10-Q 1 asiacarbon10q063011.htm asiacarbon10q063011.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
Form 10-Q
 


(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended: June 30, 2011
 
or
 
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 333-167090
 
ASIA CARBON INDUSTRIES, INC.
(Exact Name of small business issuer as specified in its charter)

Maryland
 
26-2895795
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
110 Wall Street, 11th Floor, New York, New York 10005
(Address of principal executive offices) (Zip Code)
 
Issuer’s telephone Number: (646) 623-6999
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer o
 
Accelerated filer  o
     
Non-accelerated filer o
 
Smaller reporting company  x
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
As of August 12, 2011 the issuer had 50,608,077 outstanding shares of Common Stock.
 
 
TABLE OF CONTENTS

 
 
 
PART I

Item 1. Financial Statements.

 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
 
INDEX TO FINANCIAL STATEMENTS
 
 
Page
   
   As of June 30, 2011 (Unaudited) and December 31, 2010
F - 1
   
   Three and Six Months ended June 30, 2011 and 2010 (Unaudited)
F - 2
   
   Six Months Ended June 30, 2011 and 2010 (Unaudited)
F - 3
   
F - 4



 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
 Current Assets:
           
Cash and equivalents
  $ 7,594,147     $ 5,717,142  
Accounts receivable, net
    5,579,119       6,034,573  
Inventories
    1,540,012       1,476,061  
Prepaid expenses
    6,189       6,061  
Total Current Assets
    14,719,467       13,233,837  
                 
 Property and Equipment, Net
    13,947,825       11,031,788  
                 
 Other Assets:
               
Idle assets, net
    898,554       959,967  
Land use rights, net
    213,837       211,770  
Total Other Assets
    1,112,391       1,171,737  
                 
 TOTAL ASSETS
  $ 29,779,683     $ 25,437,362  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
 Current Liabilities:
               
Short term debt
  $ 1,339,875     $ 1,312,163  
Accounts payable
    3,801,668       3,913,207  
Accrued liabilities
    168,590       163,518  
Taxes payable
    714,322       896,351  
Investor deposit payable
    60,955       -  
Due to shareholder
    20,274       19,855  
Total Current Liabilities
    6,105,684       6,305,094  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity:
               
Series A Convertible Preferred Stock, $0.001 par value, 5,000,000
  authorized, none issued and outstanding
    -       -  
Blank Check Preferred Stock, $0.001 par value, 5,000,000
  authorized, none issued and outstanding
    -       -  
Common stock, $0.001 par value, 100,000,000 authorized, 50,608,077
  issued and outstanding at June 30, 2011 and December 31, 2010
    50,608       50,608  
Additional paid-in capital
    5,533,737       5,533,737  
Statutory reserves
    1,224,559       1,224,559  
Retained earnings
    14,714,923       10,628,010  
Accumulated other comprehensive income
    2,150,172       1,695,354  
Total Stockholders' Equity
    23,673,999       19,132,268  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 29,779,683     $ 25,437,362  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net Sales
  $ 13,500,872     $ 5,855,079     $ 26,942,388     $ 11,149,952  
Cost of Sales
    10,552,294       5,062,032       20,812,378       9,566,244  
Gross Profit
    2,948,578       793,047       6,130,010       1,583,708  
                                 
 Operating Expenses:
                               
Depreciation
    57,586       16,186       114,505       32,372  
Bad debts
    (2,158 )     17,815       1,124       14,194  
Selling
    72,411       33,714       143,487       69,636  
Professional fees
    48,781       90,006       157,678       277,328  
Other
    58,842       34,774       109,472       68,987  
  Total
    235,462       192,495       526,266       462,517  
Income From Operations
    2,713,116       600,552       5,603,744       1,121,191  
Other Income and (Expense)
                               
Interest income
    8,948       -       8,948       -  
Interest expense
    (30,882 )     (35,055 )     (58,060 )     (70,699 )
  Total Other Income and (Expense)
    (21,934 )     (35,055 )     (49,112 )     (70,699 )
Income Before Provision for Tax
    2,691,182       565,497       5,554,632       1,050,492  
Provision for tax
    709,742       187,569       1,467,719       355,296  
Net Income
    1,981,440       377,928       4,086,913       695,196  
                                 
Other comprehensive income
    294,776       105,508       454,818       104,917  
Comprehensive Income
  $ 2,276,216     $ 483,436     $ 4,541,731     $ 800,113  
                                 
Net Income Per Share - Basic
  $ 0.04     $ 0.01     $ 0.08     $ 0.01  
Net Income Per Share - Diluted
  $ 0.04     $ 0.01     $ 0.08     $ 0.01  
Weighted Average Shares Outstanding - Basic
    50,608,077       49,056,223       50,608,077       46,382,104  
Weighted Average Shares Outstanding - Diluted
    50,608,077       49,056,223       50,608,077       46,382,104  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)
 
   
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net Income
  $ 4,086,913     $ 695,196  
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
               
 Provision for allowances, returns and doubtful accounts
    1,124       14,194  
 Depreciation
    634,226       248,871  
 Amortization of land use rights
    2,376       812  
 Common stock issued for services
    -       34,617  
 Changes in operating assets and liabilities:
               
    Decrease (increase) in accounts receivable
    452,223       (322,245 )
    (Increase) decrease in inventories
    (63,951 )     71,472  
    (Increase) decrease in prepaid expenses
    (128 )     24,960  
    (Decrease) increase in accounts payable
    (111,539 )     509,929  
    Increase in accrued expenses
    5,072       21,671  
    (Decrease) in taxes payable
    (182,029 )     (165,436 )
Net Cash Provided by Operating Activities
    4,824,287       1,134,041  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (3,236,557 )     (1,416,000 )
Net Cash Used in Investing Activities
    (3,236,557 )     (1,416,000 )
                 
