Item 1.
Business
Corporate History
Asia Carbon Industries, Inc. (the "Company" or “we”) was incorporated in the State of Maryland on June 23, 2008. Through the steps described below, we became the indirect holding company for Taiyuan Hongxing Carbon Black, Ltd. ("Hongxing"), a manufacturer of carbon black products in the People's Republic of China ("PRC"), on December 29, 2009.
On November 10, 2008, we formed Jinzheng Liteweisi Carbon (Taiyuan) Co., Ltd. (“Liteweisi”) as our wholly-owned subsidiary and a "wholly foreign-owned enterprise" in the PRC.
The laws of the PRC place restrictions on round trip investments, which are defined under PRC law as an acquisition of a PRC entity by an offshore special purpose vehicle owned by one or more PRC residents. To comply with these restrictions, on December 29, 2009, we, 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 (the “Hongxing Shareholders”). Asia Carbon issued 36,239,394 restricted shares of its common stock to Karen Prudente, nominee and trustee for the Hongxing Shareholders, for Hongxing and the Hongxing Shareholders entering into the Entrusted Agreements. Karen Prudente’s role with respect to the restricted shares held by the Hongxing Shareholders is to manage the trust of the Hongxing Shareholders. These restricted shares issued to Karen Prudente were issued in reliance upon the exemptions set forth in Section 4(2) of the Securities Act of 1933, as amended, on the basis that they were issued under circumstances not involving a public offering. As a result of the aforementioned transaction, the Hongxing Shareholders obtained control of the Company. Subsequently, on April 17, 2012, the Hongxing Shareholders exercised options to purchase 32,615,455 shares as conditions for the exercise met.
Generally, we provide Hongxing with technology consulting and management services pursuant to the Entrusted Agreements, the material terms are as follows:
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Entrusted Management Agreement - pursuant to this agreement entered into by and among the Hongxing Shareholders, Hongxing, and Liteweisi, the Hongxing Shareholders and Hongxing entrust the management of Hongxing to Liteweisi until (a) the winding up of Hongxing, (b) the termination date of the agreement as determined by the parties, or (c) the date on which Liteweisi acquires Hongxing. During the term, Liteweisi is fully and exclusively responsible for the management of Hongxing. In consideration of such services, the Hongxing Shareholders and Hongxing will pay a fee to Liteweisi as set forth in the agreement.
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Exclusive Option Agreement - pursuant to this agreement entered into by and among Liteweisi, the Hongxing Shareholders, and Hongxing, the Hongxing Shareholders grant Liteweisi an irrevocable exclusive purchase option to purchase all or part of the shares of Hongxing, currently owned by any of the Hongxing Shareholders. Further, Hongxing grants Liteweisi an irrevocable exclusive purchase option to purchase all or part of the assets and business of Hongxing. Liteweisi and the Hongxing Shareholders will enter into relevant agreements regarding the price of acquisition based on the circumstances of the exercise of the option, and the consideration shall be refunded to Liteweisi or Hongxing at no consideration in an appropriate manner decided by Liteweisi. Upon the exercise of the option, Liteweisi will be subject to non-competition restrictions as set forth in the agreement.
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Exclusive Purchase Agreement - pursuant to this agreement entered into by and among Liteweisi and Hongxing, Hongxing grants to Liteweisi the sole and exclusive right of purchasing all the products produced and manufactured by Hongxing at a price which is equal to the total cost of the products subject to adjustments by the parties’ mutual written agreement.
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Pledge of Equity Agreement -pursuant to this agreement entered into by and among the Hongxing Shareholders (as Pledgors), and Liteweisi (as Pledgee), the equity interest of the Hongxing Shareholders is pledged to guarantee all of the rights and interest Liteweisi is entitled to under the Entrusted Management Agreement, the Exclusive Option Agreement, and the Shareholders’ Voting Proxy Agreement. The Hongxing Shareholders pledge, by way of a first priority pledge, all of its rights, title and interest in (i) 100% of the equity interest in Hongxing, (ii) 100% of the registered capital of Hongxing, (iii) all investment certificates and other documents in respect of the registered capital of Hongxing, (iv) all money, dividends, interest and benefits at any time arising in respect of all the equity interest and registered capital of Hongxing, and (v) all voting rights and all other rights and benefits attaching to or accruing to the equity interest of the registered capital of Hongxing to Liteweisi.
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Shareholders’ Voting Proxy Agreement - pursuant to this agreement entered into by and among the Hongxing Shareholders and Liteweisi, the Hongxing Shareholders irrevocably appoint the persons designated by Liteweisi with the exclusive right to exercise, on their behalf, all of their voting rights of Hongxing. The persons designated by Liteweisi shall be the full board of directors of Liteweisi.
When we sell our equity or borrow funds we expect the proceeds will be forwarded to Hongxing and accounted for as a loan to Hongxing and eliminated during consolidation. We may also use the proceeds to repurchase our capital stock or for our corporate overhead expenses. If we borrow funds we expect to be the primary obligor on any debt. For example, in April 2010 we raised $1,368,464, and in May 2010, we raised $1,667,984 in two private placements from certain non-affiliated accredited investors in a private placement of our common stock. Net proceeds after our expenses were provided to Hongxing through Liteweisi.
The Entrusted Agreements empowered Asia Carbon, through Liteweisi, the ability to substantially influence Hongxing’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. As a result of these Entrusted Agreements, which obligates Asia Carbon to absorb a majority of the risk of loss from Hongxing’s activities and enable Asia Carbon to receive a majority of its expected residual returns, Asia Carbon, through its wholly-owned subsidiaries, accounts for Hongxing as its Variable Interest Entity (“VIE”) under ASC 810-10. Accordingly, Asia Carbon consolidates Hongxing’s operating results, assets and liabilities.
By causing our subsidiary Liteweisi to enter into the Entrusted Agreements, we obtained substantially the same result as a direct share exchange, which is to permit us to consolidate the financial results of Hongxing as our VIE.
The following diagram sets forth the corporate structure of the Company as of December 31, 2012:
Neither Asia Carbon nor Liteweisi has any operations or plans to have any operations in the future other than acting as a holding and management company for Hongxing and raising capital for its operations. However, we reserve the right to change our operating plans regarding Asia Carbon and Liteweisi.
History of Hongxing
Hongxing, the primary entity through which we operate our business, was formed on December 4, 2003 as a limited liability company under the laws of the PRC, under the approval of Shanxi Development and Reform Commission. In December 2009, Hongxing and Liteweisi, a wholly-owned subsidiary of Asia Carbon, entered into a number of contractual agreements by which Liteweisi was entrusted to manage and operate Hongxing. These contractual agreements, described in further detail above, also provide for the consolidation of the financial statements of Asia Carbon, Liteweisi, and Hongxing.
Business of Hongxing
We are a holding company that, through our wholly-owned subsidiary Liteweisi and our variable interest entity ("VIE") Hongxing, manufactures in the PRC a series of high quality carbon black products under the brand name “Great Double Star.”
According to Company research, we are one of the top ten carbon black producers in Shanxi Province in China and have relationships with a high-profile customer base. Revenue for 2012 was $45.9 million, a decrease of $3.2 million, or 7%, compared to revenue in 2011. In 2011, we reported revenues of $49.1 million, a 65% increase over 2010, and $7.3 million in net income, a 123% increase compared to 2010.
Carbon black is a deep black powder with a number of applications. Derived from the controlled combustion of coal tar or residual oil feedstock, carbon black’s desirable chemical properties make it a critical raw material for many industries. It is widely used within the rubber industry as reinforcing filler; the paint and coating industry use carbon black as coloring agent and it is used in batteries as a conductive agent. Carbon black is used predominately by the automotive tire industry, where it can improve rubber’s strength, wear resistance, and life span, and thus lower the overall cost of tire products.
Hongxing manufactures carbon black through wet method production. In 2010, the Company directed resources to converting one of its existing lines into a wet method production line to produce better quality, lower cost, and more environmentally friendly carbon black. The wet line commenced full operation in the fourth quarter of 2010.
In June 2012, Hongxing began construction on a 3000 KW power plant, which was completed and commenced its testing in January 2013. Utilizing residual exhaust gas generated from Hongxing’s carbon black manufacturing process, the plant’s 3000 KW capacity is expected to satisfy Hongxing’s electricity needs for current production lines.
In September 2012 Hongxing 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 commenced in October 2012. As the three dry production lines ceased operations during the conversion period, Hongxing’s fourth quarter of 2012 and annual operations results were negatively affected. The project has been and will be funded by cash from operations. Management expects the project to be completed at the end of June 2013. The total estimated cost is approximately $4 million.
