UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 
 [X]
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
 
 For the
quarterly period ended March 31, 2009
 
 [  ]
TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT
 
 For the
transition period from 
to
 
 Commission
File Number:  333-114564
 
 CHINA CARBON GRAPHITE GROUP, INC.
 
  Nevada
                
                98-0550699(State
      or other jurisdiction of incorporation of organization)
                
                (I.R.S.
      Employer Identification No.)
  China
Carbon Graphite Group, Inc.
 c/o
Xinghe Yongle Carbon Co., Ltd.
 787
Xicheng Wai
 Chengguantown
 Xinghe
County
 Inner
Mongolia, China
 (Address
of principal executive office)
 
 (86)
474-7209723
 (Registrant’s
telephone number)
 
 Copies
to:
 Asher
S. Levitsky PC
 Sichenzia
Ross Friedman Ference LLP
 61
Broadway, 32nd
Floor
 New
York, New York 10006
 Phone:
(212) 981-6767
 Fax:
(212) 930 - 9725
 E-mail:
alevitsky@srff.com
 
 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
                      (Do
      not check if smaller reporting company)
                    [  ]
                    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.  13,785,470 shares of common
stock are issued and outstanding as of May 12, 2009.
  
 
 
 CHINA
CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES
 FORM
10-Q
 March
31, 2009
 
 
 
 
 TABLE
OF CONTENTS
   Page
      No.PART
      I. - FINANCIAL INFORMATIONItem
      1.
                  Financial
      Statements:
                  3Condensed
      Consolidated Balance Sheets at March 31, 2009 (unaudited) and December 31,
      2008
                  3Condensed
      Consolidated Statements of Income and Comprehensive Income for the three
      months ended March 31, 2009 and 2008 (unaudited)
                  4Condensed
      Consolidated Statements of Changes in Stockholders’ Equity for the three
      months ended March 31, 2009 (unaudited)
                  5Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2009 and 2008 (unaudited)
                  6Notes
      to Condensed Consolidated Financial Statements
                  7Item
      2.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                  21Item
      3.
                  Quantitative
      and Qualitative Disclosure About Market Risk
                  30Item
      4
                  Controls
      and Procedures.
                  30PART
      II - OTHER INFORMATIONItem
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds.
                  32Item
      6.
                  Exhibits.
                  32
     1
  FORWARD
LOOKING STATEMENTS
  This report contains forward-looking
statements regarding our business, financial condition, results of operations
and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “estimates” and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not deemed to
represent an all-inclusive means of identifying forward-looking statements as
denoted in this report. Additionally, statements concerning future matters are
forward-looking statements.
  Although forward-looking statements in
this report reflect the good faith judgment of our management, such statements
can only be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed in or anticipated by the forward-looking statements. Factors that
could cause or contribute to such differences in results and outcomes include,
without limitation, those specifically addressed under the headings “Risks
Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in our annual report on Form 10-K, in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
this Form 10-Q and in other reports that we file with the
SEC.   You are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
file reports with the SEC. The SEC maintains a website (www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including us. You can
also read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain
additional information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
  We undertake no obligation to revise or
update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this report, except as required by
law. Readers are urged to carefully review and consider the various disclosures
made throughout the entirety of this quarterly report, which are designed to
advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
  
  
 2
   
 PART
1 - FINANCIAL INFORMATION
 
 Item
1.  Financial Statements.
 
 China Carbon Graphite Group, Inc. and
      SubsidiariesCondensed
      Consolidated Balance SheetsMarch
      31, 2009
                                  
                                  
                                  December
      31, 2008(Unaudited)
                                  
                                  
                                  (Audited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                                  
                                  $
                                  243,697
                                  
                                  
                                  $
                                  51,799Trade
      accounts receivable, net
                                  
                                  
                                  4,020,953
                                  
                                  
                                  
                                  4,224,410Notes
      receivable
                                  
                                  
                                  65,736
                                  
                                  
                                  
                                  27,720Other
      receivables
                                  
                                  
                                  233,228
                                  
                                  
                                  
                                  150,694Advance
      to related party
                                  
                                  
                                  290,774
                                  
                                  
                                  
                                  290,409Advance
      to suppliers, net
                                  
                                  
                                  543,573
                                  
                                  
                                  