Cash Flows from Financing Activities
               
Proceeds from short term debt
    1,339,875       -  
Repayment of short term debt
    (1,339,875 )     -  
Cash advance from shareholder
    -       19,327  
Shareholder loans
    -       (2,615,993 )
Collection of shareholder loans
    -       2,615,993  
Proceeds from investor deposit payable
    60,955       -  
Proceeds from private placement
    -       3,038,903  
Commission paid for private placement
    -       (804,500 )
Net Cash Provided by Financing Activities
    60,955       2,253,730  
                 
Effect of Exchange Rate Changes on Cash
    228,320       20,471  
Net Increase in Cash and Equivalents
    1,877,005       1,992,242  
Cash and Equivalents - Beginning of Period
    5,717,142       2,172,641  
                 
Cash and Equivalents - End of Period
  $ 7,594,147     $ 4,164,883  
                 
Supplemental Cash Flow Information:
               
Interest Paid
  $ 57,386     $ 71,163  
Income taxes
  $ 1,422,694     $ 475,671  
                 
Non Cash Transaction:
               
Common stock issued for services
  $ -     $ 34,617  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 and 2010 (UNAUDITED) and DECEMBER 31, 2010

NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION

Organizations

Asia Carbon Industries, Inc. (“Asia Carbon” or “Company”) was incorporated June 23, 2008 under the laws of the State of Maryland.  The Company is a holding Company to develop business opportunities in the People’s Republic of China (“PRC”).

On November 10, 2008, Asia Carbon formed a wholly-owned subsidiary, Jin Zheng Li-Te-Wei-Si Carbon (Taiyuan) Inc. (“Liteweisi”) under PRC law in Taiyuan, China. Liteweisi is a management company to manage operations in China.

Taiyuan Hongxing Carbon Black Ltd. Company (“Hongxing”) was incorporated December 4, 2003 under the laws of the PRC. Hongxing is located at Qingxu County, Taiyuan, Shanxi province of China. Hongxing had two shareholders with registered capital of $384,300. Hongxing’s registered capital was $3,316,300 after one shareholder contributed $2,932,000 to Hongxing in 2008.

On December 29, 2009, Asia Carbon had, through its wholly owned subsidiary, Liteweisi, entered into Entrusted Management, Exclusive Option, Exclusive Purchase, Pledge of Equity and Shareholders’ Voting Proxy Agreements (collectively, the “Entrusted Agreements”) with Hongxing and shareholders of Hongxing, Guoyun Yao and Chunde Meng (“Hongxing Shareholders”). The effect of the Entrusted Agreements is to cede control of management and economic benefits of Hongxing to Liteweisi.  Asia Carbon issued 36,239,394 restricted shares of its common stock, par value $0.001 (the “Common Stock”), to Karen Prudente, nominee and trustee for the Hongxing Shareholders for Hongxing and the Hongxing Shareholders for the Entrusted Agreements with Liteweisi.

The Entrusted Agreements empowered Asia Carbon, through Liteweisi, the ability to substantially influence Hongxing’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. As a result of these Entrusted Agreements, which obligate Asia Carbon to absorb a majority of the risk of loss from Hongxing’s activities and enable Asia Carbon to receive a majority of its expected residual returns, Asia Carbon, through its wholly-owned subsidiaries, accounts for Hongxing as its Variable Interest Entity (“VIE”) under ASC 810-10. Accordingly, Asia Carbon consolidates Hongxing’s operating results, assets and liabilities.

For accounting purposes, the transaction was accounted for in a manner similar to a reverse merger or recapitalization, since the stockholders of Hongxing owned a majority of Asia Carbon’s Common Stock immediately following the transaction. Consequently, the assets and liabilities and historical operations reflected in the consolidated financial statements prior to the transaction are those of Hongxing and are recorded at the historical cost of Hongxing, and the consolidated financial statements after completion of the transaction include the assets and liabilities of Asia Carbon, Liteweisi, and Hongxing (collectively, the “Company”), historical operations of Hongxing, and operations of Asia Carbon and Liteweisi from the date of the transaction. The 36,239,394 restricted shares of Common Stock issued to Karen Prudente were presented as outstanding for all periods.

Asia Carbon, through its operating company in China, manufactures three carbon black products N220, N330 and N660 under the brand name “Great Double Star”. Most of the Company’s products are used by the domestic tire industry.

Base of Presentation

The accompanying consolidated financial statements were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Basis of Consolidation

The consolidated financial statements include the accounts of the Asia Carbon and its subsidiaries. All significant inter-company transactions were eliminated in consolidation.
 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and equivalents, accounts receivable, prepaid expenses, short term debt, accounts payable and accrued liabilities, various taxes payable and customer advances.  The fair value of these financial instruments approximates their carrying amounts in the balance sheets due to their short term maturity or by comparison to other instruments with similar terms.

Foreign Currency Translation

The functional currency of Hongxing and Litweisi is the Chinese Renminbi (“RMB”).  The reporting currency of the Company is the United States dollar (“US dollar”).

The assets and liabilities of Hongxing and Litweisi are translated into US dollars at period-end exchange rates.  The exchange rates used were 0.1547, 0.1475 and 0.1465 at June 30, 2011 and 2010 and December 31, 2010, respectively. The revenues and expenses are translated into US dollars at average exchange rates of the periods. The exchange rates used were 0.1538, 0.1465 for the three months ended June 30, 2011 and 2010; 0.1528 and 0.1465 for the six months ended June 30, 2011 and 2010, respectively; and 0.1477 for the year ended December 31, 2010.   Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were included in the consolidated results of operations.  There was no material foreign currency transaction gain or loss for 2011 or 2010.

Cash and Equivalents

Cash and equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

Inventories

Inventories are stated at the lower of cost, as determined on a weighted average basis, or market. Costs of inventories include raw materials and related costs incurred in bringing the products to the Company’s location and in proper condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The Company writes down inventories to market value if below cost. The Company also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

Property, Plant and Equipment, Net

Property, plant and equipment is stated at cost less accumulated depreciation.  Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.
 