Industry Overview
While growth in worldwide demand may slow down, it is anticipated that China’s domestic demand will continue to bolster a healthy rubber market.
China is the world’s second largest producer of carbon black. According to the latest available report, a 2008 report by Dong Fang Securities, a national and comprehensive securities company in China that provides services like security underwriting, brokerage, investment consulting, and financial advising, the rubber industry accounts for 89.5% of worldwide carbon black consumption, 67.5% of which is used for tire manufacturing and 9.5% is for other rubber car parts (such as fan belts, bumpers, etc.). Other rubber industries account for 12.5%. The remaining 10.5% is used in other non-rubber industries like ink, coating, plastic, etc.
It is management’s belief based on industry experience that modern carbon black products are an adaption of early "lamp blacks," first produced in China over 3,500 years ago, when printers used the soot generated from burning oil in lamps to make ink. The technology did not change much until advances in the twentieth century facilitated cost-effective mass production. Today, carbon black is primarily produced from "sour" gas (natural gas that contains hydrogen sulfide or sulfur) and coal tar (one of the by-products formed when coal is carbonized to make coke or gasified to make coal gas).
It is our belief based on industry experience that the “dry” granulation method was traditionally used to produce carbon black. While this method is efficient, it has drawbacks. In its initial form, carbon black is a fluffy, black powder, which is difficult to handle and easily released into the atmosphere where it can be breathed in by workers. Without proper ventilation and worker protection, this can be a health hazard. Carbon black dust can also get into small, even closed spaces, such as electrical boxes, making it difficult to keep the work area clean.
It is also our belief based on industry experience that carbon black supplies were initially produced largely in the United States ("US"), predominately in oil producing areas such as Texas. However, as environmental and employee health concerns grew, production in the US decreased substantially. The shortfall was made up for in countries like China, where regulations are less stringent and labor is more accessible and less expensive. Today, these countries account for the majority of global production.
Over time, efforts to improve the overall manufacturing process resulted in the development of a “wet” granulation production method. This wet process virtually eliminates the carbon dust and provides additional benefits. Wet manufacturing lowers the cost of producing carbon black, leaves a smaller environmental footprint, and yields a final product that is denser and more durable. As a result, longer lasting end products are produced. The Company is converting all its existing lines from dry granulation to the wet production method.
Carbon Black Industry in China
According to China’s Carbon Black Association, the only national organization in the carbon black industry in China whose mandate is to assist the government to supervise the industry, conduct industry research and statistics, and to publish such research findings, and whose data are widely used and regarded as authoritative, of which Hongxing is a member, indicated that in 2007, the aggregate net revenue for its 39 members was $485 million, a 55.87% increase as compared to 2006. Sales volume for 2007 was 1.78 million tons, an increase of 31.17% compared to 2006. As a whole, China’s carbon black production capacity continues to grow; in 2008, the total output of carbon black in China reached 2.43 million tons, a 5.65% increase of 2.3 million tons from the total output in 2007. In 2009, the total output of carbon black reached 2.83 million tons. The total output of carbon black was approximately 3.76 million tons, 3.85 million tons and 3.25 million tons, in 2012, 2011 and 2010, respectively.
There are several factors affecting China’s carbon black market. The following is an overview of the key issues.
The total output of carbon black is in surplus, but the availability of high-quality and wet-granulation carbon black varieties for radial tire production is still insufficient to meet demand. In China, tire manufacturing accounts for more than 80% of total carbon black consumption. According to the China Association of Automobile Manufacturers, a self-regulatory and non-for-profit organization for auto manufacturers, spare part manufacturers and related industries approved by the Ministry of Civil Affairs of China, auto sales were 19.27 million, 18.50 million, 18.00 million and 13.64 million in 2012, 2011, 2010 and 2009, respectively, making China the largest auto market in the world. In the next few years, it is also expected that more and more global tire manufacturers will shift their production base to China.
To accelerate the industrial restructuring, and prevent redundant low-level construction and environmental pollution, the PRC strengthened its regulation over the carbon black industry in June 2002, issuing "The Directory of the Elimination of Outdated Production Capacity, Processes and Products." According to the Directory, any dry granulation device with annual production capacity of less than or equal to 10,000 tons of carbon black was to be eliminated. This decree resulted in more than 70 small-scale carbon black manufacturing companies withdrawing from the market due to outdated technology. As the market of carbon black intensifies, small-scale and poor performing enterprises will be eliminated. The China market favors large enterprises with great production capacity and modern technology.
It is management’s belief based on industry experience that China’s Eleventh Five-year Plan (2006-2010) with respect to the carbon black industry targets the development and production of high-quality and high-grade varieties for radial tires, especially for "green" high performance tires and tires with low rolling-resistance. As demand for conventional carbon black varieties for basic tires and other downstream sectors decreases, the Five-Year Plan encourages the carbon black sector to make greater effort in technical innovation and product development to satisfy the demand in the tire market.
While benefiting companies such as Hongxing, with the capability and resources to heed these government initiatives, such directives also serve as barriers to entry for new firms who must secure construction and environmental permits; many new projects have been rejected due to deviation from environmental protection standards. In recent years, China’s carbon black companies have made great strides to achieve energy conservation and emission reduction.
Properties of Carbon Black
The main three properties of carbon black are:
Particle Size
The diameter of spherical particles is the fundamental property which largely affects blackness and dispersibility when carbon black is mixed with resins or other vehicles. In general, the smaller the particle size is, the higher the blackness of carbon black becomes. Dispersion, however, becomes difficult due to an increase in coagulation force.
Structure
Like particle size, the size of the structure also affects the blackness and dispersibility of carbon black. Generally, the increase of structure size improves dispersibility but lowers blackness. Carbon black with a larger structure in particular shows an excellent conductive property.
Surface Chemistry
Various functional groups exist on carbon black’s surface. The affinity of carbon black with inks or paint varnishes changes depending on the type and amount of the functional groups.
Carbon black, with a large amount of hydroxyl group given with oxidation treatment, has a greatly enhanced affinity to print inks or varnishes, showing an excellent dispersibility.
Production of Carbon Black
Carbon black is produced with the thermal decomposition method or the partial combustion method using hydrocarbons such as oil or natural gas as raw material.
The characteristics of carbon black vary depending on manufacturing process, and therefore carbon black is classified by manufacturing process. Carbon black produced with the furnace or “dry” process, which was traditionally used, is called “furnace black,” distinguishing it from carbon black, which is manufactured with other processes.
The Company’s three production lines use the dry granulation method to produce carbon black. This method forms carbon black by blowing petroleum oil or coal oil as raw material (feedstock oil) into high-temperature gases to combust them partially. This method is suitable for mass production due to its high yield, and allows wide control over its properties such as particle size or structure. This is currently the most common method used for manufacturing carbon black for various applications from rubber reinforcement to coloring.
While this is efficient, a significant amount of carbon dust is generated. It is this dust which causes health and environmental concerns. The “wet” granulation lines that Hongxing completed on October 26, 2010, provide a number of significant benefits, including gas comprehensive utilization, lowering black carbon production cost, reducing environmental pollution, increasing black carbon product quality, and increased varieties of black carbon. The wet line has an annual capacity of 25,000 tons of carbon black. The Company is in the process of converting the rest three dry production lines to wet specialty carbon black production lines.
Products
The Company currently manufactures two “hard” and one “soft” carbon black products, called N220, N330 and N660, respectively. N220 hard carbon black, which has good strength and elongation properties, is mainly used in the manufacturing of automobile tires. The N330 hard carbon black has a lower production cost and is mainly used in manufacturing sides of automobile tires. The Company’s “soft” product N660, is a soft carbon black which has the flexibility necessary for the production of automobile tire inner tubes and hoses.
The demand for hard carbon black is significantly higher than the demand for the soft carbon black.
At the end of 2012, the market price of dry N220 hard carbon black was $919 per ton, of wet N220 hard carbon black was $933 per ton, of N330 hard carbon black was $864 per ton, and of N660 soft carbon black was $809 per ton. At the end of 2011, the market price of dry N220 hard carbon black was $1,008 per ton, of wet N220 hard carbon black was $1,090 per ton, of N330 hard carbon black was $952 per ton, and of N660 soft carbon black was $934 per ton. In terms of profitability, wet N220 is the most profitable product (the cost of producing wet N220 is the lowest among the three products). Producing a ton of wet N220 carbon black requires roughly 1.7 -1.8 tons of coal tar, and the profit margin is about 30%; producing a ton of wet N660 soft carbon black requires roughly 1.7 - 1.8 tons of coal tar, and the profit margin is about 18%; while producing a ton of dry N220 or N330 hard carbon black requires about 1.9 tons of coal tar, and the profit margin is only 6% -11%.
