Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q

(Mark One)

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x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

 

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 registrant as specified in its charter)

 

Maryland	26-2895795
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

11 E. 86th Street, Suite 19B

New York, New York 10028-0501

 (Address of principal executive offices) (Zip Code)

[phone]

(Issuer's telephone number, including area code)

Indicate by check mark whether the issuer (1) 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 o   No x

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      o (Do not check if a smaller reporting company)	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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  52,357,052 shares of common stock, $.001 par value, as of November 2, 2012.

 

 

 

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Table of Contents

 

TABLE OF CONTENTS

 

PART I				FINANCIAL INFORMATION		Page
Item 1.				Financial Statements		3
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
Item 3.				Quantitative and Qualitative Disclosures About Market Risk		10
Item 4.				Controls and Procedures		10
PART II				OTHER INFORMATION
Item 1.				Legal Proceedings		11
Item 1A.				Risk Factors		11
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds		11
Item 3.				Defaults Upon Senior Securities		11
Item 4.				Mine Safety Disclosures		11
Item 5.				Other Information		11
Item 6.				Exhibits		11
SIGNATURES						12
EXHIBITS/CERTIFICATIONS

 

 

 

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PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements.

 

 

 

ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

 

	Page
Consolidated Balance Sheets    September  30, 2012 (Unaudited) and December 31, 2011	F - 1
Consolidated Statements of Income and Comprehensive Income    Three and Nine Months ended September 30, 2012 and 2011 (Unaudited)	F - 2
Consolidated Statements of Cash Flows    Nine Months ended September 30, 2012 and 2011 (Unaudited)	F - 3
Notes to Consolidated Financial Statements (Unaudited)	F - 4

 

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ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2012				2011
ASSETS		(Unaudited)
Current Assets:
Cash and equivalents		$	7,180,849			$	8,092,411
Accounts receivable, net			5,574,850				4,404,319
Inventories			3,242,618				3,146,756
Prepaid expenses			118,864				11,138
Total Current Assets			16,117,181				15,654,624
Property, Plant and Equipment, net			23,220,511				18,431,407
Other Assets:
Land use rights, net			213,723				217,145
TOTAL ASSETS		$	39,551,415			$	34,303,176
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt		$	1,366,755			$	1,376,074
Accounts payable			3,195,247				4,009,531
Accrued liabilities			189,027				153,735
Taxes payable			624,863				694,219
Investor deposit payable			50,000				49,985
Due to shareholder			26,442				26,415
Total Current Liabilities			5,452,334				6,309,959
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, 52,357,052 and 50,978,580   issued and outstanding at September 30, 2012 and December 31, 2011, respectively			52,357				50,979
Additional paid-in capital			6,590,901				5,942,339
Statutory reserves			2,025,737				2,025,737
Retained earnings			22,514,586				17,138,113
Accumulated other comprehensive income			2,915,500				2,836,049
Total Stockholders' Equity			34,099,081				27,993,217
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	39,551,415			$	34,303,176

 

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

 

 

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ASIA CARBON INDUSTRIES , INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Net Sales		$	12,699,296			$	10,997,216			$	38,475,522			$	37,939,604
Cost of Sales			9,999,108				8,364,288				29,912,709				29,176,666
Gross Profit			2,700,188				2,632,928				8,562,813				8,762,938
Operating Expenses:
Depreciation			25,644				58,342				77,176				172,847
Selling			94,451				79,419				279,439				222,906
Professional fees			49,181				207,621				204,681				365,299
Other			170,630				109,745				521,388				220,341
Total Operating Expenses			339,906				455,127				1,082,684				981,393
Income From Operations			2,360,282				2,177,801				7,480,129				7,781,545
Other Income and (Expense)
Interest income			4,881				9,855				22,985				18,803
Interest expense			(49,889	)			(45,690	)			(144,770	)			(103,750	)
Total Other Income and (Expense)			(45,008	)			(35,835	)			(121,785	)			(84,947	)
Income Before Provision for Tax			2,315,274				2,141,966				7,358,344				7,696,598
Provision for tax			617,359				614,304				1,981,871				2,082,023
Net Income			1,697,915				1,527,662				5,376,473				5,614,575
Other comprehensive income			363,187				331,360				79,451				786,178
Comprehensive Income		$	2,061,102			$	1,859,022			$	5,455,924			$	6,400,753
Net Income Per Share - Basic		$	0.03			$	0.03			$	0.10			$	0.11
Net Income Per Share - Diluted		$	0.03			$	0.03			$	0.10			$	0.11
Weighted Average Shares Outstanding - Basic			52,357,052				50,642,690				51,957,189				50,619,741
Weighted Average Shares Outstanding - Diluted			52,357,052				50,642,690				51,957,189				50,619,741

 

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

 

 

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ASIA CARBON INDUSTRIES , INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

 

