10-Q 1 f10q0916_chinacarbongraph.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

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

For the transition period from _______________ to _______________

Commission File Number: 333-114564

CHINA CARBON GRAPHITE GROUP, INC.

(Exact name of registrant as specified in its charter)

Nevada

98-0550699

(State or other jurisdiction of

incorporation of organization)

(I.R.S. Employer

Identification No.)

20955 Pathfinder Road, Suite 200

Diamond Bar, CA 91765

(Address of principal executive offices, zip code)

(909) 843-6518

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 14, 2016, there were 33,670,518 shares of common stock issued and outstanding.

CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2016

TABLE OF CONTENTS

		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
	Signatures	39

PART 1 - FINANCIAL INFORMATION

Item 1.

Financial Statements.

The following unaudited interim financial statements of China Carbon Graphite Group, Inc. (referred to herein as the "Company," "we," "us" or "our") are included in this quarterly report on Form 10-Q:

China Carbon Graphite Group, Inc.

September 30, 2016 and 2015

Index to the Consolidated Financial Statements

	Page

Consolidated Balance Sheets at September 30, 2016 (unaudited) and December 31, 2015		2

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine months Ended September 30, 2016 and 2015		3

Unaudited Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2016 and 2015		4

Notes to Unaudited Consolidated Financial Statements		5

China Carbon Graphite Group, Inc. and subsidiaries

Consolidated Balance Sheets

	September 30, 2016			December 31, 2015

ASSETS

Current Assets
Cash and cash equivalents	$	34,018		$	35,523
Account Receivable		125,533			25,718
Inventories		3,325			2,386
Prepaid expenses		-			211
Other receivables, net		9,456			42,695
Total current assets		172,332			106,533

Property And Equipment, Net		24,525			30,646

Total Assets	$	196,857		$	137,179

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
Accounts payable and accrued expenses	$	181,293		$	193,448
Accrued payroll - related party		533,170			532,623
Advance from customers		-			7,260
Other payables		1,248,603			1,013,994
Due to related parties		142,877			147,083
Dividends payable		55,015			55,015
Total current liabilities		2,160,958			1,949,423

Total Liabilities		2,160,958			1,949,423

Stockholders' Equity (Deficit)
Common stock, $0.001 par value; 100,000,000 shares authorized 33,934,518 and 33,670,518 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		33,934			33,670
Additional paid-in capital		48,398,759			48,391,103
Accumulated other comprehensive income		82,714			76,978
Accumulated loss		(50,479,508	)		(50,313,995	)
Total stockholders' equity (deficit)		(1,964,101	)		(1,812,244	)
Total Liabilities and Stockholders' Equity (Deficit)	$	196,857		$	137,179

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

China Carbon Graphite Group, Inc. and subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

For the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

	Three Months ended September 30,						Nine Months ended September 30,
	2016			2015			2016			2015

Sales	$	171,582		$	117,572		$	574,522		$	146,408

Cost of Goods Sold		142,887			70,149			474,477			80,626
Gross Profit		28,695			47,423			100,045			65,782

Operating Expenses
Selling expenses		5,222			9,131			18,212			19,591
General and administrative		104,598			584,106			304,448			781,527
Total operating expenses		109,820			593,237			322,660			801,118

Loss from continuing operations before other income (expense) and income taxes		(81,125	)		(545,814	)		(222,615	)		(735,336	)

Other Income (Expense)
Interest expense		(224	)		(731	)		(560	)		(1,707	)
Other income (expense), net		17,748			21,355			57,662			59,787
Total other expense (income), net		17,524			20,624			57,102			58,080

Loss from continuing operations before income taxes		(63,601	)		(525,190	)		(165,513	)		(677,256	)

Income Tax Expense		-			-			-			-

Net loss from continuing operations		(63,601	)		(525,190	)		(165,513	)		(677,256	)
Discontinued operations, net of income taxes		-			-			-			-
Net loss		(63,601	)		(525,190	)		(165,513	)		(677,256	)