Manufacturing
The dry production of carbon black includes five processes: the supply of raw materials process, carbon black formation process, separation of carbon black process, dry granulation, and packaging process, as illustrated in the following diagram. The Company no longer has such production process since September 2012.
The wet production of carbon black is more complex in terms of technology and procedures, as illustrated in the following diagram.
Uses for Carbon Black
Practically all rubber products which require good tensile and abrasion wear properties use carbon black, thus they are black in color. Where physical properties are important but colors other than black are desired, such as white tennis shoes, precipitated or fused silica is typically substituted. The most common use of carbon black has been as a reinforcing agent in tires. Today, because of its unique properties, the uses of carbon black have expanded to include pigmentation, ultraviolet (UV) stabilization and conductive agents in a variety of everyday and specialty high performance products, including:
Tires and Industrial Rubber Products
Carbon black is added to rubber as both a filler and as a strengthening or reinforcing agent. For various types of tires, it is used in inner liners, carcasses, sidewalls and treads utilizing different types based on specific performance requirements. Carbon black is also used in many molded and extruded industrial rubber products, such as belts, hoses, gaskets, chassis bumpers, and multiple types of pads, boots, wiper blades, fascia, conveyor wheels, and grommets. A typical car tire contains approximately 3.63 kg of carbon black.
Coloring Agent for Ink and Paints
Carbon black has higher tinting strength compared to iron black or organic pigments, and is widely used for newspaper inks, printing inks, India inks, and paints. Carbon black is also used as black pigment for inkjet ink or toners. Carbon blacks enhance formulations and deliver broad flexibility in meeting specific color requirements.
Resin and Film Coloring Agents
Carbon black has high tinting strength and is thermally stable, and therefore it is widely used for general coloring for resins and films. Carbon black is also excellent for absorbing ultraviolet light, providing both a superb resistance against ultraviolet rays and a coloring effect when just a small amount is mixed with resins. Carbon black based resins are used in automobile bumpers, wire coverings and steel pipe linings which require weather resistance in particular.
Electric Conductive Agent
Carbon black particles have a graphite-like crystalline structure, providing excellent electric conductivity. Therefore, carbon black is widely used as conductive filler, mixed in plastics, elastomers, paints, adhesives, films, and pastes. For example, fuel caps and fuel-introducing pipes for automobiles are required to provide electric conductivity for preventing static and carbon black is an excellent antistatic agent.
Electrostatic Discharge (ESD) Compounds
Carbon blacks can be designed to transform electrical characteristics from insulating to conductive in products such as electronics packaging, safety applications, and automotive parts.
Plastics
Carbon blacks are widely used for conductive packaging, films, fibers, moldings, pipes and semi-conductive cable compounds in products such as refuse sacks, industrial bags, photographic containers, agriculture mulch film, stretch wrap, and thermoplastic molding applications for automotive, electrical/electronics, household appliances and blow-molded containers.
High Performance Coatings:
Carbon blacks provide pigmentation, conductivity, and UV protection for a number of coating applications including automotive (primer basecoats and clearcoats), marine, aerospace, decorative, wood, and industrial coatings.
Raw Materials and Equipment
The principal raw material used in our manufacture of carbon black is the residual heavy oils derived from distillation of coal tars. Raw material costs generally are influenced by the availability of various types of carbon black feedstock and natural gas, and related transportation costs.
Shanxi Province, where Hongxing’s facilities are located, is rich in coal tar resources, giving the Company an ample supply of raw materials. Even under serious competition for coal tar supply, Hongxing’s management believes that it would be able to stabilize its supply chain. Additionally, as Hongxing expands its operations, it anticipates that it will garner greater purchasing power, which in turn will bring the company greater leverage in pricing.
We have entered into long term contracts with a number of suppliers. Such long term contracts in our industry are typically for one year term due to the fluctuating prices of raw materials. We believe these contracts help us maintain regular production capacity even when supply experiences a shortage. During the year, the contracts guarantee the supply of specified amount of raw materials from the supplier, but the exact purchase price is determined by market conditions at the time purchase occurs. We keep good relationships with our suppliers, and we believe they grant us priority in purchase of raw materials at a competitive price. Because the price of raw materials fluctuates in accordance with supply and demand, the price of our end products will reflect the price fluctuation of the raw materials.
Production equipment includes the following: burning furnace, reaction furnace, heat collecting furnace, air heater, dyer, industrial blender, air blower, industrial vacuum, oil pre heater, pressuring air generator, oil pump, water pump, air filter, lifter, storage container, packaging machine, DCS controller etc. Production equipment is manufactured according to our specifications in accordance with national safety standards.
Suppliers
For the last two fiscal years, Hongxing’s top suppliers from whom the Company purchased more than 10% of its total purchase were as follows:
Customers
The following table illustrates the percentage of sales to each of our major customers in the last two fiscal years.
Sales and Marketing
Because carbon black is essentially a commodity and there are relatively few large end users, the industry is relationship and price-driven rather than directed by marketing efforts. To that end, Hongxing’s sales team focuses on spending time with existing and potential customers. Hongxing has assigned an exclusive sales person for each major market, and each of its target customers is visited frequently. Currently, the majority of sales occur in Shandong, Jiangsu and Guangdong Provinces.
Hongxing’s target market is large rubber companies and tire producers, and the Company’s management believes it has strong relationships with existing customers. With its effective, dedicated sales network, high quality product, reasonable price and strong after-sale service, management believes that as many as 90% of Chinese tire manufacturers are familiar with its products.
Currently our production falls short of market demand. In spite of this, we seek to expand our business presence and distribution channels in China. We have established an office in Qingdao, Shandong province, with plans to expand our business into areas where major tire manufacturers are located.
We plan to promote our products and increase our brand awareness through our relationships with several trade companies in Qingdao, Shangdong Province, where enterprises situated within the area enjoy the preferential policies such as tax rebates for exports and tax-free trading within the bonded area. Meanwhile, we will continue to cultivate good relations with additional rubber and plastic companies.
Growth Strategy
We have a multi-prong growth strategy, with the objective of establishing the Company as a leading manufacturer and marketer in China’s growing carbon black sector, with a particular emphasis in the tire and automotive industries.
To execute this strategy, we intend to implement the following plan:
Complete conversion of existing production facilities. The primary component of this strategy is the addition of wet processing capabilities, which will provide the Company and its customers with several benefits, as discussed below. The capacity of the first completed wet line is approximately 25,000 tons per year. In September 2012, the Company decided to renovate and convert its three dry production lines to specialty carbon black production lines with a total production capability of 18,000 tons per year. The project is to be completed at the end of June 2013. The total estimated cost is approximately $4 million, funded by the Company’s cash from operations.
Low-carbon and clean production. To pave the way to low-carbon and clean production, we seek to use natural gas to enhance its production process for energy conservation and emission reduction. The project was completed. We are using natural gas as fuel in wet production line, which will increase the quality of our products. Secondly, we are planning to build a power plant to recycle the exhaust gas produced in the manufacturing process to generate electricity needed in the production.
Development of superior end product. Wet carbon black products are more stable than dry carbon black products in quality and performance. In the next five years, we believe our clients will require their carbon black to be denser and of higher quality to satisfy these three properties: lower rolling resistance, higher wet skid resistance, and stronger wear resistance. This denser, higher quality carbon black can only be produced through wet processing means.
Improved Margins. The wet granulation method will improve the gross profit margin also. While the raw materials expense is the same, the wet process will consume less raw materials and yield higher quality end product, enabling the Company to charge a premium for wet process carbon black.
Expansion of the distribution network. Management believes the domestic market represents a substantial opportunity, particularly as China’s rural economy is modernized. The nation’s growing “middle class” continues to increase demand for automobiles. To this end, we will continue to add to our dedicated sales force within existing markets, in addition to expanding into new geographic areas.
Expansion of production capacity. We will continue to expand our current production capacity in the future. We intend to add new wet granulation production lines. We have the option of building a new wet line with 40,000 tons of capacity per year, or acquiring a target company with wet production capacity. We will continue to evaluate alternatives to add production capacity to our carbon black operation by analyzing the cost benefits of acquisition versus build out.
