NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
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” 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 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 entry into the Entrusted Agreement and the issuance of shares to nominee and trustee holder to the Hongxing Shareholders are collectively referred to as “the transaction” hereafter.
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 Financial Accounting Standards Board (“FASB”) 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 Call Option Agreements dated December 29, 2009 between Karen Prudente and Ms. Guoyun 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. Guoyun Yao and Mr. Chunde Meng exercised options to purchase 32,615,455 shares of common stock.
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 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”).
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
Unaudited Interim Financial Information
These financial statements and other financial information included in this quarterly report on Form 10-Q are unaudited, with the exception of the December 31, 2012 balance sheet. These unaudited interim consolidated financial statements have been prepared in accordance with US GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and related notes for the year ended December 31, 2012, included in the Company’s 2012 Annual Report on Form 10-K. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2013.
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. Stockholders' equity is translated at historical 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
|
|
|
Year Ended
|
|
|
|
|
June 30, 2013
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
|
RMB/US$ exchange rate at the period end
|
|
|
0.1620
|
|
|
|
0.1574
|
|
|
|
0.1589
|
|
|
Average RMB/US$ exchange rate for the period
|
|
|
0.1612
|
|
|
|
0.1580
|
|
|
|
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 six months ended June 30, 2013 or 2012.
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 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
The Company recognizes 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 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 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.
Segment Information
FASB ASC subtopic 280-10, “Segment Reporting”, 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 FASB 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 FASB 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.
Uncertain Tax Positions
Interest associated with unrecognized tax benefits are classified as income tax and penalties are classified in selling, general and administrative expenses in the consolidated statements of income and comprehensive income.
Reclassifications
Certain prior period amounts were reclassified to conform to the manner of presentation in the current period.
Recent Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Comprehensive Income—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income ("AOCI") by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. ASU 2013-02 will be effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. As this ASU only requires enhanced disclosure, the adoption did not have an impact on the Company’s financial position or results of operations.
NOTE 3 – ACCOUNTS RECEIVABLE, NET
Accounts receivable balances were as follows:
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Accounts receivable
|
|
$
|
2,642,854
|
|
|
$
|
3,694,429
|
|
|
Allowance for doubtful accounts
|
|
|
(163,564
|
)
|
|
|
(71,785
|
)
|
|
Accounts receivable, net
|
|
$
|
2,479,290
|
|
|
$
|
3,622,644
|
|
NOTE 4 – INVENTORIES
Inventories consisted of the following:
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Raw materials
|
|
$
|
1,301,150
|
|
|
$
|
1,277,286
|
|
|
Packing and other materials
|
|
|
20,248
|
|
|
|
40,664
|
|
|
Finished products
|
|
|
389,433
|
|
|
|
1,075,171
|
|
|
|
|
$
|
1,710,831
|
|
|
$
|
2,393,121
|
|
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are summarized as follows:
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Plant
|
|
20
|
|
|
$
|
8,861,484
|
|
|
$
|
8,340,697
|
|
|
Machinery and equipment
|
|
10
|
|
|
|
24,881,178
|
|
|
|
16,839,670
|
|
|
Transportation equipment
|
|
5
|
|
|
|
118,836
|
|
|
|
117,750
|
|
|
Other machinery and equipment
|
|
5
|
|
|
|
62,509
|
|
|
|
61,938
|
|
|
Construction in progress
|
|
|
|
|
|
1,619,905
|
|
|
|
4,969,047
|
|
|
|
|
|
|
|
|
35,543,912
|
|
|
|
30,329,102
|
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(4,647,661
|
)
|
|
|
(3,422,173
|
)
|
|
Property, plant and equipment, net
|
|
|
|
|
$
|
30,896,251
|
|
|
$
|
26,906,929
|
|
Total depreciation was $473,292 and $936,063 for the three and six months ended June 30, 2013 and $449,400 and $889,707 for the three and six months ended June 30, 2012. Depreciation included in cost of manufacturing was $441,914 and $878,590 for the three and six months ended June 30, 2013 and $423,676 and $838,175 for the three and six months ended June 30, 2012.