Long Lived Assets

The Company evaluates potential impairment of long-lived assets, in accordance with Accounting Standards Codification (ASC) 360-10-15 “Impairment or Disposal of Long-Lived Assets” which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstances that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.

Revenue Recognition

We recognize revenue from sales of products. Sales are recognized when these four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectivity is reasonably assured. Sales revenue is presented net of value added tax (VAT), sales rebates and returns. No return allowance is made as product returns are insignificant based on historical experience. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables.  Credit risk is controlled through credit approvals, limits and monitoring procedures.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors.  Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted.  The Company does not routinely permit customers to return products and historically, customer returns have been immaterial. The Company will replace a product if the customer is not satisfied with its quality. Freight in costs are included in cost of goods sold.

Advertising Costs

Advertising costs are expensed as incurred. There were no material adverting costs for 2011 or 2010.

Research and Development

In accordance with the Accounting Standards Codification subtopic 730-10, Research and Development, the Company expenses all research and development costs as incurred. There were no material research and development cost for 2011 or 2010.

Segment Information

ASC 280-10 requires disclosures about segments and related information of a public entity.  The Company manufactures and sells carbon black made from tar oil. The Company and its major suppliers and customers are all located in the PRC. The Company operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Statement of Cash Flows

In accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon local currencies using average translation rates. As a result, amounts reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding asset and liabilities balances on the consolidated balance sheets.

Income Taxes

The Company accounts for income taxes using the asset and liability method described in ASC 740-10, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.  A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
 

Reclassifications

Certain prior year amounts were reclassified to conform to the manner of presentation in the current year.

NOTE 3 – INTERIM FINANCIAL STATEMENTS

The unaudited consolidated financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 were prepared in accordance with US GAAP for interim financial information and with Securities and Exchange Commission (“SEC”) instructions to Form 10Q. In the opinion of management, the unaudited consolidated financial statements were prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2011 and the results of operations and cash flows for the three and six months ended June 30, 2011 and 2010. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three and six month period ended June 30, 2011 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2011. The balance sheet at December 31, 2010 was derived from the audited consolidated financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP was condensed or omitted pursuant to the SEC’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2010 included in our Form 10K filed on March 31, 2011.

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable at June 30, 2011 and December 31, 2010 consisted of the following:

   
2011
   
2010
 
   
(Unaudited)
       
Accounts receivable
  $ 5,679,990     $ 6,132,213  
Allowance for doubtful accounts
    (100,871 )     (97,640 )
Accounts receivable, net
  $ 5,579,119     $ 6,034,573  

NOTE 5 INVENTORIES
 
Inventories at June 30, 2011 and December 31, 2010 consisted of the following:

   
2011
   
2010
 
   
(Unaudited)
       
Raw materials
  $ 1,128,431     $ 1,138,027  
Packing and other materials
    40,031       49,051  
Finished products
    371,550       288,983  
    $ 1,540,012     $ 1,476,061  
 

NOTE 6  PROPERTY AND EQUIPMENT
 
Property and equipment was summarized as follows at June 30, 2011 and December 31, 2010:

   
Estimated Useful Lives
   
 
2011
   
 
2010
 
         
(Unaudited)
       
Plant
    20     $ 4,706,498     $ 3,705,864  
Machinery and equipment
    10       9,991,103       9,784,462  
Transportation equipment
    5       113,503       111,155  
Other machinery and equipment
    5       56,455       55,287  
Construction in progress
            2,314,188       -  
              17,181,747       13,656,768  
Less:  Accumulated Depreciation
            3,233,922       2,624,980  
            $ 13,947,825     $ 11,031,788  

Construction in progress consisted of the Company’s natural gas project and by-products processing project. Total estimated budget for natural gas project and by-products processing project are RMB 16 million ($2.5 million) and RMB 18 million ($2.8 million), respectively.

Depreciation of property and equipment was $634,226 and $248,871 for six months ended June 30, 2011 and 2010, respectively. Depreciation of property and equipment was $323,917 and $124,435 for three months ended June 30, 2011 and 2010, respectively. Depreciation included in cost of goods sold was $519,721 and $216,499 for six months ended June 30, 2011 and 2010, respectively. Depreciation included in cost of goods sold was $266,331 and $108,249 for three months ended June 30, 2011 and 2010, respectively.

NOTE 7 – IDLE ASSETS

To build a new wet method production line, the Company retired its fourth dry method production line in July 2008, which was built in 2007. Most of the equipment and parts were in good condition and able to be used in the new wet method production line. The remaining net book value of the fourth dry method production line was RMB 14,735,993 ($2,160,297, translated at 2008 exchange rate). In July 2008, the Company decided to stop depreciation of these assets until completion of the new production line.

On October 26, 2010, the Company completed the construction of the new wet production line. Approximately 50% of the equipment and parts of the fourth dry production line were used in the Company’s new wet method production line. The remaining equipment and parts with net book value of RMB 7,391,507 ($1,119,961, translated at 2010 exchange rate) became idle assets. The Company planned to use remainder of the equipment and parts as replacement parts for the Company’s other three dry production lines, or to sell them in the used market place.  The estimated remaining useful lives for the idle assets are seven years. The Company’s policy is to depreciate the idle assets during their estimated remaining useful lives until they are reused or sold.

Depreciation of idle assets was $40,595 and $80,720 for three and six months ended June 30, 2011. Depreciation of idle assets was included in the depreciation expense.
 

NOTE 8 – SHAREHOLDERS LOANS RECEIVABLE

During the first quarter of 2010, the Company loaned RMB 16,226,224 ($2,377,142) and RMB 1,630,386 ($238,851) to two of the Company’s significant shareholders. Shareholder loans were interest free and due on demand. On June 23, 2010, the Company received RMB 16,226,224 ($2,377,142) and RMB 1,630,386 ($238,851) from the aforementioned shareholders, respectively.