Investment in recyclable energy. In conjunction with the addition of these new production lines, subject to the availability of financing, the Company intends to construct a thermal power plant within its facility campus that would use the exhaust gas generated from the manufacturing of the carbon black to generate electricity. There are no specific plans for construction of a thermal plant at this time.
Continue to Develop and Market New Products. As China continues the shift from an agricultural market to a “controlled” capitalist environment, the demand for other carbon black related products, such as toner, high performance paints, electric materials, etc. is expected to expand as well. Management will be opportunistic in its approach to new product development. Line extensions are expected to come as a result of thorough internal research and development, customer requests, and acquisitions. In conjunction with the expansion of production capacity, we plan to continue to target and cater to the needs of both our new and existing customers.
Quality Control
Carbon black dust spreads easily in the air through virtually any air current or movement. Additionally, because carbon black is a pigment, it can stain exposed surfaces. We remain concerned with the effects of our operations on our employees and the environment, and to that end, management has instituted specific procedures that minimize the production of dust and optimize working conditions. These specific procedures entail strengthening the Company’s previous measures and standards, including upgrading the granulator, installing the dust-absorption to equipment by section and classification, and upgrading previously manual operations to a numerically controlled automatic packing system.
It is management’s belief based on industry experience that generally, there are no negative clinical health effects to the manufacture of carbon black. However, our facilities are subject to regular inspection to ensure they comply with health, safety and environmental regulations. This includes regular maintenance of equipment, training of employees with regard to handling of carbon black, and regular review of emergency response to conditions associated with the use of carbon black.
Hongxing’s advanced technology and scientific means of detection have met the PRC’s environmental protection and safety requirements. Our carbon black products have been verified by the ISO9000 quality system certification, and were identified by the Industrial Technology Research Institute. Our products are fully in compliance with national standards. To meet the environmental protection and safety standards, we are monitored by the local Environmental Protection Monitoring Station. These inspections are carried out in three aspects: (i) air surveillance, using a TH0150C large air sampler and TG328B analysis libra, and measuring against the national air pollutant emission standard, (ii) noise surveillance, using a HS6288D noise analysis instrument and measuring against the national industrial enterprise factory boundary noise emission standard and (iii) water surveillance, using a series of analysis instruments such as TG328B analysis Libra and measuring against the national standard for general wastewater discharge.
We were awarded the “Orange Company Prize” by Shanxi Environment Protection Administration in 2008. The Orange Company Prize is awarded by the provincial environmental government to indicate our environment protection standards meet the required standards. The Bureau of Environmental Protection of Taiyuan classifies the local companies into five categories by different environment protection level being achieved. Among them, the green and blue awards are the top two levels, which usually go to the agricultural business, while red and black levels mean that the company has failed to meet environmental protection standards. The Orange award means the Company met all the required standards, such as us.
Competition
We are in a very competitive and concentrated market. We have an annual capacity of 61,000 tons in the year of 2011. Our annual capacity temporarily reduced to 43,000 tons in the year of 2012 due to the conversion construction taken place on our three dry production lines during that year.
Our competitive advantages are as below:
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We are close to the areas where our raw material, coal tar oil is produced. As a result, we could have stable raw material suppliers with lower transportation cost.
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We are growing with our customers together.
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Our flat management structure lowered management cost.
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As a result of the foregoing, we have a higher net profit rate compared to the top manufacturers in China.
Since new participants have to undergo a long period of production before they are capable of satisfying large quantity orders, management believes our primary competition lies in current market participants. Currently carbon black manufacturers are expanding their facilities through the use of new technologies and acquisition, new participants will find it very difficult to gain market share. The entry requirements for entering the industry have become tougher.
One of the largest barriers to entry is developing solid long-term clients. We believe we already have long-term relationships with several of our important customers, like Xuzhou Xulun Rubber Co., Ltd, Shifeng Juxing Tire Co., Ltd and Shandong Luhe Group Co., Ltd.
Intellectual Property
Our trademark “Great Double Star” was registered with the State Administration for Industry and Commerce, Trademark Office, and is valid from February 14, 2008 to February 13, 2018. It is registered for use with Commodity (Type 1), namely industrial carbon black, chemical rubber enhancer, industrial chemicals, activated carbon, accelerants, fixative, gas purifying agent, rubber preservatives, and chemicals for industrial usage.
Government Regulation
Environmental Regulation
Hongxing’s operation and facilities are subject to environmental laws and regulations stipulated by the national and the local environment protection bureaus in China. Relevant laws and regulations include provisions governing construction of production lines, air emissions, water discharges and the management and disposal of hazardous substances and wastes, more particularly, the laws on environment protection, water and air pollution, air pollutant emission standards, general wastewater discharge standards and industrial enterprise factory boundary noise emission standards.
On November 15, 2004, Hongxing obtained a construction commencement approval for its construction of one production line with production capacity of 12,000 tons of carbon black per year from the Taiyuan Municipal Environmental Protection Bureau. Failure to obtain the necessary environmental approvals for construction of our production lines and pollution emission permits may subject us to fines and, in some cases, may even result in the mandated cessation of production. However, Hongxing is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection, nor has it been subject to any action made by any environmental administration authorities of the PRC.
Regarding the cost of compliance, our annual investment in environmental protection equipment totals 7.9 million RMB ($1.26 million). That includes 5.4 million RMB ($0.86 million) on bag-filtering deduster, 1.6 million RMB ($0.25 million) on wastewater treatment equipment, and 900,000 RMB ($140,000) for the change of filtering bag and related materials.
Hongxing maintains controls at its production facilities to facilitate compliance with environmental rules and regulations. Hongxing is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection, nor has it been subject to any action made by any environmental administration authorities of the PRC. To management's knowledge, Hongxing’s operation meets or exceeds the existing requirements of the PRC.
Employees
As of February 15, 2013, Hongxing had 202 full time employees.
Hongxing maintains good relations with its employees. All of its employees belong to the Labor Union committee of Taiyuan Hongxing Carbon Black Co., Ltd., it is a self-operated organization but governed by the General Labor Union of Xigu Village, Qingxu County.
Hongxing is required to contribute a portion of its employees' total salaries to the Chinese government's social insurance funds, including medical insurance and unemployment insurance and to purchase job injuries insurance for employees, in accordance with relevant regulations. The government's social insurance funds account for 10% of employees' total salaries, while job injuries insurance premiums are about RMB 50 ($8) per person per year. Hongxing expects the amount of its contribution to the government's social insurance funds and the cost related to job injuries insurance to increase in the future as it expands its workforce and operations.
Executive Offices
Our executive office in China for Hongxing is located at Qingxu County, Taiyuan, Shanxi Province, Tel: 86-351-5966868, and Fax: 86-351-5966308. Our company website address is: www.asiacarbonindustries.com.
Risk of Loss and Product Liability Insurance
The Company doesn’t have any product liability insurance for its products.
Item 1A.
Item 1A.
Risk Factors
Not applicable.
Item 1B.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Item 2.
Properties
All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants landholders a "land use right" after a purchase price for such "land use right" is paid to the government. The "land use right" allows the holder the right to use the land for a specified long-term period of time and enjoys all the incidents of ownership of the land. The following are the details regarding Shanxi Hongxing’s land use rights.
Land Use Rights through Grants from Land Administrative Bureau
As of December 31, 2012, we occupied buildings as set forth below:
Owned Premises
Leased Premises
As of December 31, 2012, we had the following leases over two pieces of land used for production line construction:
(1)
49 mu (8.07 acre) parcel of land. The lease terms are for a yearly payment of RMB10,000 ($1,605) through July, 2053.
(2)
Second 49 mu (8.07 acre) parcel of land. The lease terms were for a yearly payment of RMB 10,000 ($1,605) through June, 2056.
Item 3.
Item 3.
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 4.
Item 4.
Mine Safety disclosures
Not Applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Equity and Related Stockholder Matters
From December 2, 2010 to March 26, 2012, our common stock had been quoted on the OTC Bulletin Board under the symbol ACRB. Prior to December 2, 2010, there was no active market for our common stock. Since March 27, 2012, our common stock has been quoted on OTCQB tier of the OTC Market. The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board and OTC Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
The last reported sales price of our common stock on the OTC Market on December 31, 2012 was $0.19.
The Securities and Exchange Commission has rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system.
Holders
According to the records of our transfer agent, as of February 20, 2013, there were approximately 59 holders of record of our common stock.