Other Comprehensive Income
Foreign currency translation gain (loss)		869			(34,912	)		5,736			(34,011	)
Total Comprehensive Loss	$	(62,732	)	$	(560,102	)	$	(159,777	)	$	(711,267	)

Share Data
Basic and diluted loss per share
Continued operations	$	(0.00	)	$	(0.02	)	$	(0.00	)	$	(0.02	)
Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00
Net loss per share – basic and diluted	$	(0.00	)	$	(0.02	)	$	(0.00	)	$	(0.02	)

Weighted average common shares outstanding, basic		33,934,518			33,670,518			33,869,000			33,670,518

Weighted average common shares outstanding, diluted		33,934,518			33,670,518			33,869,000			33,670,518

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

China Carbon Graphite Group, Inc. and subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months ended September 30,
	2016			2015
Cash Flows from Operating Activities
Net Loss available to common shareholders	$	(165,513	)	$	(677,256	)
Adjustments to reconcile net cash provided by (used in) operating activities
Depreciation and Amortization		6,478			6,715
Impairment of Goodwill		-			494,540
Stock compensation		7,920			-
Changes in operating assets and liabilities
Accounts receivable		(101,926	)		(43,026	)
Other receivables		32,620			(9,515	)
Advance to suppliers		-			16,780
Inventory		(1,021	)		(1,345	)
Accounts payable and accrued liabilities		(9,234	)		157,264
Advance from customers		(7,149	)		(6,568	)
Taxes payable		1,644			6,814
Other payables		236,831			27,334
Net cash used in operating activities		650			(28,263	)

Cash flows from investing activities
Acquisition of plant and equipment		(1,163	)		(1,067	)
Net cash used in investing activities		(1,163	)		(1,067	)

Cash flows from financing activities
Proceeds from loan from related parties		-			24,489
Net cash provided by financing activities		-			24,489

Effect of exchange rate fluctuation on cash and cash equivalents		(992	)		(589	)

Net decrease in cash		(1,505	)		(5,430	)

Cash and cash equivalents at beginning of period		35,523			30,863

Cash and cash equivalents at ending of period	$	34,018		$	25,433

Supplemental disclosure of cash flow information

Interest paid	$	560		$	1,707
Income taxes paid	$	-		$	-

Non-cash activities:

Issuance of common stock for compensation	$	7,920		$	-

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

China Carbon Graphite Group, Inc. and subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(Unaudited)

(1) Organization and Business

China Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture and sales of graphene and graphene oxide and graphite bipolar plates in the People’s Republic of China (“China” or the “PRC”). We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

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

The consolidated financial statements presented herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries, Golden Ivy Limited, Royal Elite International Limited, Royal Elite New Energy Science and Technology (ShangHai) Co., Ltd., Talent International Investment Limited, and Xinghe Yongle Carbon Co., Ltd.

Organizational Structure Chart

The following chart sets forth our organizational structure:

Liquidity and Working Capital Deficit

As of September 30, 2016 and as of December 31, 2015, the Company managed to operate its business with a negative working capital.

The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:

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

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

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

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

(2) Going Concern

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended September 30, 2016, the Company has incurred operating losses and working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s Plan to Continue as a Going Concern

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with other companies in the graphite industry.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.

(3) Basis for Preparation of the Consolidated Financial Statements

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2015. The consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements. The results of the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2016.

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

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

The financial statements have been prepared in order to present the financial position and results of operations of the Company and its subsidiaries whose financial condition consolidated with the Company pursuant to ASC Topic 810-10, Consolidation, in accordance with U.S. GAAP. All significant intercompany accounts and transactions have been eliminated.

(4) Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.

Use of estimates

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting period. Some of the significant estimates include values and lives assigned to acquired property, equipment and intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and stock warrant valuation. Actual results may differ from these estimates.

Cash and cash equivalents

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

Accounts receivable

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

Inventory

Inventory is stated at the lower of cost or market. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion. Cost is determined using the weighted average method. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. Impairment of inventories is recorded in cost of goods sold.