		2012				2011
Cash Flows from Operating Activities:
Net Income		$	5,376,473			$	5,614,575
Adjustments to Reconcile Net Income to      Net Cash Provided by Operating Activities:
Provision for doubtful accounts			18,068				1,124
Depreciation			1,337,713				956,208
Amortization of land use rights			3,682				3,587
Common stock issued for services			450,000				17,750
Options issued for services			-				135,915
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			(1,188,811	)			1,386,126
Increase in inventories			(95,862	)			(868,693	)
Increase in prepaid expenses			(107,726	)			(211	)
Decrease in accounts payable			(814,284	)			(380,557	)
Increase in accrued expenses			35,292				1,236
Decrease in taxes payable			(69,356	)			(121,481	)
Net Cash Provided by Operating Activities			4,945,189				6,745,579
Cash Flows from Investing Activities:
Capital expenditures			(6,112,152	)			(5,710,468	)
Net Cash Used in Investing Activities			(6,112,152	)			(5,710,468	)
Cash Flows from Financing Activities:
Repayment of short term debt			(1,377,893	)			(1,357,888	)
Proceeds from short term debt			1,366,755				1,357,888
Cash advances from shareholder			-				5,593
Decrease in investor deposit payable			15				71,440
Proceeds from private placement			199,940				121,528
Net Cash Provided by Financing Activities			188,817				198,561
Effect of Exchange Rate Changes on Cash			66,584				429,011
Net (Decrease) Increase in Cash and Equivalents			(911,562	)			1,662,683
Cash and Equivalents - Beginning of the Period			8,092,411				5,717,142
Cash and Equivalents - End of the Period		$	7,180,849			$	7,379,825
Supplemental Cash Flow Information:
Interest Paid		$	144,863			$	103,010
Income taxes		$	1,939,780			$	2,132,840

 

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

 

 

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ASIA CARBON INDUSTRIES , INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organizations

Asia Carbon Industries, Inc. (“Asia Carbon”) 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” or “China”).

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 formed to manage operations in China.

Taiyuan Hongxing Carbon Black Ltd. (“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, through 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 was to cede control of management and the economic benefits of Hongxing to Liteweisi.  Asia Carbon issued 36,239,394 restricted shares of its common stock, par value $0.001 per share, 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 gave Asia Carbon, through Liteweisi, the ability to substantially influence Hongxing’s 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 Accounting Standards Codification (“ASC”) subtopic 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.

On April 17, 2012, pursuant to a Call Option Agreements dated December 29, 2009 between Karen Prudente and Ms. Guo Yun Yao, the Chairman and Chief Executive Officer (“CEO”) of Asia Carbon, and Mr. Chun De Meng, a director and Chief Operating Officer (“COO”) of Asia Carbon, respectively (the “ Call Option Agreements”), Ms. Guo Yun Yao and Mr. Chun De Meng exercised options to purchase 32,615,455 shares of common stock (the “Exercised Shares”). Of the Exercised Shares, Ms. Guo Yun Yao received 19,680,064 shares, representing 37.8% of the Company’s outstanding shares of common stock, and Mr. Chun De Meng received 2,535,391 shares, representing 4.8% of the Company’s outstanding shares of common stock. The remaining balance of shares held in trust by Karen Prudente is 3,623,939 shares. 10,400,000 shares of the Exercised Shares were immediately gifted to eight relatives of Ms. Yao and Mr. Meng.

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

Basis 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”).

 

 

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Principles of Consolidation

The consolidated financial statements include the accounts of Asia Carbon, its subsidiaries, and its VIE for which Asia Carbon is the primary beneficiary. 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 which 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 amounts due to shareholder. 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 Liteweisi 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 Liteweisi are translated into US dollars at period-end exchange rates.  The revenues and expenses are translated into US dollars at average exchange rates of the periods. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

The foreign exchange rates used in the translation are follows:

		Three Months Ended								Nine Months Ended								Year Ended
		September 30,								September 30,								December 31,
		2012				2011				2012				2011				2011
RMB/US$ exchange rate at the period end			0.1591				0.1568				0.1591				0.1568				0.1589
Average RMB/US$ exchange rate for the period			0.1575				0.1558				0.1580				0.1544				0.1547

 

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 the three and nine months ended September 30, 2012 or 2011.

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.

 

 

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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 ASC subtopic 360-10-15 “Impairment or Disposal of Long-Lived Assets” which requires to evaluate a long-lived asset for recoverability when there are events 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. Freight-in costs are included in cost of sales.

Advertising Costs

Advertising costs are expensed as incurred. There were no material advertising costs for the three and nine months ended September 30, 2012 and 2011.

Research and Development

In accordance with the ASC 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 the three and nine months ended September 30, 2012 and 2011.

Segment Information

ASC subtopic 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 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 subtopic 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.

 

 

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Reclassifications

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

Recent Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. The Company adopted this ASU by presenting the comparative components of comprehensive income within our consolidated financial statements of income and comprehensive income (unaudited).

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”). This ASU is intended to simplify how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of these changes had no impact on our consolidated financial statements.