NOTE 9 – XIGU LOAN RECEIVABLE AND LAND USE RIGHTS
 
On December 29, 2005, the Company lent RMB 554,130 ($85,735) to Xigu Village (“Village”), which was interest free and due December 29, 2008.  The Village failed to pay the loan as of December 29, 2008.  Pursuant to the loan agreement, once the Village was in default, the Company had the right to use the outstanding amount as a prepayment to its future rent obligation for this 49 mu (8.07 acre) parcel of land. The lease requires a yearly payment of RMB 10,000 ($1,547) through July, 2053. The balance due was capitalized at December 31, 2008 as land use rights and amortized over the remaining life of land use rights lease.

On October 31, 2007, the Company lent an additional RMB 1,000,000 ($154,720) to the Village. The loan was interest free and due October 31, 2010. Xigu Village failed to repay the loan as of October 31, 2010. Pursuant to the loan agreement,  if the Village was unable to repay the loan when due, the Company had  the right to offset the defaulted loan balance against future rent obligations of the Company’s newly leased second 49 mu (8.07 acre) parcel of land. The lease requires a yearly payment of RMB 10,000 ($1,547) through June 2056, the loan balance due was capitalized as land use rights and amortized over the remaining life of land use rights lease started on November 1, 2010.

As of June 30, 2011 and December 31, 2010, land use rights were as follows:

   
2011
   
2010
 
   
(Unaudited)
       
Land use rights
  $ 240,455     $ 235,482  
Less:  accumulated amortization
    (26,618 )     (23,712 )
Land use rights, net
  $ 213,837     $ 211,770  

Amortization of land use rights was recorded as rent. Rent expense was $1,195 and $406 for three months ended June 30, 2011 and 2010, respectively. Rent expense was $2,376 and $812 for six months ended June 30, 2011 and 2010, respectively

The estimated annual amortization of land use rights for the next five years and thereafter is as follows as of June 30, 2011, by years:

2012
  $ 4,809  
2013
    4,809  
2014
    4,809  
2015
    4,809  
2016
    4,809  
Thereafter
    189,792  
Total
  $ 213,837  


The minimum rent payment for land leases at June 30, 2011 was as follows by years:

2012
  $ 3,094  
2013
    3,094  
2014
    3,094  
2015
    3,094  
2016
    3,094  
Thereafter
    119,136  
Total
  $ 134,606  

NOTE 10 – SHORT TERM DEBT
 
Short term debt at June 30, 2011and December 31, 2010 consisted of the following:
 
   
2011
   
2010
 
   
(Unaudited)
       
To Xigu Credit Union
           
  Interest at 11.68%, payable March 20, 2011
  $ -     $ 487,894  
  Interest at 13.25%, payable April 28, 2012
    498,198       -  
To Chengguan Credit Union
               
  Interest at 11.68%, payable March 20, 2011
    -       824,269  
  Interest at 13.25%, payable April 28, 2012
    841,677       -  
Total Short Term Debt
  $ 1,339,875     $ 1,312,163  

The short term debts are renewable based on the past credit of the Company. Interest expense is paid quarterly. There were no other terms or loan covenants relating to these short term loans. On March 21, 2011, the Company repaid the $487,894 loan to Xigu Credit Union and the $824,269 loan to Chengguan Credit Union. On April 29, 2011, the Company borrowed the $498,198 loan from Xigu Credit Union and the $841,677 loan from Chengguan Credit Union.

NOTE 11 – TAXES PAYABLE

Taxes payable at June 30, 2011 and December 31, 2010 consisted of:

   
2011
   
2010
 
   
(Unaudited)
       
PRC corporation income tax
  $ 714,080     $ 669,055  
Value added tax
    227       213,424  
Other
    15       13,872  
Total
  $ 714,322     $ 896,351  
 

NOTE 12  COMMITMENTS AND CONTINGENCIES
 
Country Risk

As the Company's principal operations are conducted in the PRC, the Company is subject to considerations and risks not typically associated with companies in North America and Western Europe. These risks include, among others, risks associated with the political, economic and legal environments and foreign currency exchange limitations encountered in the PRC. The Company's results of operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, among other things.

In addition, all of the Company's transactions in the PRC are denominated in RMB, which must be converted into other currencies before remittance from the PRC. Both conversion of RMB into foreign currencies and remittance of foreign currencies abroad require approval of the PRC government.

Lack of Insurance

The Company currently has no insurance for its office facilities and operations and cannot be certain it can cover the risks associated with such lack of insurance or that it will be able to obtain and/or maintain insurance to cover these risks at economically feasible premiums.

Corporate Finance Advisory Services Agreements

On September 8, 2008, Asia Carbon entered a Corporate Finance Advisory Services Agreement (the “Asia Carbon Advisory Agreement”) with Friedland Corporate Investor Services LLC (“Friedland LLC”).  The agreement provided Friedland LLC would provide corporate finance advisory services to Asia Carbon designed to form a Wholly Owned Foreign Enterprise (“WOFE”) in China and to result in Asia Carbon’s shares becoming publicly-traded in the US.  As consideration for these services, Asia Carbon agreed to pay Friedland no less than 10% of the Company shares outstanding on a fully diluted basis at the time of commencement of trading of the Company’s shares. These services were provided during 2008 and were valued at $50,000 and recorded as consulting expense.

Pursuant to the Asia Carbon Advisory Agreement, the Company issued 4,700,000 and 360,809 shares to Friedland LLC on January 25, 2010 and May 11, 2010, respectively.  In addition, the Company paid $498,034 to Friedland LLC in connection with a private placement (PP). This amount was netted against the proceeds from the PP and reduced in additional paid in capital.

NOTE 13 – STOCKHOLDERS' EQUITY
 
On January 25, 2010, the Board of Directors (“BOD”) approved the resolution to execute the Asia Carbon Advisory Agreement with Friedland LLC. Pursuant to the agreement, the Board agreed to issue 4,700,000 shares to the designees of Friedland. The 4,700,000 shares issued to Friedland LLC were valued at $50,000 and recorded in 2008.