For the nine months ended September 30, 2016 and 2015, the Company has not made provision for inventory in regards to slow moving or obsolete items.

Goodwill

The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company recorded an impairment expense of $0 and $494,540 for the nine months ended September 30, 2016 and 2015, respectively.

Property and equipment

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

Machinery and equipment			5 years
Motor vehicle			5 years

Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the nine months ended September 30, 2016 and 2015.

Stock-based compensation

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

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

Common stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued are recorded in common stock to be issued.

Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service.

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

Foreign currency translation

The reporting currency of the Company is U.S. dollars. The Company uses RMB as its functional currency. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the three months ended September 30, 2016 and 2015 were $869 and $(34,912), respectively. Translation adjustments for the nine months ended September 30, 2016 and 2015 were $5,736 and $(34,011), respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2016 and 2015 were $(992) and $(589), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Assets and liabilities were translated at 6.67 RMB and 6.48 RMB to $1.00 at September 30, 2016 and December 31, 2015, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the nine months ended September 30, 2016 and 2015 were 6.58 RMB and 6.25 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Revenue recognition

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

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

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

The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the nine months ended September 30, 2016 and 2015.

Cost of goods sold

Cost of goods sold consists primarily of the costs of products.

Shipping and handling costs

The Company follows ASC 605-45, Handling Costs, and Shipping Costs, formerly known as Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company classifies shipping and handling costs paid on behalf of its customers in selling expenses. For the three months ended September 30, 2016 and 2015, shipping and handling costs were $707 and $4,827, respectively. For the nine months ended September 30, 2016 and 2015, shipping and handling costs were $7,672 and $11,118, respectively.

Segment reporting

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

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

Taxation

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

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

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

The Company recognizes that virtually all tax positions in the PRC are not free from some degree of uncertainty due to tax law and policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September 30, 2016 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of September 30, 2016, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

Enterprise income tax

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

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

Value added tax

The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. VAT payable is included in prepaid expenses of $0 and is included in prepaid expenses of $211 as of September 30, 2016 and December 31, 2015, respectively.

Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company will incur such liability or obligation.

A contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit. When the benefit is virtually certain, the asset is recognized.

Retirement benefit costs

According to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal government in the province in which the Company is registered and all qualified employees are eligible to participate in the program. Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for the payment of retirement benefits beyond the annual contributions under this program.

Fair value of financial instruments

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

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

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

	●	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

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

Earnings (loss) per share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.

The following table sets forth the computation of the number of net income per share for the nine months ended September 30, 2016 and 2015:

	September 30, 2016			September 30, 2015
Weighted average shares of common stock outstanding (basic)		33,869,000			33,670,518
Shares issuable upon conversion of Series B Preferred Stock		-			-
Weighted average shares of common stock outstanding (diluted)		33,869,000			33,670,518
Net (loss) available to common shareholders	$	(165,513	)	$	(677,256	)
Net (loss) per shares of common stock (basic)	$	(0.00	)	$	(0.02	)
Net (loss) per shares of common stock (diluted)	$	(0.00	)	$	(0.02	)

For the nine months ended September 30, 2016, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.

The following table sets forth the computation of the number of net income per share for the three months ended September 30, 2016 and 2015:

	September30, 2016			September30, 2015
Weighted average shares of common stock outstanding (basic)		33,934,518			33,670,518
Shares issuable upon conversion of Series B Preferred Stock		-			-
Weighted average shares of common stock outstanding (diluted)		33,934,518			33,670,518
Net (loss) available to common shareholders	$	(63,601	)	$	(525,190	)
Net (loss) per shares of common stock (basic)	$	(0.00	)	$	(0.02	)
Net (loss) per shares of common stock (diluted)	$	(0.00	)	$	(0.02	)

For the three months ended September 30, 2016, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.

Accumulated other comprehensive income

The Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the nine months ended September 30, 2016 and 2015 included net income and foreign currency translation adjustments.