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on the Company’s financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE, NET

Accounts receivable at September 30, 2012 and December 31, 2011(audited) consisted of the following:

		2012				2011
Accounts receivable		$	5,678,065			$	4,489,254
Allowance for doubtful accounts			(103,215	)			(84,935	)
Accounts receivable, net		$	5,574,850			$	4,404,319

 

NOTE 4  – INVENTORIES

Inventories at September 30, 2012 and December 31, 2011 (audited) consisted of the following:

		2012				2011
Raw materials		$	1,319,417			$	1,172,747
Packing and other materials			36,408				43,762
Finished products			1,886,793				1,930,247
		$	3,242,618			$	3,146,756

 

 

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NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment at September 30, 2012 and December 31, 2011 (audited) is summarized as follows:

		Estimated
		Useful Lives				2012				2011
Plant		20				$	6,735,963			$	5,784,796
Machinary and equipment		10					16,772,524				16,750,387
Transportation equipment		5					116,723				116,569
Other machinary and equipment		5					58,057				57,980
Construction in progress							5,168,624				-
							28,851,891				22,709,732
Less: accumulated depreciation							5,631,380				4,278,325
						$	23,220,511			$	18,431,407

 

Depreciation of property, plant and equipment was $448,006 and $287,381 for the three months ended September 30, 2012 and 2011, and $1,337,713 and $956,208 for the nine months ended September 30, 2012 and 2011, respectively. Depreciation included in cost of sales was $422,362 and $270,167 for the three months ended September 30, 2012 and $1,260,537 and $783,361 for the nine months ended September 30, 2012 and 2011, respectively.

The Company begun construction of a 3000KW power plant, which will utilize residual heat generated from the Company’s carbon black manufacturing process and related water supply project. The plant’s 3000KW capacity will satisfy the Company’s electricity needs for the current production capacities. Total estimated cost to complete the construction of these facilities is $1.1 million. The expected completion time is the end of November 2012.

NOTE 6 – LAND USE RIGHTS, NET

On December 29, 2005, the Company lent RMB554,130 ($88,168) to Xigu Village (“Village”), which was interest free and due December 29, 2008. The Village failed to repay 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 49 mu (8.07 acre) of land the Village owns. The lease requires a yearly payment of RMB10,000 ($1,591) through July 2053, which started from July 2003. The Company has no obligation to pay this lease due to the default of Village loan. The balance of the Village loan receivable was capitalized at December 31, 2008 as land use rights and amortized over the remaining life of the land use rights.

On October 31, 2007, the Company lent an additional RMB1,000,000 ($159,110) 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 RMB10,000 ($1,591) through June 2056, which started from June 2006. The Company has no obligation to pay this lease due to the default of Village loan. The balance of the Village loan receivable was capitalized as land use rights and amortized over the remaining life of the land use rights lease started on November 1, 2010.

As of September 30, 2012 and December 31, 2011 (audited), land use rights were as follows:

 

		2012				2011
Land use rights		$	247,278			$	246,951
Less: accumulated amortization			33,555				29,806
Land use rights, net		$	213,723			$	217,145

Amortization of land use rights was recorded as rent. Rent expense was $1,224 and $1,211 for the three months ended September 30, 2012 and 2011, respectively, and $3,682 and $3,587 for the nine months ended September 30, 2012 and 2011, respectively.

 

 

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As of September 30, 2012, the estimated annual amortization of land use rights for the next five years and thereafter is as follows:

 

2013		$	4,946
2014			4,946
2015			4,946
2016			4,946
2017			4,946
Thereafter			188,993
Total		$	213,723

 

NOTE 7 – SHORT TERM DEBT

Short term debt at September 30, 2012 and December 31, 2011 (audited) consisted of the following:

 

		2012				2011
To Xigu Credit Union
Interest at 13.25%, payable April 28, 2012		$	-			$	511,658
Interest at 14.43%, payable December 27, 2012			505,970				-
To Chengguan Credit Union
Interest at 13.25%, payable April 28, 2012			-				864,416
Interest at 14.43%, payable December 27, 2012			860,785				-
Total Short Term Debt		$	1,366,755			$	1,376,074

The short term debts are renewable based on the past credit of the Company. Interest is paid quarterly. There are no other terms or loan covenants relating to these short term loans. On April 28, 2012, the Company repaid the $511,658 loan to Xigu Credit Union and the $864,416 loan to Chengguan Credit Union. On April 28, 2012, the Company borrowed (i) $505,970 from Xigu Credit Union at 14.43% due December 27, 2012; and (ii) $860,785 from Chengguan Credit Union at 14.43% and matures December 27, 2012.

NOTE 8 – TAXES PAYABLE

Taxes payable at September 30, 2012 and December 31, 2011 (audited) consisted of:

		2012				2011
PRC corporation income tax		$	623,788			$	581,697
Value added tax			990				102,032
Other			85				10,490
Total		$	624,863			$	694,219

 

NOTE 9  – COMMITMENTS AND CONTINGENCIES

Country Risk

As the Company's principal operations are conducted in the PRC, it 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.

 

 

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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.

2011 Stock Incentive Plan

On September 13, 2011, the board of directors (“BOD”) of Asia Carbon passed a resolution to adopt Asia Carbon’s 2011 Incentive Stock Plan (the “Plan”) which aims to support and increase the Company’s ability to attract, engage and retain individuals of exceptional talent, to provide additional incentive for persons employed by the Company, including without limitation any employee, director, general partner or officer, and to advance the best interests of the Company by providing to those persons who have a substantial responsibility for its management, affairs, and growth, a proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with the Company. The Plan reserved 5,000,000 shares of common stock of the Company for the issuance of equity awards thereunder.

On March 16, 2012, the BOD passed a resolution to issue 1,000,000 shares of common stock of the Company under the Plan to 10 senior managers or key employees as part of compensation for 2012. The cost is estimated at $450,000 based on the closing price of the Company’s common stock on March 15, 2012 of $0.45. The Company plans to expense this compensation cost evenly in 2012, resulting in $112,500 and $337,500 being expensed as general and administrative expenses in the three and nine months ended September 30, 2012.

