 9, 2012, the Company issued 200,000 shares of common stock at a price of $0.56 per share to unrelated parties to raise money for the Company’s operations.

On May 9, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On June 21, 2012, the Company issued 100,000 shares of common stock as compensation for one service company. On September 7, the Company retired these 100,000 shares of common stock.

On July 6, 2012, the Company issued 45,000 shares of common stock as compensation for one service company.

On September 6, 2012, the Company issued 30,000 shares of common stock as compensation for one service company.

On October 4, 2012, the Company issued 260,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On December 13, 2012, we issued an aggregate of 100,000 shares of common stock to four directors as compensation for services provided in 2012.

On December 13, 2012, we issued 60,000 shares of common stock to an employee for services provided in 2012.

On December 20, 2012, the Company issued 60,000 shares of common stock as compensation for one service company.

On December 20, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.

On December 28, 2012, the Company issued 65,000 shares of common stock as compensation for one service company.

On January 15, 2013, the Company issued 30,000 shares of common stock as compensation for one service company.

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On March 28, 2013, the Company issued 30,000 shares of common stock as compensation for one service company.

In May 2013, the Company issued 1,000,000 shares of restricted common stock to Mr. Dengyong Jin as a reward to his services provided. The 1,000,000 shares were valued at $500,000, or $0.5 per share based on the closing price of the Company’s common stock on the date of issuance, and recorded as general and administration expense. Mr. Dengyong Jin is the CEO of Xinghe Xingyong Carbon Co., Ltd., which is the Company’s Subsidiary.

On May 7, 2013, the Company elected Dong Jin as directors.  Mr. Dong Jin is the son of Dengyong Jin.

In May 2013, the Company issued 25,000 shares of restricted common stock to Mr. Dong Jin for service as director. The 25,000 shares were valued at $6,250, or $ 0.25 per share based on the closing price of the Company’s common stock on the date of issuance, and recorded as stock compensation.

Based on representations made by the third parties to whom we issued these shares, such issuances were exempt from registration pursuant to Section 4(2) of the Securities Act and either Regulation 506 of the SEC thereunder or Regulation S.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA CARBON GRAPHITE GROUP, INC.
Date: May 15, 2013	By:	/s/ Donghai Yu
		Donghai Yu
		Chief Executive Officer

Date: May 15, 2013	By:	/s/ Zhenfang Yang
		Zhenfang Yang
		Chief Financial Officer

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