Related parties

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

Recent accounting pronouncements

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

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

	a.	Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)

	b.	Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

	c.	Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

	b.	Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

	c.	Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

(5) Concentration of Business and Credit Risk

Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.

Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.

Sales to certain customers generated over 10% of the Company’s total net sales. Sales to Jinko Solar Technology SDN. BHD, for the nine months ended September 30, 2016 were approximately 37% of the Company’s net sales. Sales to Honglang Carbon Industry Co., Ltd for the nine months ended September 30, 2016 were approximately 38% of the Company’s net sales. Sales to Nurol Teknoloji Sanayi Ve Madenci for the nine months ended September 30, 2016 were approximately 15% of the Company’s net sales.

For the nine months ended September 30, 2016, three suppliers accounted for approximately 95% of total purchases.

(6) Inventories

As of September 30, 2016 and December 31, 2015, inventories consisted of the following:

	September30, 2016		December 31, 2015
Finished goods	$	3,325	$	2,386
Reserve for slow moving and obsolete inventory		-		-
	$	3,325	$	2,386

For the nine months ended September 30, 2016 and 2015, the Company has not made provision for inventory in regards to slow moving or obsolete items. As of September 30, 2016 and December 31, 2015, the Company did not record any provision for inventory in regards to slow moving or obsolete items.

(7) Property and Equipment, net

As of September 30, 2016 and December 31, 2015, property, plant and equipment consisted of the following:

	September30, 2016			December 31, 2015
Machinery and equipment	$	6,502		$	5,513
Motor vehicles		41,892			43,125
Total		48,394			48,638
Less: accumulated depreciation		(23,869	)		(17,992	)
Plant and Equipment, net	$	24,525		$	30,646

For the three months ended September 30, 2016 and 2015, depreciation expenses amounted to $2,139 and $2,223, respectively. For the nine months ended September 30, 2016 and 2015, depreciation expenses amounted to $6,478 and $6,715, respectively.

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the nine months ended September 30, 2016 and 2015.

(8) Stockholders’ deficit

Restated Articles of Incorporation

On January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value $0.001 per share. The restated articles of incorporation authorizes the board of directors of the Company to issue one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such preferred stock. The board of directors has authorized the issuance of two series of preferred stock, Series A Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”).

Issuance of Common Stock

(a) Stock Issuances For Compensation

On March 8, 2016, the Company issued an aggregate of 200,000 shares of common stock to four directors as compensation for services provided in 2015. The issuance of these shares was recorded at fair market value at $0.03 per share.

On March 8, 2016, the Company issued 64,000 shares of common stock to the CEO and VP of Finance. The issuance of these shares was recorded at grant date fair market value in 2016.

(b) Shares Held in Escrow

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

The Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year 2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company for cancellation. As of September 30, 2016, no Escrow Shares have been transferred to investors or returned to the Company.

(9) Related Parties

As of September 30, 2016 and December 31, 2015, $142,877 and $147,083 are due to Mr. Donghai Yu, who is CEO of the Company. These amounts are advances made to the Company by unrelated parties through Mr. Donghai Yu for business operating purposes. The advances are interest free.

As of September 30, 2016 and December 31, 2015, $488,105 and $487,529 are the salary owed to Mr. Donghai Yu, who is CEO of the Company. As of September 30, 2016 and December 31, 2015, $45,000 and $45,000 are the salary owed to Mr. Grace King, who is VP finance of the Company.

(10) Other Payable

Other payable amounted $1,248,603 and $1,013,994 as of September 30, 2016 and December 31, 2015, respectively. Other payable are money borrowed from unrelated parties for operating purpose. These payable are without collateral, interest free, and due on demand.

(11) Lease Commitment

Our principal executive office is located in US. The Company leased its corporate address month to month for an annual fee of $1,440.

Royal Shanghai leased an office space in China, the lease term ends on March 31, 2017. The monthly rent is approximately $2,917 (RMB 18,329).

Item 2.