Entry into Guaranty Agreements – Related Party Transaction

On May 24, 2012, Liteweisi and Hongxing separately entered into a Guaranty Agreement with Mr. Liang Qiao, an individual residing in the PRC (the “Lender”), Ms. Guo Yun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO (Ms. Yao and Mr. Meng jointly, the “Borrowers”) for a loan totaling RMB18 million ($2,863,980) (the “Loan”). The Loan was due on August 23, 2012. Liteweisi and Hongxing were jointly liable for the Loan until the Loan was repaid at which point the guaranty obligation extinguishes. The Loan was repaid in full in September 2012.

NOTE 10 – STOCKHOLDERS’ EQUITY

On September 13, 2011, the BOD passed a resolution to issue and sell 151,910 restricted shares of common stock of the Company to two investors for $121,528 at $0.80 per share.

On September 13, 2011, the BOD passed a resolution to issue 25,000 restricted shares of common stock of the Company to Cody Management in consideration of investor relations services. The stock was valued at $0.71 per share (the market closing price on September 12, 2011). An investor relations expense of $17,750 was recorded during the three months ended September 30, 2011.

On September 13, 2011, the BOD passed a resolution to issue options to purchase 400,000 shares of the Company’s common stock at $1.00 per share to three individuals in consideration for investor relations services. The $155,600 fair value of the stock options was calculated using a Black-Scholes option pricing model (“BSOPM”) and the following assumptions: risk-free interest rate of 0.35%; expected stock price volatility of 100%; stock price of $0.71 per share; exercise price of $1.00 per share; and term of 3 years.

Effective July 1, 2011, the Company granted stock options to its chief financial officer (“CFO”) and to a director as part of their 2011 compensation package. The number of options and specified terms were formalized pursuant to a unanimous written consent of the BOD dated September 30, 2011, whereby the Company granted 220,000 stock options to its CFO and 75,000 stock options to the director. The exercise price of the options is $0.64, the higher of the market closing price at December 31, 2011 and the market closing price at September 30, 2011. These stock options expire on December 31, 2014. The $116,230 fair value of the stock options was calculated using a BSOPM and the following assumptions: risk-free interest rate of 0.42%; expected stock price volatility of 100%; stock price of $0.64 per share; exercise price of $0.64 per share; and term of 3 years. The $116,230 estimated fair value of these stock options was expensed evenly over the quarters ending September 30 and December 31, 2011.

On December 23, 2011, the BOD passed a resolution to issue and sell 193,593 restricted shares of common stock of the Company to three investors for $133,780.

 

 

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On March 15, 2012, the BOD passed a resolution to issue and sell 156,250 restricted shares of common stock of the Company to one investor for $100,000.

On March 15, 2012, the BOD passed a resolution to issue 1,000,000 shares of common stock of the Company to 10 senior managers or key employees as part of compensation for 2012 pursuant to the Plan. The cost is estimated at $450,000 based on market closing price on March 15, 2012 of $0.45. The Company is amortizing these compensation costs evenly throughout 2012.

On May 3, 2012, the BOD passed a resolution to issue and sell 222,222 restricted shares of common stock of the Company to two investors for $100,000.

NOTE 11 – 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 September 30, 2012 and December 31, 2011 (audited), the Company’s uninsured cash balances were approximately $7,139,000 and $8,029,000, respectively.

NOTE 12  – INCOME TAXES

The provision for income tax was $617,359 and $614,304 for the three months ended September 30, 2012 and 2011, respectively, and $1,981,871 and $2,082,023 for the nine months ended September 30, 2012 and 2011, respectively, which arose from foreign income tax incurred and or paid to the Chinese tax agent. The Company’s income tax is assessed at 25% of net income.

Foreign pretax earnings were $2,480,614 and $2,414,876 for the three months ended September 30, 2012 and 2011, respectively, and $7,930,383 and $8,166,731 for the nine months ended September 30, 2012 and 2011, respectively. Pretax earnings of a foreign subsidiary are subject to US taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-US subsidiaries except to the extent such earnings are indefinitely invested outside the US. At September 30, 2012, approximately $25,993,000 of accumulated unadjusted earnings of non-US subsidiaries was indefinitely invested. At the existing US federal income tax rate, additional taxes of approximately $2,339,000 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 September 30, 2012 and December 31, 2011 (audited).

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate was as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
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			1.7	%			3.7	%			1.9	%			2.1	%
Effective rate			26.7	%			28.7	%			26.9	%			27.1	%

 

At September 30, 2012, the Company had US net operating loss carry forwards of approximately $1,504,000. A 100% valuation allowance was recorded against their potential tax benefit due to the uncertainty of its realization.