Dividends
The payment of dividends, if any, is at the discretion of the Board of Directors (“BOD”) and is contingent on the Company's revenues and earnings, capital requirements, financial conditions. We currently intend to retain all earnings, if any, for use in business operations. Accordingly, we do not anticipate declaring any dividends in the near future.
Securities Authorized for Issuance under Equity Compensation Plans
On September 13, 2011, our BOD authorized the adoption of the 2011 Incentive Stock Plan of Asia Carbon Industries, Inc. (the “Plan”). Under the Plan, we are authorized to issue an aggregate of 5,000,000 shares of Common Stock to directors, executives and selected employees and consultants.
On September 30, 2011, we granted options to purchase 220,000 shares and 75,000 shares of Common Stock to our Chief Financial Officer, Xiaolong Zhou and our director, Michael Segal, respectively, for their services to us from July 1, 2011 to December 31, 2011 under the Plan. The options have an exercise price of $0.64 per share and may be exercised cashlessly. The options are valid for a term of three years from January 1, 2012 to December 31, 2014.
On March 16, 2012, the BOD authorized the Company to issue 1,000,000 shares of Common Stock to ten senior managers and key employees as part of compensation for 2012 under the Plan.
On February 6, 2013, the BOD authorized the Company to issue an aggregate of 2,000,000 shares of Common Stock to certain directors, executive offers and key employees as part of compensation for 2013 under the Plan.
The following table provides information as of December 31, 2012 of our outstanding equity compensation plans and arrangements.
Equity Compensation Plan Information
*This amount did not include the 2 million shares issued to certain directors, executive officers and key employees on February 6, 2013.
Recent Sales of Unregistered Securities
On March 15, 2012, the BOD approved the issuance of 156,250 shares of Common Stock to an investor for $100,000.
On May 3, 2012, the BOD approved the issuance of 222,222 restricted shares of Common Stock to two investors for $100,000.
On November 29, 2012, the BOD approved the issuance of 500,000 shares of Common Stock to two investors for $100,000.
Effective as of March 7, 2013, the BOD authorized the issuance of 31,848 shares of Common Stock to Michael Segal for his past service to the Company as a director. Mr. Segal resigned from his directorship position the same day.
All of the above offerings and sales were deemed to be exempt under either rule 506 of Regulation D and Section 4(2) or Rule 902 of Regulation S of the Securities Act of 1933, as amended.
Item 6.
Item 6.
Selected Financial Data
Not applicable.
Item 7.
Item 7.
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 these 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 two “hard” and one “soft” carbon black products, N220, N330, and N660, respectively. N220 and N330 are hard carbon black. N220 has good strength and elongation properties, and is mainly used in the manufacturing of automobile tires. N330 has a lower production cost and is mainly used in manufacturing the sides of automobile tires. N660 is a soft carbon black which has the flexibility necessary for the production of automobile tire inner tubes and hoses.
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 exhaust gas generated from the Company’s carbon black manufacturing process, the plant’s capacity is expected to satisfy the Company’s electricity needs for its current production lines. The cost of the construction of the plant is $6.4 million. The power plant is currently in its testing stage. Management estimates the plant will bring savings of $570,000 annually given the current production capacity.
In September 2012, the Company began converting its three dry production lines to special carbon black (“SCB”) production lines. SCB has a broader range of use 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. Management believes SCB will generate more revenues as a result of higher sales prices. The conversion affected the Company’s operating results of 2012 since the three dry production lines ceased operations during the fourth quarter. The conversion will continue to have a negative impact on the Company’s 2013 operating results until its completion. This project is funded by the cash from the Company’s operations. The total estimated cost is $4 million. The project is expected to be completed by the second quarter of 2013.
Results of Operations
Comparisons for the Years Ended December 31, 2012 and 2011
Sales
Sales for 2012 totaled $45,937,814, a decrease of $3,184,230, or 7%, compared to $49,122,044 for 2011. The decrease in sales was attributable to the decrease in unit sales price. The average sales price of our products was $908 per metric ton during 2012, a decrease of $81, or 8%, from $989 during 2011.
During 2012, the Company sold 46,518 metric tons of carbon black, a decrease of 1,135 metric tons, or 2%, compared to 47,653 metric tons of carbon black in 2011. The decrease was attributable to our SCB renovation project. Beginning in October 2012, the Company terminated production on its three dry carbon black production lines and began to convert them to SCB production lines.
Cost of Sales
Cost of sales was $35,307,446 for 2012, a decrease of $2,512,663, or 7% compared to $37,820,109 in 2011. It was mainly attributable to the decrease in average purchase price of coal tar. The average price of coal tars was $384 per metric ton during 2012, a decrease of $16 per metric ton, or 4% from $400 per metric ton during 2011. The decrease in cost of sales was also attributable to the decrease of the quantity of coal tar used in 2012. 77,339 metric tons of coal tar was used in 2012, a decrease of 9,475 metric tons, or 11% compared to 86,814 metric tons in 2011. The decrease in use of coal tar was a direct result of the Company's use of natural gas as fuel in production starting from 2012. We estimated 4,750 tons of coal tar was saved by using natural gas as fuel in 2012.
Gross Profit
Gross profit was $10,630,368 in 2012, a decrease of $671,567, or 6%, compared to $11,301,935 in 2011. The decrease was a result of the decrease in sales (7% in 2012). The gross profit rate was 23% for both 2012 and 2011.
Operating Expenses
Operating expenses included depreciation, allowance for bad debts, selling, professional and consulting fees and other general and administrative expenses. Operating expenses were $1,563,817 in 2012, an increase of $355,851, or 29% compared to $1,207,966 in 2011.
The increase in operating expenses was attributable to an equity award granted under the Company’s 2011 Incentive Stock Plan (the “Plan”). 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 to ten senior managers or key employees as part of compensation for 2012. The estimated cost of $450,000, which was based on the $0.45 closing price of the Company’s common stock on March 15, 2012, was included in other general and administrative expenses.
Selling expenses increased $36,458, or 12%, to $341,703 in 2012 from $305,245 in 2011. The increase was mainly attributable to increased delivery cost, a direct result of higher gas prices.
The increase in selling expenses and other general and administrative expenses was offset by the decrease of professional and consulting fees. Professional and consulting fees were $266,501 in 2012, a decrease of $164,299, or 38% compared to $430,800 in 2011. The decrease resulted from a reduction in non-cash expenses in 2012. Included in professional and consulting fees in 2011, non-cash expenses totaled $153,665: common stock issued for investor relations services was $17,750; options issued for investor relation services were valued at $69,600; options issued to Chief Financial Officer were $49,736 and to a director were $16,579.
Net Income
Net income was $6,453,248 in 2012, a decrease of $858,033, or 12%, compared to $7,311,281 in 2011. Net income per share was $0.12 in 2012 and $0.14 in 2011. The 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 $6,664,444 and $8,092,411 as of December 31, 2012 and 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.
Accounts receivable were $3,622,644 and $4,404,319, or 29% and 28%, of current assets, as of December 31, 2012 and 2011, respectively. The Company had five 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.
Accounts receivable aging as of December 31, 2012 and 2011 was as follows:
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 $71,785 and $84,935 as of December 31, 2012 and 2011, respectively.
Net cash provided by operating activities was $8,282,358 in 2012, a decrease of $344,445, compared to $8,626,803 in 2011. The decrease in net cash provided by operating activities was mainly due to a decrease in net income of $858,033 and adjustments as a result of changes in working capital components. The changes in working capital components primarily contributing to the increase in cash flow used in operating activities were: (i) a decrease of $794,825 in accounts receivable and (ii) a decrease in inventories of $753,635, offset by a decrease in accounts payable of $2,046,836.
Net cash used in investing activities were $9,348,419 and $6,663,431 in 2012 and 2011, respectively. Capital expenditures of $940,024 in 2012 was for the construction of the Company’s new warehouse, $5,966,012 for the construction of power plant, $2,398,408 for the special carbon black production lines and $43,975 for purchase of other equipment. Capital expenditures of $6,663,431 in 2011 was for the Company’s natural gas and by-product processing projects.
Net cash provided by financing activities was $224,335 and $310,886 in 2012 and 2011, respectively. During 2012, the Company received $250,015 from private investors. The Company repaid short term loans of $2,734,470 and obtained new short term loans of $2,708,790. In 2011, the Company received $305,293 from private investors. The Company repaid short term loans of $1,376,074 and obtained $1,376,074 short term loans. The Company also received a $5,593 advance from CEO, a major shareholder.
Short Term Debt
Short term debt at December 31, 2012 and 2011 consisted of the following:
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.