On January 25, 2010, the BOD approved a resolution to issue 74,900 shares of Common Stock to its sole director, Mr. Michael Segal at the time for his services as a director of the Company. Since there was no established market for the Company’s equity, the price of private placement was used as a market price to value the service. A fee of $24,717 was recorded during the three months ended March 31, 2010.

On February 17, 2010, the BOD approved a resolution to issue 30,000 shares of Common Stock to Ms. Karen Prudente for her services to manage the trust of Hongxing shareholders. Since there is no established market for Company’s equity, the price of private placement was used as a market price to value the service. A fee of $9,900 was recorded during the three months ended March 31, 2010.
 

On February 10, 2010, Asia Carbon issued 4,146,710 shares of Common Stock to twenty one individual subscribers at $0.33 per share for $1,368,417. On March 29, 2010 the Company issued 186,726 to two individual subscribers at $0.33 per share for $61,620. As of March 31, 2010, total commission paid to brokers was $634,966.

On April 30, 2010, Asia Carbon issued 4,867,772 shares of Common Stock to seven individual subscribers at $0.33 per share for $1,606,366. Total commissions and finder’s fees were $169,534.

On May 3, 2010, Asia Carbon issued 1,666 shares of Common Stock to one individual subscriber at $1.50 per share for $2,500.

On May 11, 2010, the BOD approved the resolution to issue additional 360,809 shares to Friedland LLC, pursuant to the Advisory Services Agreement between the Company and Friedland dated September 8, 2008.

NOTE 14  CONCENTRATION OF CREDIT RISK
 
The Company maintains cash balances in various banks in China. Currently, no deposit insurance system has been set up in China. Therefore, the Company will bear all risk if any of these banks become insolvent. As of June 30, 2011 and December 31, 2010, the Company’s uninsured cash balances were $7,588,183 and $5,559,314, respectively.

NOTE 15  INCOME TAXES
 
The provision for income tax was $709,742 and $187,569 for three months ended June 30, 2011 and 2010, respectively, and $1,467,719 and $355,296 for the six months ended June 30, 2011 and 2010, respectively, which arose from foreign income tax incurred and or paid to the Chinese tax authorities. The Company’s income tax was assessed on 25% of net income.

Foreign pretax earnings were $2,760,235 and $615,175 for three months ended June 30, 2011 and 2010, respectively. Foreign pretax earnings were $5,751,772 and $1,288,294 for six months ended June 30, 2011 and 2010, respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent such earnings are indefinitely invested outside the United States. At June 30, 2011, approximately $16,488,000 of accumulated unadjusted earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of $1,484,000 approximately would have to be provided if such earnings were remitted currently.

The Company did not have any significant temporary differences giving rise to deferred tax liabilities as of June 30, 2011 and 2010.

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate was as follows for the three and six months ended June 30, 2011 and 2010:

   
Three Months
   
Six Months
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
US statutory tax rate
    34.0 %     34.0 %     34.0 %     34.0 %
Tax rate difference
    -9.0 %     -9.0 %     -9.0 %     -9.0 %
Changes in valuation allowance
    1.4 %     8.2 %     1.4 %     8.8 %
Effective Rate
    26.4 %     33.2 %     26.4 %     33.8 %

At June 30, 2011, the Company had US net operating loss carry forwards of $599,905. A 100% valuation allowance was recorded against their potential tax benefit due to the uncertainty of its realization.
 

NOTE 16 – MAJOR VENDORS AND CUSTOMERS
 
The Company purchased raw materials predominantly from eight and six vendors during the three and six months ended June 30, 2011 and 2010, respectively. The percentage of total purchase during the periods, and accounts payable balance at the end of the periods to these vendors were as follows:

     
2011
   
2010
 
     
Three Months
Ended June 30,
   
Six Months
Ended June 30,
   
 
June 30,
   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
   
 
June 30,
 
Vendor
   
% of Purchases
   
% of Purchases
   
Accounts Payable Balance
   
% of Purchases
   
% of Purchases
   
Accounts Payable Balance
 
  1       12 %     12 %   $ 430,726       14 %     13 %   $ 431,307  
  2       12 %     12 %     459,327       17 %     17 %     403,171  
  3       12 %     12 %     490,276       15 %     14 %     294,695  
  4       13 %     13 %     422,205       18 %     19 %     333,889  
  5       13 %     13 %     431,366       18 %     19 %     339,774  
  6       13 %     13 %     475.558       18 %     18 %     382,542  
  7       13 %     13 %     473,638       -       -       -  
  8       12 %     12 %     493,425       -       -       -  
Total
      100 %     100 %   $ 3,676,521       100 %     100 %   $ 2,185,378  

During the three and six months ended June 30, 2011, four customers accounted for 74% of sales.  During the three and six months ended June 30, 2010, four and three customers accounted for 81% and 72% of sales, respectively. The percentage to total sales during the periods, and accounts receivable balance at the end of the periods to these customers were as follows:

     
2011
   
2010
 
     
Three Months
Ended June 30,
   
Six Months
Ended June 30,
   
June 30,
   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
   
June 30,
 
Customer
   
% of Sales
   
% of Sales
   
Accounts Receivable Balance
   
% of Sales
   
% of Sales
   
Accounts Receivable Balance
 
  1       -       -     $ -       20 %     21 %   $ 561,547  
  2       -       -       -       11 %     -       45,237  
  3       21 %     21 %     1,144,494       20 %     21 %     514,258  
  4       30 %     30 %     1,565,902       30 %     30 %     712,599  
  5       10 %     11 %     594,225       -       -          
  6       13 %     12 %     721,985       -       -          
Total
      74 %     74 %   $ 4,026,606       81 %     72 %   $ 1,833,641  


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.