 

 

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NOTE 13 – MAJOR CUSTOMERS AND VENDORS

For the three months ended September 30, 2012, four customers accounted for 62% of sales. During the comparable period in 2011, four customers accounted for 81% of sales. For the nine months ended September 30, 2012, four customers accounted for 66% of sales. During the comparable period in 2011, five customers accounted for 85% of sales. The percentage of total sales during the three and nine months ended September 30, 2012 and 2011 and accounts receivable balances at the end of the periods to these customers were as follows:

			2012												2011
			Three Months Ended Sept 30,				Nine Months Ended Sept 30,				Sept 30,				Three Months Ended Sept 30,				Nine Months Ended Sept 30,				Sept 30,
Customer			% of Sales				% of Sales				Accounts Receivable Balance				% of Sales				% of Sales				Accounts Receivable Balance
A				20	%			22	%		$	1,210,108				32	%			30	%		$	1,402,494
B				19	%			20	%			1,134,803				24	%			22	%			1,113,718
C				11	%			12	%			713,195				15	%			13	%			734,200
D				12	%			12	%			614,228				10	%			10	%			530,047
E				*				*				-				*				10	%			434,438
Total				62	%			66	%		$	3,672,334				81	%			85	%		$	4,214,897
*          Percentage of total sales was less than 10%.

The Company purchased raw materials predominantly from eight vendors during the three months ended September 30, 2012 and 2011. The Company purchased raw materials predominantly from seven and eight vendors during the nine months ended September 30, 2012 and 2011, respectively. The purchase percentage of total purchases from vendors from which the Company bought over 10% of its total purchases during the three and nine months ended September 30, 2012 and 2011, and accounts payable balances at the end of the periods to these vendors were as follows:

			2012												2011
			Three Months Ended Sept 30,				Nine Months Ended Sept 30,				Sept 30,				Three Months Ended Sept 30,				Nine Months Ended Sept 30,				Sept 30,
Vendor			% of Purchases				% of Purchases				Accounts Payble Balance				% of Purchases				% of Purchases				Accounts Payble Balance
A				*				*			$	-				12	%			12	%		$	405,254
B				*				*				-				11	%			12	%			396,125
C				*				*				-				12	%			12	%			382,099
D				13	%			13	%			440,787				13	%			13	%			448,784
E				12	%			13	%			444,624				13	%			13	%			429,330
F				12	%			13	%			443,203				13	%			13	%			425,280
G				13	%			13	%			418,023				13	%			13	%			446,444
H				13	%			13	%			434,708				13	%			12	%			472,506
I				12	%			10	%			273,569				*				*				-
J				13	%			10	%			293,083				*				*				-
K				12	%			*				284,583				*				*				-
Total				100	%			85	%		$	3,032,580				100	%			100	%		$	3,405,822
*         Percentage of purchase was less than 10%.

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as the slow-down of the global financial markets and its impact on economic growth in general, the competition in the carbon black industry and the impact of such competition on pricing, revenues and margins, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of this risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

Unless the context indicates otherwise, as used in the following discussion, “Company”, “we,” “us,” and “our,” refer to (i) Asia Carbon Industries, Inc. (“Asia Carbon”), a corporation incorporated in the State of Maryland; (ii) Jin Zheng Li-Te-Wei-Si Carbon (Taiyuan) Inc. (“Liteweisi”), a wholly-owned subsidiary of Asia Carbon organized under the laws of the PRC; (iii) Taiyuan Hongxing Carbon Black Ltd. (“Hongxing”), a company organized under the laws of the PRC, the Variable Interest Entity (“VIE”) of Asia Carbon.

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “US dollar” and “$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

The Company, through Hongxing, its operating company in the PRC, manufactures carbon black products under the brand name “Great Double Star” and other by-products.

The Company currently manufactures one “soft” and two “hard” carbon black products, called N660, N330, and N220, respectively. N660 is a soft carbon black which has the flexibility necessary for the production of automobile tire inner tubes and hoses. N220 and N330 are hard carbon black. N220 has good strength and elongation properties, is mainly used in the manufacturing of automobile tires. N330 has a lower production cost and is mainly used in manufacturing sides of automobile tires.

Most of the Company’s products are used by the tire industry in China.

Recent Development

In June 2012, the Company began construction on a 3000 KW power plant. Utilizing residual heat generated from the Company’s carbon black manufacturing process, the plant’s 3000 KW capacity will satisfy the Company’s electricity needs for current production lines.

The budget for construction of the facility is approximately $6.3 million, which will be fully funded by Company operations. The  management estimates that the facility will reduce Asia Carbon’s electricity expenses by approximately $1.3 million annually. The construction is to be completed by the end of November 2012.

In September 2012, the Company decided to renovate and convert its three dry production lines to specialty carbon black production lines. Specialty carbon black has a broader range of use as compared to the more traditional products including use as a pigmenting agent, UV stabilizer or conductive agent in a variety of products, such as plastics, toners and printing ink and coating, battery and electrical parts. The management believes the specialty carbon black to be produced at the new facilities will potentially generate more revenues as a result of the higher sales prices. The conversion will affect the Company’s fourth quarter and annual operations results since the three dry production lines will cease operations during the conversion period. The project began construction on October 2012 which has been and will be funded by cash from operations. The project is to be completed in three to five months depending on the weather. The total estimated cost is approximately $4 million.