                                  1,017,088Inventories
                                  
                                  
                                  16,011,638
                                  
                                  
                                  
                                  15,889,549Prepaid
      expenses
                                  
                                  
                                  85,133
                                  
                                  
                                  
                                  -Total
      current assets
                                  
                                  
                                  21,494,732
                                  
                                  
                                  
                                  21,651,669Property
      and equipment, net
                                  
                                  
                                  22,199,061
                                  
                                  
                                  
                                  21,003,607Construction
      in progress
                                  
                                  
                                  854,115
                                  
                                  
                                  
                                  2,029,777Land
      use rights, net
                                  
                                  
                                  3,589,770
                                  
                                  
                                  
                                  3,604,324$
                                  48,137,678
                                  
                                  
                                  $
                                  48,289,377LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                                  
                                  $
                                  808,392
                                  
                                  
                                  $
                                  1,253,265Advance
      from customers
                                  
                                  
                                  786,957
                                  
                                  
                                  
                                  640,346Taxes
      payable
                                  
                                  
                                  236,940
                                  
                                  
                                  
                                  362,298Short
      term bank loans
                                  
                                  
                                  4,893,654
                                  
                                  
                                  
                                  4,887,514Long
      term bank loan - current portion
                                  
                                  
                                  1,460,792
                                  
                                  
                                  
                                  1,896,647Loan
      from shareholder
                                  
                                  
                                  30,337
                                  
                                  
                                  
                                  -Other
      payables
                                  
                                  
                                  544,507
                                  
                                  
                                  
                                  551,096Total
      current liabilities
                                  
                                  
                                  8,761,579
                                  
                                  
                                  
                                  9,591,166Long
      Term LiabilitiesLong
      term bank loan - non-current portion
                                  
                                  
                                  3,213,744
                                  
                                  
                                  
                                  3,209,711Total
      liabilities
                                  
                                  
                                  11,975,323
                                  
                                  
                                  
                                  12,800,877Contingencies
      and Commitments (Note 16)Stockholders'
      EquityConvertible
      preferred stock, par value $0.001 per share,authorized
      20,000,000 shares, issued and outstanding 453,411 and
      1,200,499shares
      at March 31,2009 and December 31, 2008, respectively
                                  
                                  $
                                  453
                                  
                                  
                                  $
                                  1,200Common
      stock, $0.001 par value,  authorized 100,000,000
      shares,issued
      and outstanding 13,785,470 and 12,218,412 sharesat
      March 31, 2009 and December 31, 2008, respectively
                                  
                                  
                                  13,785
                                  
                                  
                                  
                                  12,218Additional
      paid-in capital
                                  
                                  
                                  8,847,506
                                  
                                  
                                  
                                  8,690,426Accumulated
      other comprehensive income
                                  
                                  
                                  5,036,027
                                  
                                  
                                  
                                  4,991,113Retained
      earnings
                                  
                                  
                                  22,264,584
                                  
                                  
                                  
                                  21,793,543Total
      stockholders' equity
                                  
                                  
                                  36,162,355
                                  
                                  
                                  
                                  35,488,500$
                                  48,137,678
                                  
                                  
                                  $
                                  48,289,377
 The
accompanying notes are an integral part of these financial
statements
 3
  China Carbon Graphite Group, Inc and
      subsidiariesCondensed
      Consolidated Statements of Income and Comprehensive Income
      (Unaudited)Three
      months ended March 31,2009
                            
                            
                            2008Sales
                            
                            $
                            2,893,647
                            
                            
                            $
                            5,728,002Cost
      of Goods Sold
                            
                            
                            2,052,752
                            
                            
                            
                            4,366,293Gross
      Profit
                            
                            
                            840,895
                            
                            
                            
                            1,361,709Operating
      ExpensesSelling
      expenses
                            
                            
                            308,645
                            
                            
                            
                            20,334General
      and administrative
                            
                            
                            135,995
                            
                            
                            
                            149,204Depreciation
      and amortization
                            
                            
                            19,080
                            
                            
                            
                            15,140463,720
                            
                            
                            
                            184,678Operating
      Income Before Other Income (Expense)and
      Income Tax Expense
                            
                            
                            377,175
                            
                            
                            
                            1,177,030Other
      Income (Expense)Other
      income
                            
                            
                            292,116
                            
                            
                            