The Company started the construction of a 3000KW power plant including a water recycling system in June 2012, which is to utilize residual exhaust gas generated from the Company’s carbon black manufacturing process. Total cost of construction of the plant was approximately $6.4 million. The test of the power plant was completed at the beginning of 2013. The plant is currently being utilized for commercial production and satisfies the Company’s electricity needs for the current production capacities.
Beginning in October 2012, the Company terminated its production on the three dry carbon black production lines and began to convert them to special carbon black (“SCB”) production lines. In connection with the construction of the SCB production lines, the Company transferred the book value of the three dry production lines from property, plant and equipment to construction in progress in the fourth quarter of 2012. Most of the equipment and parts were in good condition and suitable to be used in the new SCB production lines. The Company’s policy is to continuously depreciate these assets during the construction period using estimated remaining useful lives until they are reused, sold, or disposed of. As of June 30, 2013, the SCB production lines have been completed and related construction in progress was transferred to property, plant and equipment.
The Company is constructing a circulating tank to recycle water for use by the factory with a total contract price of approximately $4,000,000.
NOTE 6 – LAND USE RIGHTS, NET
On December 29, 2005, the Company lent RMB554,130 ($89,764) to Xigu Village (“Village”), which was interest free and due December 29, 2008. The Village failed to repay the loan by 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 ($1,620) from July 2003 through July 2053. The Company has no obligation to pay this lease due to the default of the Village loan. The balance of the Village loan receivable was capitalized on December 31, 2008 as land use rights and is amortized over the remaining life of the land use rights.
On October 31, 2007, the Company lent an additional RMB 1,000,000 ($161,991) to the Village. The loan was interest free and due October 31, 2010. The 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 ($1,620) through June 2056 from June 2006. The Company has no obligation to pay this lease due to the default of the Village loan. The balance of the Village loan receivable was capitalized on November 1, 2010 as land use rights and is amortized over the remaining life of the land use rights.
Land use rights balances were as follows:
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Land use rights
|
|
$
|
244,573
|
|
|
$
|
249,453
|
|
|
Less: accumulated amortization
|
|
|
(30,758
|
)
|
|
|
(35,097
|
)
|
|
Land use rights, net
|
|
$
|
213,815
|
|
|
$
|
214,356
|
|
Amortization of land use rights was recorded as rent. Rent expense was $1,253 and $2,491 for the three and six months ended June 30, 2013 and $1,227 and $2,458 for the three and six months ended June 30, 2012.
As of June 30, 2013, the estimated future amortization of land use rights is as follows:
|
Years Ending
December 31,
|
|
|
|
|
2013
|
|
$
|
2,518
|
|
|
2014
|
|
|
5,035
|
|
|
2015
|
|
|
5,035
|
|
|
2016
|
|
|
5,035
|
|
|
2017
|
|
|
5,035
|
|
|
2018
|
|
|
5,035
|
|
|
Thereafter
|
|
|
186,122
|
|
|
|
|
$
|
213,815
|
|
NOTE 7 – SHORT TERM DEBT
Short term debt consisted of the following:
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
To Xigu Credit Union
|
|
|
|
|
|
|
|
Interest at 12%, payable December 26, 2013
|
|
$
|
502,171
|
|
|
$
|
497,581
|
|
|
To Chengguan Credit Union
|
|
|
|
|
|
|
|
|
|
Interest at 12%, payable December 26, 2013
|
|
|
874,425
|
|
|
|
866,433
|
|
|
|
|
$
|
1,376,596
|
|
|
$
|
1,364,014
|
|
The short term loans 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.
The Xigu Creidt Union short-term loan of $502,171 (RMB 3,100,000) was due on December 27, 2012 and was renewed at interest rate of 12%, the new maturity date is December 26, 2013.