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

This quarterly report on Form 10-Q and other reports filed by China Carbon Graphite Group, Inc. (“we,” “us,” “our,” or the “Company”) from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

We are engaged in the manufacturing of graphene, graphene oxide and graphite bipolar plates products in the PRC. We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

As of and for the three months ended September 30, 2016, the Company has incurred operating losses. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with or acquire other graphite companies.

PRC regulations grant broad powers to the government to adjust the price of raw materials and manufactured products. Although the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be implemented in the future, thereby affecting our results of operations and financial condition.

Results of Operations

Comparison of the Three Months Ended September 30, 2016 and 2015

Sales.

During the three months ended September 30, 2016, we had sales of $171,582, compared to sales of $117,572 for the three months ended September 30, 2015, an increase of $54,010, or approximately 45.94%. Significant sales increase was mainly attributable to the increase in demand for products among consumers in the market.

Cost of goods sold.

Our cost of goods sold consists of the purchase cost. During the three months ended September 30, 2016, our cost of goods sold was $142,887, compared to $70,149 for the cost of goods sold for the three months ended September 30, 2015, an increase of $72,738 or approximately 103.69%. The increase in the cost of sales was primarily attributable to the significant increase in sales volume.

Gross profit.

Our gross profit decreased from $47,423 for the three months ended September 30, 2015 to $28,695 for the three months ended September 30, 2016. The decrease of the gross profit is mainly attributed to the increase of cost of goods sold comparing to the increase of sales.

Gross profit Margin.

Our gross profit margin decreased from 40.3% for the three months ended September 30, 2015 to 16.7% for the three months ended September 30, 2016 because the Company are selling much lower margin products during the three month ended September 30, 2016, compared to the three months ended September 30, 2015.

Operating expenses.

Operating expenses totaled $109,820 for the three months ended September 30, 2016, compared to $593,237 for the three months ended September 30, 2015, a decrease of $483,417, or approximately 81.49%. The decrease is mainly attributed to the decrease in general and administrative expenses and selling expenses. The Company recorded an impairment expense of $0 and $494,540 for the three months ended September 30, 2016 and 2015, respectively.

Selling, general and administrative expenses.

Selling expenses decreased from $9,131 for the three months ended September 30, 2015 to $5,222 for the three months ended September 30, 2016, a decrease of $3,909, or 42.81%. The decrease is mainly attributed to decreased payroll expenses because the Company has less staff to meet the development demand.

Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $104,598 for the three months ended September 30, 2016, compared to $584,106 for the three months ended September 30, 2015, a decrease of $479,508 or 82.09%. The decrease of general and administrative expenses are mainly due to the write off of goodwill $494,540 in expense in 2015.

Loss from operations.

As a result of the factors described above, operating loss was $81,125 for the three months ended September 30, 2016, compared to operating loss of $545,814 for the three months ended September 30, 2015, a decrease of approximately $464,689, or 85.14%.

Other income and expenses.

Our interest expense was $224 for the three months ended September 30, 2016, compared to $731 for the three months ended September 30, 2015.

Rental income of $17,748 and $21,355 were recorded as other income for the three months ended September 30, 2016 and 2015, respectively.

Income tax.

During the three months ended September 30, 2016 and 2015, we did not incur any income tax due for these periods.

Net loss.

As a result of the factors described above, our net loss for the three months ended September 30, 2016 was $63,601, compared to net loss of $525,190 for the three months ended September 30, 2015, a decrease of $461,589, or 87.89%.

Foreign currency translation.

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the three months ended September 30, 2016 was $869, compared a translation loss of $34,912 for the three months ended September 30, 2015, a decrease of $35,781.

Net loss available to common stockholders.

Net loss available to our common stockholders was $63,601, or $(0.00) per share (basic and diluted), for the three months ended September 30, 2016, compared to net loss of $525,190, or net loss of $(0.02) per share (basic and diluted), for the three months ended September 30, 2015.

Comparison of the Nine Months Ended September 30, 2016 and 2015

Sales.

During the nine months ended September 30, 2016, we had sales of $574,522, compared to sales of $146,408 for the nine months ended September 30, 2015, an increase of $428,114, or approximately 292.41%. Significant sales increase was mainly attributable to the increase in demand for products among consumers in the market.