On April 28, 2012, the Company repaid the $511,658 loan to Xigu Credit Union and borrowed $505,970 from the same at 14.43% due December 27, 2012. On the due date, the Company repaid Xigu Credit Union the principal and borrowed $497,581 from the same at 12% due December 26, 2013.
On April 28, 2012, the Company repaid the $864,416 loan to Chengguan Credit Union and borrowed $860,785 from the same at 14.43% due December 27, 2012. On the due date, the Company repaid the principal to Chengguan Credit Union and borrowed $866,433 from the same at 12% due December 26, 2013.
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 and loans from banks will be sufficient to enable us to meet our cash requirements for the next 12 months. However, as we are seeking to increase our production capacity in the near future, and it is possible that cash from operations will not be 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.
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, Ms. Guoyun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO 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 it was repaid at which point the guaranty obligation extinguished. The Loan was repaid in full in September 2012 and Liteweisi and Hongxing’s joint guaranty obligation extinguished accordingly.
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
Revenue is recognized when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. 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.
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 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Item 8.
Financial Statements and Supplementary Data
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
F - 1
Consolidated Balance Sheets
December 31, 2012 and 2011
F - 2
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 2012 and 2011
F - 3
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2012 and 2011
F - 4
Consolidated Statements of Cash Flows
Years Ended December 31, 2012 and 2011
F - 5
Notes to Consolidated Financial Statements
F - 6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Asia Carbon Industries, Inc.
We have audited the accompanying consolidated balance sheets of Asia Carbon Industries, Inc. and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2012 and 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Asia Carbon Industries, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years ended December 31, 2012 and 2011, in conformity with the U.S. generally accepted accounting principles.
Goldman Kurland and Mohidin LLP
Encino, California
March 18, 2013
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these consolidated financial statements.
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2012 AND 2011
The accompanying notes are an integral part of these consolidated financial statements.
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these consolidated financial statements.
ASIA CARBON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
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 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 Agreements 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 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 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. Chunde 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
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” or “US$”).
The assets and liabilities of Hongxing and Liteweisi are translated into US dollars at year-end exchange rates. The revenues and expenses are translated into US dollars at average exchange rates of the years reported. 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:
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 statements of income and comprehensive income. There was no material foreign currency transaction gain or loss for 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.
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 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.
Advertising Costs
Advertising costs are expensed as incurred. There were no material advertising costs for 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 2012 and 2011.
Segment Information
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 coal tar. 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 with 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 liability 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, “Income Taxes”, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
Reclassifications
Certain prior year amounts were reclassified to conform to the manner of presentation in the current year.
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.
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 the Company’s 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
Accounts receivable at December 31, 2012 and 2011 consisted of the following:
NOTE 4 - INVENTORIES
Inventories at December 31, 2012 and 2011 consisted of the following:
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at December 31, 2012 and 2011 are summarized as follows:
Depreciation of property, plant and equipment was $1,806,002 and $1,322,452 for 2012 and 2011, respectively. Depreciation included in cost of sales was $1,572,586 and $1,086,687 for 2012 and 2011, respectively.
The Company constructed a 3000KW power plant including a water recycling system in 2012, which is utilizing residual exhaust gas generated from the Company’s carbon black manufacturing process. Management expects the power plant will satisfy the Company’s electricity needs for its current production capacities. Total cost of construction of the plant was $6.4 million. The power plant is currently being tested.
Starting 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. Total budgeted investment for SCB production lines is $4 million. 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 line. The Company depreciates these assets during the construction period using estimated remaining useful lives until they are reused, sold, or disposed of.
NOTE 6 - LAND USE RIGHTS, NET
On December 29, 2005, the Company lent RMB554,130 ($88,943) 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 ($1,605) 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 ($160,510) to the Village. The loan was interest free and due October 31, 2010. The Village failed to repay the loan by 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 ($1,605) from June 2006 through June 2056. 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.
As of December 31, 2012 and 2011, land use rights were as follows:
Amortization of land use rights was recorded as rent. Rent expense was $4,927 and $4,809 for 2012 and 2011, respectively.
As of December 31, 2012, the estimated annual amortization of land use rights for the next five years and thereafter is as follows:
NOTE 7 - SHORT TERM DEBT
Short term debt at December 31, 2012 and 2011 consisted of the following:
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.
On April 28, 2012, the Company repaid the $511,658 loan to Xigu Credit Union and borrowed $505,970 from the same at 14.43% due December 27, 2012. On the due date, the Company repaid Xigu Credit Union the principal and borrowed $497,581 from the same at 12% due December 26, 2013.
On April 28, 2012, the Company repaid the $864,416 loan to Chengguan Credit Union and borrowed $860,785 from the same at 14.43% due December 27, 2012. On the due date, the Company repaid the principal to Chengguan Credit Union and borrowed $866,433 from the same at 12% due December 26, 2013.
NOTE 8 - TAXES PAYABLE
Taxes payable at December 31, 2012 and 2011 consisted of the following:
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.
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 ten 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 expensed this compensation cost in 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, Ms. Guoyun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO for a loan totaling RMB18 million ($2,889,180) (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.
NOTE 10 - STOCKHOLDERS’ EQUITY
On September 13, 2011, the BOD passed a resolution to issue and sell 151,910 shares of common stock of the Company to two accredited investors in China for $121,528 at $0.80 per share. The stock was valued at $0.71 per share (the market closing price on September 12, 2011).
On September 13, 2011, the BOD passed a resolution to issue 25,000 shares of common stock of the Company to Cody Management for 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 in 2011.
On September 13, 2011, the BOD passed a resolution to grant options to purchase 400,000 shares of the Company’s common stock at $1.00 per share to three individuals for investor relations services. The $69,600 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 52%; stock price of $0.71 per share; exercise price of $1.00 per share; and term of three 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 December 31, 2014. The $66,315 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 52%; stock price of $0.64 per share; exercise price of $0.64 per share; and term of 3 years.
On December 23, 2011, the BOD passed a resolution to issue and sell 193,593 shares of common stock of the Company to three accredited investors in China for $133,780. The stock was valued at $0.64 per share (the market closing price on December 22, 2011).
On March 15, 2012, the 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).
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 December 31, 2012 and 2011, the Company’s uninsured cash balances were approximately $6,632,000 and $8,029,000, respectively.
NOTE 12 - INCOME TAXES
The provision for income taxes was $2,447,300 and $2,661,717 for 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 $9,647,337 and $10,502,057 for 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 December 31, 2012, approximately $27,244,000 of accumulated unadjusted earnings of non-US subsidiaries was indefinitely invested. At the existing US federal income tax rate, additional taxes of approximately $2,452,000 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 December 31, 2012 and 2011.
For 2012 and 2011, reconciliation of the differences between the statutory US Federal income tax rate and the effective rate was as follows:
At December 31, 2012, the Company had US net operating loss carry forwards of approximately $1,679,000. A 100% valuation allowance was recorded against their potential tax benefit due to the uncertainty of its realization.
NOTE 13 - MAJOR CUSTOMERS AND VENDORS
During 2012, four customers accounted for 63% of sales. During 2011, five customers accounted for 85% of sales. The percentage of sales during 2012 and 2011 and accounts receivable balances at the end of the years to these customers were as follows:
The Company purchased raw materials predominantly from seven vendors in 2012 and from eight vendors in 2011. The percentage of total purchases from vendors from which the Company bought over 10% of its total purchases and accounts payable balances at the end of the years to these vendors were as follows:
NOTE 14 - SUBSEQUENT EVENTS
On February 6, 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 ten senior managers and key employees as part of compensation for 2013. 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 will expense this compensation cost in 2013.
Effective 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.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our President, Chief Financial Officer and Secretary, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, our President, Chief Financial Officer and Secretary concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
As of December 31, 2012, our management, under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, performed the process of evaluating the effectiveness of our internal control over financial reporting as required by Rules 13a-15(c) and 15d-15(c) under the Exchange Act. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework , including the following five framework components: i) control environment, ii) risk assessment, iii) control activities, iv) information and communications, and v) monitoring.
Our management evaluated the design and operating effectiveness of our internal control over financial reporting as part of this assessment, using its knowledge and understanding of our organization, operations, and processes, to determine, in its judgment, the sources and potential likelihood of misstatements in financial reporting. Based on this assessment, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that our internal control over financial reporting was not effective as of December 31, 2012.