                            199,196Interest
      income
                            
                            
                            94
                            
                            
                            
                            178Interest
      expense
                            
                            
                            (198,345
                            )
                            
                            
                            (133,223
                            )93,865
                            
                            
                            
                            66,151Income
      Before Income Tax Expense
                            
                            
                            471,040
                            
                            
                            
                            1,243,181Income
      tax expense
                            
                            
                            -
                            
                            
                            
                            -Net
      income
                            
                            
                            471,040
                            
                            
                            
                            1,243,181Deemed
      preferred stock dividend
                            
                            
                            -
                            
                            
                            
                            (854,300
                            )Net
      income available to common shareholders
                            
                            $
                            471,040
                            
                            
                            $
                            388,881Comprehensive
      incomeNet
      income
                            
                            $
                            471,040
                            
                            
                            $
                            1,243,181Other
      comprehensive incomeForeign
      currency translation gain
                            
                            
                            44,914
                            
                            
                            
                            1,252,143Total
      Comprehensive Income
                            
                            $
                            515,954
                            
                            
                            $
                            2,495,324Share
      dataBasic
      earnings per share
                            
                            $
                            0.04
                            
                            
                            $
                            0.03Diluted
      earnings per share
                            
                            $
                            0.04
                            
                            
                            $
                            0.02Weighted
      average common shares outstanding,basic
                            
                            
                            12,768,144
                            
                            
                            
                            13,218,412Weighted
      average common shares outstanding,diluted
                            
                            
                            13,847,244
                            
                            
                            
                            18,757,257
 The
accompanying notes are an integral part of these financial
statements
  4
  China Carbon Graphite Group, Inc and
      subsidiariesCondensed
      Consolidated Statements of Changes in Stockholders' EquityFor
      the three months ended March 31,2009 (Unaudited)Common
      Stock
                                                                            
                                                                            
                                                                            Convertible
      preferred Stock
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            AccumulatedAdditional
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Other
                                                                            
                                                                            TotalNumber
                                                                            
                                                                            
                                                                            Amount
                                                                            
                                                                            
                                                                            Number
                                                                            
                                                                            
                                                                            Amount
                                                                            
                                                                            
                                                                            Paid-In
                                                                            
                                                                            
                                                                            Retained
                                                                            
                                                                            
                                                                            Comprehensive
                                                                            
                                                                            Stockholders'Capital
                                                                            
                                                                            
                                                                            Earnings
                                                                            
                                                                            
                                                                            Income
                                                                            
                                                                            EquityBalance
      at December 31, 2008
                                                                            
                                                                            
                                                                            12,218,412
                                                                            
                                                                            
                                                                            $
                                                                            12,218
                                                                            
                                                                            
                                                                            
                                                                            1,200,499
                                                                            
                                                                            
                                                                            $
                                                                            1,200
                                                                            
                                                                            
                                                                            $
                                                                            8,690,426
                                                                            
                                                                            
                                                                            $
                                                                            21,793,543
                                                                            
                                                                            
                                                                            $
                                                                            4,991,113
                                                                            
                                                                            $
                                                                            35,488,500Foreign
      currency translation adjustment
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            44,914
                                                                            
                                                                            
                                                                            44,914Net
      income for the periodended
      March 31, 2009
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            471,040
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            471,040Issuance
      of common stock for consulting fee
                                                                            
                                                                            
                                                                            750,000
                                                                            
                                                                            
                                                                            
                                                                            750
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            89,250
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            90,000Issuance
      of common stock for cash
                                                                            
                                                                            
                                                                            70,000
                                                                            
                                                                            
                                                                            
                                                                            70
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            67,830
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            67,900Conversion
      of preferred stock to common stock
                                                                            
                                                                            
                                                                            747,058
                                                                            
                                                                            
                                                                            
                                                                            747
                                                                            
                                                                            
                                                                            
                                                                            (747,058
                                                                            )
                                                                            
                                                                            
                                                                            (747
                                                                            )
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            -Balance
      at March 31, 2009
                                                                            
                                                                            
                                                                            13,785,470
                                                                            
                                                                            
                                                                            $
                                                                            13,785
                                                                            
                                                                            
                                                                            