 
 

 

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Results of Operations

Comparisons for the Three Months Ended September 30, 2012 and 2011

Sales

		2012								2011
Product		Sales				Quantity (Metric Ton)				Sales				Quantity (Metric Ton)
N220		$	7,924,482				8,481			$	7,329,444				7,292
N330			2,096,747				2,434				1,650,681				1,847
N660			1,971,471				2,428				1,600,559				1,849
Naphthalene oil			706,596				1,050				416,532				510
Total Sales		$	12,699,296				14,393			$	10,997,216				11,498

Sales for the three months ended September 30, 2012 totaled $12,699,296, an increase of $1,702,080 or 15%, compared to $10,997,216 for the comparable period of 2011. The increase in sales was mainly attributable to the increase in sales quantities. Increase in sales quantities brought $2,768,911 income offset by a decrease of $1,066,831, which resulted from a lower sales price in the current quarter. The average sales price of our products was $882 per metric ton during three months ended September 30, 2012, a decrease of $74 per ton, or 8%, from $956 per ton during three months ended September 30, 2011. In the three months ended September 30, 2012, we sold 14,393 metric tons of carbon black and naphthalene oil, an increase of 2,895 metric tons, or 25%, compared to 11,498 metric tons in the comparable period of 2011.

During the three months ended September 30, 2012 and 2011, the Company sold 13,343 tons and 10,988 tons of carbon blacks, respectively, an increase of 2,355 tons or 21%. The increase in sales quantity was attributable to the quality of our products and the increase in new customers.   The Company’s total carbon black production capacity was 61,000 tons per annum. The annualized production/total capacity utilization rate was 87% and 72% during three months ended September 30, 2012 and 2011, respectively.

Cost of Sales

Cost of sales was $9,999,108 for the three months ended September 30, 2012, an increase of $1,634,820, or 20% compared to $8,364,288 in the three months ended September 30, 2011. It was mainly attributable to the increase in sales quantities in the three months ended September 30, 2012. Products used 22,672 metric tons of coal tar oil in the three months ended September 30, 2012, an increase of 3,139 tons, or 16%, compared to 19,533 tons in the same period in 2011. The increase in usage of coal tar oil resulted from increase in sales quantities. The average price of coal tars was $374 per ton during the three months ended September 30, 2012, a decrease of $15 per ton, or 4%, from $389 per ton during the same period of 2011.

Gross Profit Rate

Gross profit was $2,700,188 in the three months ended September 30, 2012, an increase of $67,260, or 3%, compared to $2,632,928 in the three months ended September 30, 2011. The gross profit rate was 21% for the three months ended September 30, 2012, a decrease of 3 percentage point, compared to 24% in the comparable period. The decrease in gross profit rate was a result of the decrease in sales price (8% in the three months ended September 30, 2012), which was greater than the decrease in cost of coal tar oils (4% in the three months ended September 30, 2012).

 

 

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Operating Expenses

Operating expenses included depreciation, allowance for bad debts, selling, professional and consulting fees and other general and administrative expenses. Operating expenses were $339,906 in the three months ended September 30, 2012, a decrease of $115,221, or 25% compared to $455,127 in the three months ended September 30, 2011.

 

The decrease in operating expenses was mainly attributable to the decrease in professional fees, offset by the increase of stock compensation cost. Professional fees was $49,181 in the three months ended September 30, 2012, a decrease of $158,440, or 76%, compared to $207,621 in the comparable period. Among the professional fees in 2011, non-cash expenses totaled $153,665: common stock issued for investor relation services was valued at $17,750; options issued for investor relation services were valued at $77,800; options issued to Chief Financial Officer and certain director were valued at $58,115.   On March 16, 2012, the Company’s board of directors passed a resolution to issue 1,000,000 shares of common stock of the Company under the Company’s 2011 Stock Incentive Plan (the “Plan”) to ten senior managers or key employees as part of their compensation for 2012.  The cost is estimated at $450,000 based on the closing price of the Company’s common stock on March 15, 2012 of $0.45. The Company plans to expense this compensation evenly in 2012, resulting in $112,500 being expensed as general and administrative expenses in the three months ended September 30, 2012.

Our selling expenses increased $15,032, or 19%, to $94,451 in the three months ended September 30, 2012 from $79,419 in the same period of 2011. The increase in selling expense was mainly attributable to increased delivery cost, which resulted from increased sales quantity volume and higher gas prices.

Net Income

Net income was $1,697,915 for the three months ended September 30, 2012, an increase of $170,253, or 11%, compared to $1,527,662 in the three months ended September 30, 2011. Net income per share was $0.03 in 2012 and 2011. Increase in net income was a result of increased sales and reduced operating expenses.

Comparisons for the Nine Months Ended September 30, 2012 and 2011

Sales

 

			2012								2011
Product			Sales				Quantity (Metric Ton)				Sales				Quantity (Metric Ton)
N220			$	23,825,192				24,788			$	24,537,793				23,007
N330				6,271,128				7,144				6,081,877				6,401
N660				5,978,149				7,142				5,996,156				6,418
Naphthalene oil				2,401,053				3,150				1,323,778				1,520
Total Sales			$	38,475,522				42,224			$	37,939,604				37,346

 

Sales for the nine months ended September 30, 2012 totaled $38,475,522, an increase of $535,918 or 1%, compared to $37,939,604 for the comparable period of 2011.  The increase in sales was mainly attributable to the increase in sales quantities offset by the decrease in sales price. During the nine months ended September 30, 2012, the Company sold 42,224 metric tons of carbon black and naphthalene oil, an increase of 4,878 metric tons, or 13%, compared to 37,346 metric tons in the comparable period of 2011.The average sales price of our products was $911 per metric ton during the nine months ended September 30, 2012, a decrease of $105 per ton, or 10%, from $1,016 per ton during the nine months ended September 30, 2011.