Specifically, our management identified certain matters involving internal control and our operations that it considered to be material weaknesses. As defined in the Exchange Act, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified by our management as of December 31, 2012, are described below:
We lacked sufficiently-trained personnel to provide for adequate segregation of duties within the accounting system and effective oversight of controls over access, change, data, and security management. Because this control deficiency, and the related segregation of duties constraints, is pervasive in nature and impacts all significant accounts, our management believes this deficiency rises to the level of material weaknesses.
Plan for Remediation of Material Weaknesses
As financial conditions permit, we plan to take the following actions to improve our internal control over financial reporting, including actions to remediate those material weaknesses identified.
1.
Recruit qualified staff for internal control positions and develop a suitable internal control system to provide effective oversight of our internal control over financial reporting.
2.
Establish a suitable internal control system within the Company in accordance with the SOX compliance requirements. We may look for outside help, including engage the services of qualified consultants with Chinese GAAP, US GAAP and SEC reporting experiences.
3.
Continue training for all accounting and other related staff.
Our management will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures, as well as its internal control over financial reporting, on an ongoing basis, and is committed to taking further action and implementing additional improvements, as necessary and as funds allow. However, our management cannot guarantee that the measures taken or any future measures will remediate the material weaknesses identified or that any additional material weaknesses or significant deficiencies will not arise in the future due to a failure to implement and maintain adequate internal control.
Because we are a smaller reporting company, we are exempt from the requirement under Section 404(b) of the Sarbanes-Oxley Act of 2002 to include in the annual report an attestation report of the independent registered public accounting firm regarding internal control over financial reporting, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
During the most recent quarter ended December 31, 2012, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
Effective February 6, 2013, the BOD approved the grant of an aggregate of two million (2,000,000) shares of Common Stock to certain directors, executive officers and employees of the Company under the Plan.
Under the Plan, the Board granted (i) 700,000 shares of the Common Stock to Ms. Guoyun Yao, our Chairman and Chief Executive Officer, (ii) 600,000 shares of the Common Stock to Mr. Chunde Meng, our Chief Operating Officer, (iii) 50,000 shares of the Common Stock to each of Mr. Baozhu Ren and Mr. Jianjun Wang, both are our directors and (iv) 30,000 shares of the Common Stock to each of Mr. Lei Shi, our director and Mr. Xiaolong Zhou, our Chief Financial Officer. The remaining 540,000 shares of the Common Stock were granted to eleven key employees.
Effective March 7, 2013, the BOD authorized the Company to issue 31,848 shares of Common Stock to a director for his past services. The issuance was based on exemption under Section 4(2) of the Securities Act of 1933, as amended.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The following are our officers and directors as of March 10, 2013. All of our officers and directors are residents of the PRC and, therefore, it may be difficult for investors to effect service of process within the US upon them or to enforce judgments against them for judgments obtained from the US courts.
The following table sets forth certain information concerning our current directors and executive officers:
Biographies
Guoyun Yao founded Hongxing in December 2003 and has served as Chairman of Hongxing since that time. Since May 2010, Ms. Yao has also serves as Chief Executive Officer, President, and Secretary of the Company. She is responsible for the day-to-day management and major decision-making in the operating company. She has also served as the general manager of Chongxing Qingxu County Tapestry Limited since January 1998. Prior to joining the Company, from 1987 to 1993, Ms. Yao was general manager of the Xigu Village Carpet Processing Co., Ltd. She also worked at the bureau of City Management of Qingxu County from January 1994 to December 1997, which engaged in construction work. Yao participated in the “National Economy Training Program of Women” in Shanxi Province in 2006. She was awarded “Woman of the Year in Taiyuan Economy” in 2007. She was elected the member of Chinese People’s Political Consultative Conference (CPPCC) Committee in Qingxu County for two consecutive terms (2007 and 2008). Ms. Yao’s knowledge and expertise in the Company’s industry, her history with the Company, her management skills and other business experience and acumen led to the Board’s conclusion that Ms. Yao should serve as Chairman of our BOD.
Chunde Meng joined Hongxing in 2003 as head of the Company’s market development team and in December 2003 he became General Manager of Hongxing, primarily responsible for operations and sales. Since January 1998, he has also served as the Chairman of Chongxing Qingxu County Tapestry Limited. Prior to that, Mr. Meng was a project manager in the bureau of City Management of Qingxu County from January 1994 to December 1997. In 2004, he participated in the training program of Zhongyu Carbon Black Rubber Group Training Association and won the honorary titles “Model Worker in Qingxu County" in 2006 and "Economy Model in Qingxu County" in 2007. Mr. Meng’s knowledge and expertise in the Company’s industry, his history with the Company, and his other business experience and acumen led to the Board’s conclusion that Mr. Meng should serve as a member of our Board.
Xiaolong Zhou was appointed as our Chief Financial Officer on September 1, 2008. He had been a senior accountant in Liss Okou Goldstein Okun and Tancer CPA'S P.C. in Great Neck, New York for the prior nine years. He is a certified public accountant, registered in the state of New York, a member of the American Institute of Certified Public Accountants, and a member of the New York State Society of Certified Public Accountants. Mr. Zhou obtained an M.B.A. in accountancy degree from Baruch College of CUNY and an M.A. in economics degree from City College of CUNY. He obtained a B.A. in economics degree from Fudan University, Shanghai, China.
Lei Shi joined Hongxing in October 2004 and has been serving as Deputy General Manager of Corporate Finance and Sales since then. Prior to joining Hongxing, from January 1999 to September 2004, Mr. Shi served as a tax collector with the taxation agency of Qingxu County. Mr. Lei graduated from Shanxi Finance & Taxation College in 1998. Mr. Lei’s industry experience, his history with Hongxing, and his diverse business experience and acumen in tax led to the Board’s conclusion that Mr. Shi should serve as a member of our BOD.
Jianjun Wang joined Hongxing in October 2007 and has been serving as Deputy General Manager of Finance since then. Mr. Wang is a certified accountant in China. Prior to joining Hongxing, he was an accountant at Taiyuan Gengyang Industrial Group Corporation from March 2004 to February 2006 and at Shanxi Longhui Gas Co., Ltd, and Shanxi Yaxin Coal Co., Ltd. from March 2006 to September 2007. Mr. Wang’s industry experience, his history with Hongxing, and his diverse business experience and acumen in accounting led to the Board’s conclusion that Mr. Wang should serve as a member of our BOD.
Baozhu Ren served as a Deputy General Manager at Hongxing since May 2008. Before joining the Company, he was the General Accountant of Shanxi Construction Machinery from May of 1988 to May 2008. Mr. Ren received a Bachelor’s Degree from Shanxi Financial Institution in 1984. Mr. Ren’s experience and education in accounting and his familiarity with the Company makes him a valuable member to our BOD.
Directors and Officers of Hongxing
The following table sets forth certain information as of March 10, 2013 concerning the directors and executive officers of our operating entity, Hongxing. The information regarding Guoyun Yao, Chunde Meng, Baozhu Ren, Lei Shi and Jianjun Wang is set forth above.
Faqua Bai joined Hongxing in August 2004 as a director of production and has been serving as a director and deputy general manager of Hongxing since March 2006. Prior to joining Hongxing, from March 1996 to January 2000, he was the workshop director of Shenhua Carbon Black Company, managing a dry production line which has an annual output of 6,000 tons. He was promoted to the deputy director of production in February 2000, in charge of production safety.
Tielong Fu joined Hongxing in 2011 and has been serving as Chief Engineer since then. Prior to joining Hongxing, from 2008 to 2011, he served as Chief Engineer of Taiyuan Shen Tai Chemical Co. Ltd. From 2002 to 2007, Mr. Fu was the Chief Operation Officer of Shanxi Heng Da Chemical Co., Ltd.
The directors will serve until our next annual meeting, or until their successors are duly elected and qualified. The officers serve at the pleasure of the Board.
When evaluating candidates for election to the BOD, the Company seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.
The BOD does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.
Presently, we do not have “independent director” under the Corporate Governance Rules of the NASDAQ Stock Market, Inc., Rule 5605(a)(2).
Mr. Chunde Meng and Ms. Guoyun Yao are husband and wife. The other directors and officers have no family relationships among each other.
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
●
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
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Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
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Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
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Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
●
Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Audit Committee Financial Expert
Our BOD currently acts as our audit committee and is still in the process of finding an “audit committee financial expert” as defined in Regulation S-K.
Audit Committee
We have not yet appointed an audit committee. At the present time, we believe that the members of BOD are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We do, however, recognize the importance of good corporate governance and intend to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.
Compensation Committee
We do not presently have a compensation committee. Our BOD currently acts as our compensation committee.