Cost of goods sold.

Our cost of goods sold consists of the purchase cost. During the nine months ended September 30, 2016, our cost of goods sold was $474,477, compared to $80,626 for the cost of goods sold for the nine months ended September 30, 2015, an increase of $393,851 or approximately 488.49%. The increase in the cost of sales was primarily attributable to the significant increase in sales volume.

Gross profit.

Our gross profit increased from $65,782 for the nine months ended September 30, 2015 to $100,045 for the nine months ended September 30, 2016. The increase of the gross profit is mainly attributed to the increase in sales.

Gross profit Margin.

Our gross profit margin decreased from 44.9% for the nine months ended September 30, 2015 to 17.4% for the nine months ended September 30, 2016 because the Company are selling much lower margin products during the nine months ended September 30, 2016 compared to the same period 2015.

Operating expenses.

Operating expenses totaled $322,660 for the nine months ended September 30, 2016, compared to $801,118 for the nine months ended September 30, 2015, a decrease of $478,458, or approximately 59.72%. The decrease is mainly attributed to the decrease in general and administrative expenses and selling expenses. The Company recorded an impairment expense of $0 and $494,540 for the nine months ended September 30, 2016 and 2015, respectively.

Selling, general and administrative expenses.

Selling expenses decreased from $19,591 for the nine months ended September 30, 2015 to $18,212 for the nine months ended September 30, 2016, a decrease of $1,379, or 7.04%. The decrease is mainly attributed to decreased payroll expenses because the Company has less staff to meet the development demand.

Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $304,448 for the nine months ended September 30, 2016, compared to $781,527 for the nine months ended September 30, 2015, a decrease of $477,079 or 61.04%. The decrease of general and administrative expenses is mainly due to the write off of goodwill $494,540 in expense in 2015.

Loss from operations.

As a result of the factors described above, operating loss was $222,615 for the nine months ended September 30, 2016, compared to operating loss of $735,336 for the nine months ended September 30, 2015, a decrease of approximately $512,721, or 69.73%.

Other income and expenses.

Our interest expense was $560 for the nine months ended September 30, 2016, compared to $1,707 for the nine months ended September 30, 2015.

Rental income of $57,662 and $59,787 were recorded as other income for the nine months ended September 30, 2016 and 2015, respectively.

Income tax.

During the nine months ended September 30, 2016 and 2015, we did not incur any income tax due for these periods.

Net loss.

As a result of the factors described above, our net loss for the nine months ended September 30, 2016 was $165,513, compared to net loss of $677,256 for the nine months ended September 30, 2015, a decrease of $511,743, or 75.56%.

Foreign currency translation.

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the nine months ended September 30, 2016 was $5,736, compared a translation loss of $34,011 for the nine months ended September 30, 2015, an increase of $39,747.

Net loss available to common stockholders.

Net loss available to our common stockholders was $165,513, or $(0.00) per share (basic and diluted), for the nine months ended September 30, 2016, compared to net loss of $677,256, or net loss of $(0.02) per share (basic and diluted), for the nine months ended September 30, 2015.

Liquidity and Capital Resources

Comparison of the Nine Months Ended September 30, 2016 and 2015

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

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

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

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

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

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

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

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

Our primary capital needs have been to fund our working capital requirements. Our primary sources of financing will be cash generated from loans from banks, equity investment from investors, and borrowings from unrelated parties.

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. At this point, there can be no assurance that the Company is able to obtain such funding.

Our long-term goal is to develop our Royal Shanghai business. During the interim, we expect that anticipated cash flows from future operations, loans and equity investment from unrelated or related parties, provided that:

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

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

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

At September 30, 2016, cash and cash equivalents were $34,018, compared to $35,523 at December 31, 2015, a decrease of $1,505. Our working capital deficit increased by $145,736 to a deficit of $1,988,626 at September 30, 2016 from $1,842,890 at December 31, 2015.