During the nine months ended September 30, 2012, the Company sold 39,074 tons of carbon black, an increase of 3,248 tons, or 9%, compared to 35,826 tons of carbon blacks in the comparable period of 2011. The increase in sales quantity was attributable to the quality of our products and the increase in new customers. The annualized production/total capacity utilization rate was 85% and 78% during the nine months ended September 30 2012 and 2011, respectively.

 

 

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Cost of Sales

Cost of sales was $29,912,709 for the nine months ended September 30, 2012, an increase of $736,043, or 3% compared to $29,176,666 in the nine months ended September 30, 2011. The increase was mainly attributable to the increase in production quantities. Products used 68,075 metric tons of coal tar oil in the nine months ended September 30, 2012, an increase of 7,946 tons, or 13%, compared to 60,129 tons in the same period in 2011. The average price of coal tars was $382 per ton during the nine months ended September 30, 2012, a decrease of $31 per ton, or 7%, from $413 per ton during the comparable period of 2011.

 

Gross Profit Rate

Gross profit was $8,562,813 in the nine months ended September 30, 2012, a decrease of $200,125, or 2% compared to $8,762,938 in the nine months ended September 30, 2011. The gross profit rate was 22% and 23% for the nine months ended September 30, 2012 and 2011, respectively. The decrease in gross profit and gross profit rate resulted from the decrease in sales price (10% in the nine months ended September 30, 2012), which was deeper than the decrease in cost of coal tar oils (7% in the nine months ended September 30, 2012).

Operating Expenses

Operating expenses included depreciation, allowance for bad debts, selling, professional and consulting fees and other general and administrative expenses. Operating expenses were $1,082,684 in the nine months ended September 30, 2012, an increase of $101,291, or 10% compared to $981,393 in the nine months ended September 30, 2011.

The increase in operating expenses was attributable to equity award granted under the Plan. On March 16, 2011, the Company’s board of directors passed a resolution to issue 1,000,000 shares of common stock of the Company under the plan to ten senior managers or key employees as part of compensation for 2012.  The cost was estimated at $450,000 based on the closing price of the Company’s common stock on March 15, 2012 of $0.45. The Company plans to expense this compensation evenly in 2012, resulting in $337,500 being expensed as general and administrative expenses in the nine months ended September 30, 2012.

Our selling expenses increased $56,533, or 25%, to $279,439 in the nine months ended September 30, 2012 from $222,906 in the same period of 2011. The increase in selling expense was mainly attributable to increased delivery cost, which resulted from increased sales quantity volume and higher gas prices.

The increase in stock compensation cost and selling cost were offset by a $95,671 decrease in depreciation expense recorded in operating expenses and a $160,618 decrease in professional fees. Among the professional fees in 2011, there was non-cash expenses of $153,665 (common stock issued for investor relation services was valued at $17,750; options issued for investor relation services were valued at $77,800; options issued to chief financial officer and director were valued at $58,115).

Net Income

Net income was $5,376,473 in the nine months ended September 30, 2012, a decrease of $238,102, or 4%, compared to $5,614,575 in the nine months ended September 30, 2011. Net income per share was $0.10 and $0.11 for the nine months ended September 30 in 2012 and 2011, respectively. Decrease in net income was a result of decreased unit sales price and increased stock incentive expenses.

Liquidity and Capital Resources

We had cash and equivalents of $7,180,849 and $8,092,411 as of September 30, 2012 and December 31, 2011, respectively. Our funds are kept in financial institutions in the PRC, which do not provide insurance for amounts on deposit.  Moreover, we are subject to the regulations of the PRC which restrict the transfer of cash from the PRC, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations incurred outside the PRC.

 

 

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Our accounts receivable have been a significant portion of our current assets, at $5,574,850 and $4,404,319 , or 35% and 28%, of current assets, as of September 30, 2012 and December 31, 2011, respectively. The increase in accounts receivable was a direct result from an increase in customers in 2012. The Company has been engaged with four new customers during 2012. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay, or to fail to make payments in a timely manner, our liquidity and results of operations could be adversely affected. An economic or industry downturn could 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 September 30, 2012 and December 31, 2011:

		Total				Current				31-90 days				91-120 days				121-360 days				Over 361 days
2012			100.00	%			85.35	%			13.00	%			1.01	%			0.00	%			0.64	%
2011			100.00	%			90.50	%			8.69	%			0.00	%			0.00	%			0.81	%

 

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 significant amount of bad debt since the inception of our operations. Allowance for doubtful accounts was $103,215 and $84,935 as of September 30, 2012 and December 31, 2011, respectively.

Net cash provided by operating activities was $4,945,189 and $6,745,579 in nine months ended September 30, 2012 and 2011, respectively. The decrease in net cash provided by operating activities in 2012 was mainly due to (i) a $2,574,937 change ($1,188,811 increase in 2012; $1,386,126 decrease in 2011) in accounts receivables, as the Company’s accounts receivable balance increased in the nine months ended September 30, 2012 compared to that of the nine months ended September 30, 2011, (ii) a $437,727 change ($814,284 decrease in 2012; $380,557 decrease in 2011) in accounts payable, as the Company paid more of its accounts payable in the nine months ended September 30, 2012 than in the nine months ended September 30, 2011.