The Chengguan Credit Union short-term loan of $874,425 (RMB 5,398,000) was due on December 27, 2012 and was renewed at interest rate of 12%, the new maturity date is December 26, 2013.
NOTE 8 – TAXES PAYABLE
Taxes payable consisted of the following:
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
PRC corporation income tax
|
|
$
|
261,650
|
|
|
$
|
464,481
|
|
|
Value added tax
|
|
|
(26,603
|
)
|
|
|
230,352
|
|
|
Other
|
|
|
-
|
|
|
|
19,580
|
|
|
Total
|
|
$
|
235,047
|
|
|
$
|
714,413
|
|
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.
Lack of Insurance
The Company currently has no insurance for its office facilities and operations and is not 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.
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. Guoyun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO for a loan totaling RMB18 million ($2,872,371) (the “Loan”) due on August 23, 2012. Liteweisi and Hongxing were jointly liable for the Loan until it was repaid when the guaranty obligation ended. The Loan was repaid in full in September 2012 and Liteweisi and Hongxing’s joint guaranty obligation extinguished accordingly.
Capital Commitments
As of June 30, 2013, the Company had capital commitments amounting to $2,429,800 to complete the circulating tank to recycle water for use by the factory.
NOTE 10 – STOCKHOLDERS’ EQUITY
On March 15, 2012, the Board of Directors (“BOD”) passed a resolution to issue and sell 156,250 shares of common stock of the Company to an accredited investor in China for $100,000. The stock was valued at $0.45 per share (the market closing price on March 14, 2012).
On May 3, 2012, the BOD passed a resolution to issue and sell 222,222 shares of common stock of the Company to two accredited investors in China for $100,000. The stock was valued at $0.38 per share (the market closing price on May 2, 2012).
On December 5, 2012, the BOD passed a resolution to issue and sell 500,000 shares of common stock of the Company to two accredited investors in China for $100,000. The stock was valued at $0.14 per share (the market closing price on December 4, 2012).
On March 7, 2013, the BOD passed a resolution to authorize the Company to issue 31,848 shares of common stock to a director for his past services. The cost is estimated at $5,000 based on the closing price of $0.16 of the common stock on March 6, 2013.
On March 20, 2013, the BOD passed a resolution to issue and sell 250,000 shares of common stock of the Company to one accredited investor in China for $50,000. The stock was valued at $0.20 per share (the market closing price on March 19, 2013).
On April 16, 2013, the BOD granted 30,000 shares of restricted stock to an officer of the Company vesting in four tranches quarterly with a performance target of the Company filing its periodic reports in a timely fashion.
On April 26, 2013, the BOD passed a resolution to issue and sell 384,615 shares of common stock of the Company to one accredited investor in China for $50,000. The stock was valued at $0.13 per share (the market closing price on April 24, 2013).
Also on April 26, 2013, the BOD passed a resolution to authorize the Company to issue 103,333 shares of common stock to the former CFO of the Company for his past services. The fair value was $12,400 based on the closing price of $0.12 per share that day.
On May 29, 2013, the BOD passed a resolution to issue and sell 400,000
shares of common stock of the Company to one accredited investor in China for $50,000. The stock was valued at $0.125 per share (the market closing price on May 28, 2013).
2011 Stock Incentive Plan
On September 13, 2011, the 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 2011. 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 expensed this compensation cost in 2012.
On March 27, 2013, the BOD passed a resolution to authorize the Company to issue 2,000,000 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 $340,000 based on the closing price of $0.17 of the Company’s common stock on February 6, 2013. The Company expensed this compensation cost in the six months ended June 30, 2013.
Restricted stock awards (“RSA”)
The Company has granted RSAs to one officer of the Company for services provided to the Company.