On December 29, 2009, Asia Carbon had, through its wholly owned subsidiary, Liteweisi, entered into an Entrusted Management, Exclusive Option, Exclusive Purchase, Pledge of Equity and Shareholders’ Voting Proxy Agreements (collectively, the “Entrusted Agreements”) with Hongxing and the shareholders of Hongxing, Guoyun Yao and Chunde Meng (“Hongxing Shareholders”). The effect of the Entrusted Agreements is to cede control of management and economic benefits of Hongxing to Liteweisi.  Asia Carbon issued 36,239,394 restricted shares of its Common Stock to Karen Prudente, nominee and trustee for the Hongxing Shareholders for Hongxing and the Hongxing Shareholders for the Entrusted Agreements with Liteweisi.

The Entrusted Agreements granted Asia Carbon, through Liteweisi, the ability to substantially influence Hongxing’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. As a result of these Entrusted Agreements, which obligate Asia Carbon to absorb a majority of the risk of loss from Hongxing’s activities and enable Asia Carbon to receive a majority of its expected residual returns, Asia Carbon, through its wholly-owned subsidiaries, accounts for Hongxing as its Variable Interest Entity (“VIE”) under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10. Accordingly, Asia Carbon consolidates Hongxing’s operating results, assets and liabilities.

For accounting purposes, the transaction was accounted for in a manner similar to a reverse merger or recapitalization, since the stockholders of Hongxing owned a majority of Asia Carbon’s Common Stock immediately following the transaction. Consequently, the assets and liabilities and historical operations reflected in the consolidated financial statements prior to the transaction are those of Hongxing and are recorded at the historical cost of Hongxing, and the consolidated financial statements after completion of the transaction include the assets and liabilities of Asia Carbon, Liteweisi, and Hongxing (collectively, the “Company”), historical operations of Hongxing, and operations of Asia Carbon and Liteweisi from the date of the transaction. The 36,239,394 restricted shares of Common Stock issued to Karen Prudente were presented as outstanding for all periods.

Asia Carbon, through its operating company in China, manufactures three carbon black products N220, N330 and N660 under the brand name “Great Double Star”.  Most of the Company’s products are used by the domestic tire industry.

Results of Operations

The Three Months Ended June 30, 2011 and 2010

Comparison of Sales for the Three Months Ended June 30, 2011 and 2010

     
2011
   
2010
 
Product
   
Sales
   
Quantity (Metric Ton)
   
Sales
   
Quantity (Metric Ton)
 
N220-D     $ 2,340,242       2,332     $ 2,020,811       2,360  
N330       2,218,323       2,333       1,913,115       2,373  
N660       2,187,882       2,333       1,921,153       2,382  
N220-W       6,295,254       5,700       -       -  
Naphthalene oil
      459,171       510       -       -  
Total Sales
    $ 13,500,872       13,208     $ 5,855,079       7,115  
 

Sales for the three months ended June 30, 2011 totaled $13,500,872, an increase of $7,645,793 or 131%, compared to $5,855,079 for the three months ended June 30, 2010.  The increase in sales was attributable mainly to our new wet production line starting production on October 26, 2010 and sale of our new byproducts - naphthalene oil. During the three months ended June 30, 2011, we sold 5,700 metric tons of N220-W and generated revenue of $6,295,254 from our new wet production line. We sold 510 metric tons of naphthalene oil and had revenue of $459,171 in the three months ended June 30, 2011. Revenue from our new wet production line and naphthalene oil together accounted for approximately 72% of total increase in sales in the three months ended June 30, 2011. The remaining 28% increase in sales was attributable to the increase of unit sales price which was a result of the recovery of financial crisis worldwide and recovery of the demand for our products.  The average sales price of our black carbon products was $1,027 per metric ton during the second quarter of 2011, an increase of $204 per ton, or 25%, from $823 per ton during the second quarter of 2010.

The Company currently has three dry method production lines. Each production line has a capacity of 12,000 metric tons per annum. Total production capacity is 36,000 tons per annum. The new wet production line started production on October 26, 2010. The designed capacity of the new wet production line is 25,000 tons per annum. The prorated production/total capacity utilization rate was 83% and 79% during the three months ended June 30, 2011 and 2010, respectively.

Comparison of Cost of Sales for the Three Months Ended June 30, 2011 and 2010

Cost of sales was $10,552,294 for three months ended June 30, 2011, an increase of $5,490,262, or 108% compared to $5,062,032 in 2010. The increase in cost of sales was mainly attributable to the increase in sales in the same period. The principal raw material used in our manufacture is residual heavy oils from distillation of coal tars. Production used 22,696 metric tons of coal tar oil for the three months ended June 30, 2011, an increase of 9,229 tons, or 69%, compared to 13,467 tons in 2010. The increase in consumption of coal tars oil accounted for approximately 62% of the increase in cost of sales. The 30% increase in the cost of sales resulted from increased coal tar oil price in 2011.  The average price of coal tars was $427 per ton during 2011, an increase of $88 per ton, or 26%, from $339 per ton during 2010. The remaining 8% increase in the cost of sales was due to other miscellaneous costs.

Comparison of Gross Profit Rate for the Three Months Ended June 30, 2011 and 2010

Gross profit was $2,948,578 for the three months ended June 30, 2011, an increase of $2,155,531, or 272%, compared to $793,047 in the comparable period of 2010. The gross profit rate was 22% for the three months ended June 30, 2011, an increase of 8 percentage points, compared to 14% in 2010. The increase in gross profit rate in 2011 was attributable mainly to production by our new wet production line and sale of byproducts.

Comparison of Operating Expenses for the Three Months Ended June 30, 2011 and 2010

Operating expenses included depreciation, allowance for bad debts, selling, professional fees and other general and administrative expenses. Operating expenses were $235,462 for the three months ended June 30, 2011, an increase of $42,967, or 22% compared to $192,495 in 2010. The increase in operating expenses was mainly attributable to the $41,400 increase in depreciation, the $38,697 increase in selling expenses and $24,068 increase in other operating expenses, offset by decrease in professional fees of $41,225 and reduction in bad debt expense of $19,973.