Net cash used in investing activities were $6,112,152 and $5,710,468 in the nine months ended September 30, 2012 and 2011, respectively. Capital expenditures of $943,528 in the nine months ended September 30, 2012 related to the Company’s new warehouse built in 2012. Capital expenditures of $5,168,624 in the nine months ended September 30, 2012 related to the Company’s new construction of power plant. The capital expenditures of $5,710,468 in the nine months ended September 30, 2011 was related to the Company’s natural gas and byproducts processing projects. The Company  plans to use natural gas as fuel in the production instead of coal tars currently used.

Net cash provided by financing activities was $188,817 and $198,561 in the nine months ended September 30, 2012 and 2011, respectively. During nine months ended September 2012, the Company received $199,955 from private investors. The Company repaid short term loans of $1,377,893 and acquired new short term loans of $1,366,755. In the comparable period of 2011, the Company received $192,968 from private investors. The Company repaid short term loans of $1,357,888 and acquired $1,357,888 short term loans. The Company also received $5,593 advance from a shareholder.

Short Term Debt

Short term debt at September 30, 2012 and December 31, 2011 (audited) consisted of the following:

		2012				2011
To Xigu Credit Union
Interest at 13.25%, payable April 28, 2012		$	-			$	511,658
Interest at 14.43%, payable December 27, 2012			505,970				-
To Chengguan Credit Union
Interest at 13.25%, payable April 28, 2012			-				864,416
Interest at 14.43%, payable December 27, 2012			860,785				-
Total Short Term Debt		$	1,366,755			$	1,376,074

 

 

The short term debts are renewable based on the past credit of the Company. Interest is paid quarterly. There are no other terms or loan covenants relating to these short term loans. On April 28, 2012, the Company repaid the $511,658 loan to Xigu Credit Union and the $864,416 loan to Chengguan Credit Union. On April 28, 2012, the Company borrowed (i) $505,970 from Xigu Credit Union at 14.43% due December 27, 2012; and (ii) $860,785 from Chengguan Credit Union at 14.43% and matures December 27, 2012.

 

 

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Our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we do not have sufficient available cash, we will 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 our working capital, together with our cash flow from operations will be sufficient to enable us to meet our cash requirements for the operation for next 12 months. However, as we are seeking to increase our production capacity in the near future, and it is possible that cash from operation will not enough to support our expansion and we may require additional funding from external source, either debt or equity financing. We cannot be sure funding will be available on reasonable terms when we require funding.

Off-balance Sheet Arrangements

On May 24, 2012, Liteweisi and Hongxing separately entered into a Guaranty Agreement with Mr. Liang Qiao, an individual residing in the PRC (the “Lender”), Ms. Guo Yun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO (Ms. Yao and Mr. Meng jointly, the “Borrowers”) for a loan totaling RMB18 million ($2,863,980) (the “Loan”). The Loan was due on August 23, 2012. Liteweisi and Hongxing were jointly liable for the Loan until the Loan was repaid at which point the guaranty obligation extinguishes. The Loan was repaid in full in September 2012.

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 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.  Freight-in costs are included in cost of sales.

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 amounts due to shareholder.  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.

 

 

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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 year-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.

Smaller reporting companies are not required to provide the information required by this Item.

 

Item 4.   Controls and Procedures.

 

(a)             Evaluation of disclosure controls and procedures .

 

At the conclusion of the period ended September 30, 2012 we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

(b)   Changes in internal controls .

 

As reported in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011, as of such fiscal year end we identified material weaknesses in our internal control over financial reporting and described several actions we plan to take to remedy such material weaknesses.  During the quarter ended September 30, 2012, we have continued on job training of accounting and other related personnel.

 

Other than as set forth herein, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II

 

OTHER INFORMATION

 

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.

 

Item 1A.  Risk Factors

 

Smaller reporting companies are not required to provide the information required by this item.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

Item 3.    Defaults Upon Senior Securities

 

None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

 

On May 24, 2012, Liteweisi and Hongxing separately entered into a Guaranty Agreement with Mr. Liang Qiao, an individual residing in the PRC (the “Lender”), Ms. Guo Yun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO (Ms. Yao and Mr. Meng jointly, the “Borrowers”) for a loan totaling RMB18 million (approximately $2,833,380) (the “Loan”). The Loan was due on August 23, 2012.  Liteweisi and Hongxing were jointly liable for the Loan until the Loan was repaid at which point the guaranty obligation extinguishes. The Loan was repaid in full in September 2012.

Item 6.    Exhibits.

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

 

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SIGNATURES

Pursuant to the requirements of the Securities 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.Name
Date:  November 14, 2012	By:	/s/ Guo Yun Yao
		Guo Yun Yao
		Chief Executive Officer, President, Secretary and Chairman of the  Board (principal executive officer)

 

Date:  November 14, 2012	By:	/s/ Xiaolong Zhou
		Xiaolong Zhou
		Chief Financial Officer (principal financial officer and principal accounting officer)

 

 

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EXHIBIT INDEX

 

 

No.		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

* Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 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 Exhibits 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.

 

 

 

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