The following table summarizes the activities for the Company’s unvested RSAs for the six months ended June 30, 2013:
|
|
|
Number of Shares
|
|
|
Weighted-Average Grant-Date Fair Value per share
|
|
|
Unvested at December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
30,000
|
|
|
$
|
0.14
|
|
|
Vested
|
|
|
(6,000
|
)
|
|
$
|
0.14
|
|
|
Unvested at June 30, 2013
|
|
|
24,000
|
|
|
$
|
0.14
|
|
As of June 30, 2013, there was unrecognized compensation cost of $3,360 related to RSAs.
For the three and six months ended June 30, 2013, stock-based compensation expense of $13,240 and $358,240 was included in general and administrative expenses. For the three and six months ended June 30, 2012, stock-based compensation expense of $112,500 and $225,000 was included in general and administrative expenses.
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 June 30, 2013 and December 31, 2012, the Company’s uninsured cash balances were approximately $5,312,000 and $6,632,000, respectively.
NOTE 12 – INCOME TAXES
The Company generated substantially all of its net income from its PRC operations for the six months ended June 30, 2013 and 2012 and has recorded income tax provision for the periods. The Company’s China operation is subject to the PRC standard enterprise income tax rate of 25% based on its taxable net profit.
Current PRC Tax Law also imposes a 10% withholding tax on all dividends paid by PRC companies to non-PRC shareholders unless any foreign shareholder’s jurisdiction has a tax treaty with the PRC that provides for a different withholding arrangement and contains rules governing such matters as international transfer pricing. No provision for withholding or other tax on the undistributed earnings of the PRC companies has been made as the earnings of these PRC companies, in the opinion of the management, will be reinvested indefinitely.
The Company did not have any significant temporary differences giving rise to deferred tax liabilities as of June 30, 2013 and December 31, 2012.
For the six months ended June 30, 2013 and 2012, reconciliation of the differences between the statutory US Federal income tax rate and the effective rate was as follows:
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|
|
Six Months Ended June 30,
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|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
US statutory tax rate
|
|
|
34.0
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%
|
|
|
34.0
|
%
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|
Tax rate difference
|
|
|
-9.0
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%
|
|
|
-9.0
|
%
|
|
Change in valuation allowance
|
|
|
9.1
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%
|
|
|
2.1
|
%
|
|
Effective rate
|
|
|
34.1
|
%
|
|
|
27.1
|
%
|
At June 30, 2013, the Company had US net operating loss carry forwards of $2,193,958. A 100% valuation allowance was recorded against their potential tax benefit due to the uncertainty of its realization.
For the six months ended June 30, 2013 and 2012, the Company had no unrecognized tax benefits and related interest and penalties expenses. Currently, the Company is not subject to examination by major tax jurisdictions.
NOTE 13 – MAJOR CUSTOMERS AND VENDORS
For the six months ended June 30, 2013, four customers accounted for 25%, 18%, 16% and 13% of the Company’s total revenue. At June 30, 2013, the outstanding trade receivables from these four customers were 24%, 18%, 15% and 14% of the total outstanding trade receivables.
For the six months ended June 30, 2012, four customers accounted for 23%, 20%, 12% and 12% of the Company’s total revenue. At June 30, 2012, the outstanding trade receivables from these four customers were 20%, 20%, 11% and 13% of the total outstanding trade receivables.
For the six months ended June 30, 2013, four suppliers accounted for 29%, 29%, 27% and 15% of the Company’s total purchases. At June 30, 2013, the outstanding trade payables to these four suppliers were 30%, 30%, 17% and 3% of the total outstanding trade payables.
For the six months ended June 30, 2012, five suppliers accounted for 13%, 13%, 13%, 13% and 13% of the Company’s total purchases. At June 30, 2012, the outstanding trade payables to these five suppliers were 15%, 14%, 15%, 14% and 14% of the total outstanding trade payables.
The loss of any of these suppliers or customers could have a material adverse effect on the Company’s financial position and results of operations.