Comparison of Net Income for the Three Months Ended June 30, 2011 and 2010

Net income was $1,981,440 for the three months ended June 30, 2011, an increase of $1,603,512, or 424%, compared to $377,928 in 2010. Increase in net income resulted from our new production capacity and improved gross margin rate.
 

The Six Months Ended June 30, 2011 and 2010

Comparison of Sales for the Six Months Ended June 30, 2011 and 2010

     
2011
   
2010
 
Product
   
Sales
   
Quantity (Metric Ton)
   
Sales
   
Quantity (Metric Ton)
 
N220-D     $ 4,667,531       4,552     $ 3,850,771       4,635  
N330       4,431,196       4,554       3,651,782       4,667  
N660       4,395,598       4,569       3,647,399       4,670  
N220-W       12,540,816       11,163       -       -  
Naphthalene oil
      907,247       1,010       -       -  
Total Sales
    $ 26,942,388       25,848     $ 11,149,952       13,982  

Sales for the six months ended June 30, 2011 totaled $26,942,388, an increase of $15,792,436 or 142%, compared to $11,149,952 for the six months ended June 30, 2010.  The increase in sales was attributable mainly to our new wet production line that started production on October 26, 2010 and sale of our new byproduct - naphthalene oil. During the six months ended June 30, 2011, we sold 11,163 metric tons of N220-W and generated revenue of $12,540,816 from our new wet production line. We sold 1,010 metric tons of naphthalene oil and had revenue of $907,247 in the six months ended June 30, 2011. Revenue from our new wet production line and naphthalene oil together accounted for approximately 65% of total increase in sales in the six months ended June 30, 2011. The remaining 35% increase in sales was attributable to the increase of unit sales price which was a result of the recovery of the financial crisis worldwide and recovery of the demand for our products.  The average sales price of our black carbon products was $1,048 per metric ton during the six months ended June 30, 2011, an increase of $251 per ton, or 31%, from $797 per ton during the comparable period of 2010.

The Company currently has three dry method production lines. Each production line has a capacity of 12,000 metric tons per annum. Total production capacity is 36,000 tons per annum. The new wet production line started production on October 26, 2010. The designed capacity of the new wet production line is 25,000 tons per annum. The prorated production/total capacity utilization rate was 81% and 78% during the six months ended June 30, 2011 and 2010, respectively.

Comparison of Cost of Sales for the Six Months Ended June 30, 2011 and 2010

Cost of sales was $20,812,378 for six months ended June 30, 2011, an increase of $11,246,134, or 118% compared to $9,566,244 in 2010. It was mainly attributable to the increase in sales in the same period. The principal raw material used in our manufacture is residual heavy oils from distillation of coal tars. Production used 44,388 metric tons of coal tar oil for the six months ended June 30, 2011, an increase of 17,805 tons, or 67%, compared to 26,583 tons in 2010. The increase in consumption of coal tars oil accounted for approximately 56% of the increase in the cost of sales. The 38% increase in the cost of sales resulted from the increased price of coal tar oil in 2011.  The average price of coal tars was $432 per ton during 2011, an increase of $107 per ton, or 33%, from $325 per ton during 2010. The remaining 6% increase in cost of sales was due to other miscellaneous costs.

Comparison of Gross Profit Rate for the Six Months Ended June 30, 2011 and 2010

Gross profit was $6,130,010 for the six months ended June 30, 2011, an increase of $4,546,302, or 287%, compared to $1,583,708 during the comparable period of 2010. The gross profit rate was 23% for the six months ended June 30, 2011, an increase of nine percentage points, compared to 14% in 2010. The increase in gross profit rate in 2011 was attributable mainly to production of our new wet production line and the sale of byproducts.
 

Comparison of Operating Expenses for the Six Months Ended June 30, 2011 and 2010

Operating expenses include depreciation, allowance for bad debts, selling, professional fees and other general and administrative expenses. Operating expenses were $526,266 for the six months ended June 30, 2011, an increase of $63,749, or 14% compared to $462,517 in 2010. The increase in operating expenses was mainly attributable to the $82,133 increase in depreciation, the $73,851 increase in selling expenses and the $40,485 increase in other operating expenses, offset by the decrease in professional fees of $119,650 and reduction in bad debt expense of $13,070.

Comparison of Net Income for the Six Months Ended June 30, 2011 and 2010

Net income was $4,086,913 for the six months ended June 30, 2011, an increase of $3,391,717, or 488%, compared to $695,196 in 2010.  The increase in net income resulted from our new production capacity and improved gross margin rate.

Liquidity and Capital Resources

We had cash and equivalents of $7,594,147 and $5,717,142 as of June 30, 2011 and December 31, 2010, respectively. Our funds are kept in financial institutions in China, which do not provide insurance for amounts on deposit.  Moreover, we are subject to the regulations of the PRC which restricts the transfer of cash from China, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations incurred outside the PRC.

Our accounts receivable has been an increasingly significant portion of our current assets, totaling $5,579,119 and $6,034,573, or 38% and 46%, of current assets, as of June 30, 2011 and December 31, 2010, respectively. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to fail to make payments in a timely manner, our liquidity and results of operations could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations. A significant deterioration in our ability to collect accounts receivable could affect our cash flow and working capital and could also impact the cost or availability of financing available to us.

Our accounts receivable aging was as follows, as of June 30, 2011 and December 31, 2010:

   
Total
   
Current
      31-90       91-120       121-360    
Over 361
 
2011
    100.00 %     83.74 %     15.64 %     0.00 %     0.00 %     0.62 %
2010
    100.00 %     96.40 %     3.03 %     0.00 %     0.00 %     0.57 %

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer’s credit worthiness deteriorates, or our customers’ actual defaults exceed historical experience, our estimates could change and impact our reported results. We have not experienced any significant amount of bad debt since the inception of our operation. Allowance for doubtful accounts was $100,871 and $97,640 as of June 30, 2011 and December 31, 2010, respectively.