As of September 30, 2016, inventories were $3,325, compared to $2,386 at December 31, 2015, an increase of $939, or 39.4%. As of September 30, 2016 and December 31, 2015, the Company has not made provision for inventory in regards to slow moving or obsolete items.

As of September 30, 2016, prepaid expenses were $0, compared to $211 at December 31, 2015, a decrease of $211, or 100%. The decrease in prepaid expenses is attributed to amortization of prepaid services.

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

	For Nine months Ended September 30
	2016			2015
Net cash flows provided by (used in) operating activities	$	650		$	(28,263	)
Net cash flows used in investing activities	$	(1,163	)	$	(1,067	)
Net cash flows provided by financing activities	$	-		$	24,489

Net cash flow provided by operating activities was $650 for the nine months ended September 30, 2016, compared to $28,263 used in operating activities for the nine months ended September 30, 2015, a decrease of $28,913. The increase in net cash flow in operating activities was mainly due to increase of $236,831 in other payables, offset by increase of $101,926 in accounts receivable.

Net cash flow used in investing activities was $1,163 for the nine months ended September 30, 2016, compared to $1,067 for the nine months ended September 30, 2015, an increase of $96, or 9%. The increase is mainly due to there were more acquisition of plant and equipment in the nine months ended September 30, 2016.

Net cash flow provided by financing activities was $0 for the nine months ended September 30, 2016, compared to $24,489 provided by financing activities for the nine months ended September 30, 2015, a decrease of $24,489. The decrease in net cash flow provided by financing activities was mainly due to proceeds received from related parties in the nine months ended September 30, 2016.

Concentration of Business and Credit Risk

Off-Balance Sheet Arrangements

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

Significant Accounting Estimates and Policies

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

Revenue Recognition

Comprehensive Income

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

Income Taxes

We account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Effective January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation of this law gradually become subject to the new tax rate within five years after the implementation of this law.

Accounts Receivable and Allowance For Doubtful Accounts

Accounts receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted to $nil as of September 30, 2016 and December 31, 2015.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion. For the three and nine months ended September 30, 2016 and 2015, the Company has not made provision for inventory in regards to slow moving or obsolete items.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets after taking into account the estimated residual value. The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the three and nine months ended September 30, 2016 and 2015.

Research and Development

Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of the cost of material used and salaries paid for the development of our products and fees paid to third parties. Our research and development expense for the three and nine months ended September 30, 2016 and 2015 were not significant.

Value Added Tax

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

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

Fair Value of Financial Instruments

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

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

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

	●	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

The carrying amounts of financial assets and liabilities, including cash and cash equivalents, accounts receivable, notes receivable, advances to suppliers, other receivables, short-term bank loans, notes payable, accounts payable, advances from customers and other payables, approximate their fair values because of the short maturity period for these instruments.

Stock-based Compensation

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

Common stock awards are granted to directors for services provided.

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

No stock compensation expenses was amortized and recognized as general and administrative expenses for the nine months ended September 30, 2016 and 2015, respectively.

Recent Accounting Pronouncements

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that thefinancial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)

Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Not applicable because we are a smaller reporting company.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of September 30, 2016.

Changes in Internal Control over Financial Reporting

During the nine months ended September 30, 2016, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and make changes that our management deems necessary.

Limitations on Controls

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

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

There are no other actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of the Company’s equity securities during the nine months ended September 30, 2016, that were not otherwise disclosed in a Current Report on Form 8-K.

Item 3.

Defaults Upon Senior Securities

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

There is no other information required to be disclosed under this item which was not previously disclosed.

Item 6.

Exhibits

Exhibit Number		Description

31.1*		Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+		Certifications of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+		Certifications of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

* Filed herewith

+ In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

SIGNATURES

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

	CHINA CARBON GRAPHITE GROUP, INC.

Date: November14, 2016	By:	/s/ Donghai Yu
		Donghai Yu
		Chief Executive Officer

Date: November14, 2016	By:	/s/ ZhenfangYang
		Zhenfang Yang
		Chief Financial Officer