Nominating Committee
We do not presently have a nominating committee. Our BOD currently acts as our nominating committee.
Board Leadership Structure
Guoyun Yao is our chairwoman and chief executive officer. At the advice of other members of the management or the Board, Ms. Yao calls meetings of BOD when necessary. We have one independent director, and we do not have a lead independent director. The Board believes that the Company's chief executive officer is best situated to serve as chairman of the Board because she is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for the Company. We believe that this leadership structure has served the Company well.
The Board’s Role in Risk Oversight
Risk is an integral part of the BOD's deliberations throughout the year. The BOD oversees and reviews an assessment prepared by management of the critical risks facing the Company, their relative magnitude and management’s actions to mitigate these risks.
Code of Ethics
We have not yet adopted a corporate code of ethics. The Company’s BOD is considering establishing a code of ethics to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
Board Meetings
The BOD met one time and acted by unanimous written consent four times during 2012.
Section 16(a) Beneficial Ownership Reporting Compliance
As of the date of this report, we are not subject to Section 16(a) of the Securities Exchange Act of 1934.
Item 11.
Item 11.
Executive Compensation
The following table reflects the compensation paid to our principal executive officer and principal financial officer during the past two fiscal years (collectively, the “Named Executive Officers”). No other executive officers earned more than $100,000 in any of the previous two fiscal years.
(1)
Guoyun Yao has been serving as our President, CEO, and Secretary since May 2010.
(2)
Bonus payment is dependent upon the profitability of the Company. Ms. Guoyun Yao is entitled to receive RMB30,000 ($4,815) as a bonus per-annum. Ms. Yao was granted 200,000 shares of Common Stock under the Plan on March 16, 2012. Applying the closing price of $0.45 of the shares on March 15, 2012, the initial value of the Stock Awards is $90,000.
(3)
Xiaolong Zhou has been serving as our Chief Financial Officer since September 1, 2008.
Outstanding Equity Awards at 2012 Fiscal Year End
The following table provides information on all restricted stock and stock option awards held by our named executive officers as of December 31, 2012.
Employment Agreements
The Company has employment agreements with its officers and directors who reside in China in accordance with PRC labor law. These employment agreements are usually in one-year term and renewable afterwards.
Director Compensation
On September 30, 2011, we granted an option to purchase 75,000 shares of Common Stock to our former director, Michael Segal for his service to us from July 1, 2011 to December 31, 2011 under the Plan. The option has an exercise price of $0.64 per share and may be exercised cashlessly. The option is valid for a term of three years from January 1, 2012 to December 31, 2014. The option cost was estimated at $16,579 by using a Black-Scholes option pricing model.
We paid $24,000 in cash annually to Mr. Michael Segal during the past two fiscal years and for the period up to February 28, 2013. In addition, we issued 31,848 shares to Mr. Segal on March 7, 2013 for his service in 2013. Such shares were issued in reliance on Section 4(2) of the Securities Act. We pay no compensation to the other directors for serving as a director. There are no other elements of compensation paid to these directors but it is expected that in the future, we may create a remuneration and expense reimbursement plan.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 10, 2013 by (i) any person or group with more than 5% of our voting securities, (ii) each director, (iii) each executive officer and (iv) all executive officers and directors as a group.
*Less than 1% of the outstanding common stock.
(1)
Unless otherwise indicated in the table above, the address of each beneficial owner is c/o Yuyuan1-1-705, Bei Mei Xintiandi, 116 Changfeng Jie Xiaodian County, Taiyuan City, Shanxi Province, China 030001.
(2)
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days. As of March 10, 2013, we had 54,888,910 outstanding shares of common stock. Certain beneficial owner listed in the table holds option to acquire any shares of our common within 60 days of the date of March 10, 2013, the calculation of percentage of class held by such owner include such shares that could be acquired upon the option exercise with the 60-day period.
(3)
This figure includes an option to purchase 220,000 shares of common stock of the Company from January 1, 2012 to December 31, 2014 at $0.64 per share under the 2011 Incentive Stock Plan.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Related parties can include any of our directors or executive officers, certain of our stockholders and their immediate family members. A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with the interests of the Company as a whole.
On May 24, 2012, Liteweisi and Hongxing separately entered into a Guaranty Agreement with Mr. Liang Qiao, an individual residing in the PRC, Ms. Guoyun Yao, the Company’s Chairman and CEO and Mr. Chunde Meng, the Company’s COO 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 it was repaid at which point the guaranty obligation extinguished. The Loan was repaid in full in September 2012 and Liteweisi and Hongxing’s joint guaranty obligation extinguished accordingly.
As previously described under “Description of Business - Corporate History,” our BOD has the right to appoint the board of directors of Hongxing and its officers and directors. The transactions described under “Description of Business-Corporate History” involve officers and directors of Liteweisi and Hongxing. To understand these relationships and these transactions, you should review the discussion under “Description of Business - Corporate History.”
Item 14.
Item 14.
Principal Accounting Fees and Services
The following table sets forth the fees that the Company accrued or paid to Goldman Kurland and Mohidin LLP (“GKM”) during 2012 and 2011:
Our Board of Directors pre-approves all audit and non-audit services performed by the Company's auditor and the fees to be paid in connection with such services.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
Exhibit Number
Description
3.1
Articles of Incorporation filed with the Secretary of State of the State of Maryland on June 23, 2008*
3.2
Bylaws of the Company*
10.1
Lease Agreement, dated June 14, 2006, by and between the villager Committee of Xigu village, Qingxu County, and Taiyuan Hongxing Carbon Black Co., Ltd.*
10.2
Lease Agreement, dated July 18, 2003, by and between the villager Committee of Xigu village, Qingxu County, and Taiyuan Hongxing Carbon Black Co., Ltd.*
10.3
Registered Trademark License Contract, by and between Guoyun Yao and Taiyuan Hongxing Carbon Black Co., Ltd.*
10.4
Entrusted Management Agreement, by and among Yao Guoyun, Meng Chun De, Taiyuan Hongxing Carbon Black Co., Ltd., and Jin Zheng Li Te Wei Si Carbon (Taiyuan) Co., Ltd.**
10.5
Exclusive Option Agreement, by and among Jin Zheng Li Te Wei Si Carbon (Taiyuan) Co., Ltd., Yao Guoyun, Meng Chun De, and Taiyuan Hongxing Carbon Black Co., Ltd.**
10.6
Exclusive Option Agreement, by and among Jin Zheng Li Te Wei Si Carbon (Taiyuan) Co., Ltd., Yao Guoyun, Meng Chun De, and Taiyuan Hongxing Carbon Black Co., Ltd.**
10.7
Pledge of Equity Agreement, by and among Yao Guoyun, Meng Chunde, Taiyuan Hongxing Carbon Black Co., Ltd. and Jinzheng Liteweisi Carbon (Taiyuan) Co., Ltd.**
10.8
Shareholders’ Voting Proxy Agreement, by and among Yao Guoyun, Meng Chun De, and Jizheng Litewisi Carbon (Taiyuan) Co., Ltd.**
10.9
Call Option Agreement, by and between Yao Guoyun and Karen Prudente.**
10.10
2011 Incentive Stock Plan ***
21.1
List of subsidiaries.*
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
*Previously filed with the Registration Statement on Form S-1 (File No. 333-167090) filed with the Securities and Exchange Commission (the “SEC”) on May 26, 2010 and incorporated herein by reference.
**Previously filed with Amendment No. 2 on Form S-1 filed with the SEC on August 23, 2010 and incorporated herein by reference.
*** Previously filed with the Registration Statement on Form S-8 filed with the SEC on December 19, 2011 and incorporated herein by reference.
The interactive data files in Exhibit No. 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASIA CARBON INDUSTRIES, INC.
Date: March 19, 2013
By:
/s/ Guoyun Yao
Guoyun Yao
Chief Executive Officer and President
(Principal Executive Officer)
In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/Guoyun Yao
Chief Executive Officer, President, Secretary and Chairman of the Board
March 19, 2013
Guoyun Yao
/s/Xiaolong Zhou
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
March 19, 2013
Xiaolong Zhou
/s/Chunde Meng
Director and Chief Operating Officer
March 19, 2013
Chunde Meng
/s/Lei Shi
Director and Vice President - Finance
March 19, 2013
Lei Shi
/s/ Jianjun Wang
Director and Assistant Vice President - Finance
March 19, 2013
Jianjun Wang
/s/Baozhu Ren
Director
March 19, 2013
Baozhu Ren