Net cash provided by operating activities was $4,824,287 and $1,134,041 for the six months ended June 30, 2011 and 2010, respectively. The increase in net cash provided by operating activities in the six months ended June 30, 2011 was mainly due to the $3,391,717 increase in net income.

Net cash used in investing activities was $3,236,557 and $1,416,000 for the six months ended June 30, 2011 and 2010, respectively. The capital expenditure of $3,236,557 in 2011 was related to the Company’s natural gas project and byproducts processing project. The Company is to use natural gas as fuel in production instead of the coal tars currently used.  The capital expenditure of $1,416,000 was related to the wet production line.
 

Net cash provided by financing activities was $60,955 and $2,253,730 for the six months ended June 30, 2011 and 2010, respectively. The Company repaid a short term loan of $1,339,875 and received proceeds from new short term loans of $1,339,875 in 2011. The Company received a deposit of $60,955 from an investor in 2011. During the six months ended June 30, 2010, the Company issued 9,202,874 shares of Common Stock to private investors and received gross proceeds of $3,038,903. Total commission paid in connection with this private placement was $804,500. During the first quarter of 2010, the Company loaned $2,615,993 to two of the Company’s significant shareholders. On June 23, 2010, the Company received the repayment of $2,615,993 from the aforementioned shareholders. The Company received a $19,327 cash advance from a shareholder in 2010.
 
Short term debt at June 30, 2011 and December 31, 2010 consisted of the following:
 
   
2011
   
2010
 
   
(Unaudited)
       
To Xigu Credit Union
           
  Interest at 11.68%, payable March 20, 2011
  $ -     $ 487,894  
  Interest at 13.25%, payable April 28, 2012
    498,198       -  
To Chengguan Credit Union
               
  Interest at 11.68%, payable March 20, 2011
    -       824,269  
  Interest at 13.25%, payable April 28, 2012
    841,677       -  
Total Short Term Debt
  $ 1,339,875     $ 1,312,163  

The short term debts are renewable based on the past credit of the Company. Interest expense is paid quarterly. There were no other terms or loan covenants relating to these short term loans. On March 21, 2011, the Company repaid the $487,894 loan to Xigu Credit Union and the $824,269 loan to Chengguan Credit Union. On April 29, 2011, the Company borrowed the $498,198 loan from Xigu Credit Union and the $841,677 loan from Chengguan Credit Union.

Our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we did not have sufficient available cash, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.

We believe that our working capital, together with our cash flow from operations will be sufficient to enable us to meet our cash requirements for the next 12 months. However, we may incur additional expenses as we seek to expand our business in the future, and it is possible that we may require additional funding for that purpose. We cannot assure you that funding will be available when we require funding.

Critical Accounting Policies and Estimates

The Company believes the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America (“US GAAP”). The Company applies the following critical accounting policies related to revenue recognition in the preparation of its financial statements.
 

General

The Company’s Consolidated Financial Statements are prepared in accordance with US GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize revenue from the sales of products. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales revenue is presented net of value added tax (“VAT”), sales rebates and returns. No return allowance is made as product returns are insignificant based on historical experience. The Company performs ongoing credit evaluations of its customers’ financial condition, but usually does not require collateral to support customer receivables.  The credit risk is controlled through credit approvals, limits and monitoring procedures.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors.  Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted.  The Company does not routinely permit customers to return products and historically, customer returns have been immaterial. The Company will replace products if our customers are not satisfied with their quality. Freight-in costs are included in cost of goods sold.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and equivalents, accounts receivable, prepaid expenses, short term debt, accounts payable and accrued liabilities, and customer advances.  The fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to their short term maturity or by comparison to other instruments with similar terms.

Foreign Currency Translation

The consolidated financial statements of the Company are translated pursuant to ASC 830, “Foreign Currency Matters.” The functional currency of Hongxing and Liteweisi is the Chinese Renminbi (“RMB”).  The reporting currency of the Company is the United States dollar (“US dollar”). The financial statements of Hongxing and Liteweisi are translated to US dollars using period-end exchange rates for assets and liabilities, historical rates for equities, and average exchange rates for revenues, costs and expenses. Translation adjustments are recorded in accumulated other comprehensive income as a component of stockholders’ equity. Transaction gains or losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.

Segment Information

ASC 280-10, “Disclosure About Segments of and Enterprise and Related Information”, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Item 3. Quantitative And Qualitative Disclosures About Market Risk.
 
Not Applicable.
 
 
Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
Changes in Internal Control Over Financial Reporting

During the most recent quarter ended June 30, 2011, there has been no change in our internal control 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 control over financial reporting.
 
 
PART II
 
Item 1. Legal Proceedings.
 
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
 
Not Applicable
 
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.
 
None.
 
Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. (Removed and Reserved).
 
 
Item 5. Other Information.
 
None. 
 
Item 6. Exhibits.
 
Exhibit
Number
 
Description of Exhibit
     
31.1
 
31.2
 
32.1
 
32.2
 
101.INS
 
XBRL Instance Document*
101.SCH
 
XBRL Schema Document*
101.CAL
 
XBRL Calculation Linkbase Document*
101.LAB
 
XBRL Label Linkbase Document*
101.PRE
 
XBRL Presentation Linkbase Document*
101.DEF
 
XBRL Definition Linkbase Document*
 
* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in XBRL (eXtensible Business Reporting Language):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text.  The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
 
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
ASIA CARBON INDUSTRIES, INC.
 
       
Date: August 12, 2011
By:
/s/ Guo Yun Yao
 
   
Guo Yun Yao
 
   
Chief Executive Officer, President, Secretary and Director
 
   
(principal executive officer)
 

       
Date: August 12, 2011
By:
/s/ Xiaolong Zhou
 
   
Xiaolong Zhou
 
   
Chief Financial Officer
(principal accounting and financial officer)