                                                                            453,441
                                                                            
                                                                            
                                                                            $
                                                                            453
                                                                            
                                                                            
                                                                            $
                                                                            8,847,506
                                                                            
                                                                            
                                                                            $
                                                                            22,264,583
                                                                            
                                                                            
                                                                            $
                                                                            5,036,027
                                                                            
                                                                            $
                                                                            36,162,355
  The
accompanying notes are an integral part of these financial
statements
  5
  China Carbon Graphite Group, Inc and
      SubsidiariesCondensed
      Consolidated Statements of Cash Flows(Unaudited)Three
      months ended March 31,2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      Income
                      
                      $
                      471,040
                      
                      
                      $
                      1,243,181Adjustments
      to reconcile net cash provided byoperating
      activitiesDepreciation
      and amortization
                      
                      
                      328,355
                      
                      
                      
                      309,846Share
      based compensation
                      
                      
                      25,220
                      
                      
                      
                      -Change
      in operating assets and liabilitiesAccounts
      receivable
                      
                      
                      208,734
                      
                      
                      
                      1,392,595Notes
      receivable
                      
                      
                      (37,975
                      )
                      
                      
                      83,307Other
      receivables
                      
                      
                      (82,334
                      )
                      
                      
                      372,245Advance
      to suppliers
                      
                      
                      474,723
                      
                      
                      
                      (301,925
                      )Inventories
                      
                      
                      (102,113
                      )
                      
                      
                      (1,159,142
                      )Prepaid
      expenses
                      
                      
                      (20,350
                      )
                      
                      
                      (29,761
                      )Accounts
      payable and accrued expenses
                      
                      
                      (446,134
                      )
                      
                      
                      (592,042
                      )Advance
      from customers
                      
                      
                      145,785
                      
                      
                      
                      (1,718,299
                      )Taxes
      payable
                      
                      
                      (125,795
                      )
                      
                      
                      (14,766
                      )Other
      payables
                      
                      
                      (7,280
                      )
                      
                      
                      509,862Net
      cash provided by operating activities
                      
                      
                      831,876
                      
                      
                      
                      95,102Cash
      flows from investing activitiesAcquisition
      of property and equipment
                      
                      
                      (1,478,173
                      )
                      
                      
                      (13,073
                      )Construction
      in progress
                      
                      
                      1,178,041
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (300,132
                      )
                      
                      
                      (13,073
                      )Cash
      flows from financing activitiesIssuance
      of preferred stock
                      
                      
                      -
                      
                      
                      
                      400,000Issuance
      of common stock
                      
                      
                      67,900
                      
                      
                      
                      -Repayment
      of bank loans
                      
                      
                      (438,174
                      )
                      
                      
                      (379,097
                      )Advance
      from related party
                      
                      
                      30,333
                      
                      
                      
                      160,921Net
      cash used in financing activities
                      
                      
                      (339,941
                      )
                      
                      
                      181,824Effect
      of exchange rate fluctuation
                      
                      
                      95
                      
                      
                      
                      60,847Net
      increase in cash
                      
                      
                      191,898
                      
                      
                      
                      324,700Cash
      and cash equivalents at beginning of period
                      
                      
                      51,799
                      
                      
                      
                      4,497Cash
      and cash equivalents at end of period
                      
                      $
                      243,697
                      
                      
                      $
                      329,197Supplemental
      disclosure of cash flow informationInterest
      paid
                      
                      $
                      198,345
                      
                      
                      $
                      133,223Income
      taxes paid
                      
                      $
                      -
                      
                      
                      $
                      -Non-cash
      financing and investing activities:Deemed
      preferred stock dividend
                      
                      $
                      -
                      
                      
                      $
                      854,300Issuance
      of common stock for consulting fee
                      
                      $
                      90,000
                      
                      
                      $
                      -
  The
accompanying notes are an integral part of these financial
statements
  6
  China
Carbon Graphite Group, Inc. and Subsidiaries
 Notes
to Condensed Consolidated Financial Statements
 For
the three months ended March 31, 2009
  1.
              Organization
      and Business
  China
Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation,
incorporated on February 13, 2003 under the name Achievers Magazine
Inc.  The Company’s corporate name was changed to China Carbon
Graphite Group, Inc. on January 30, 2008.
 
 The
Company is the sole stockholder of Talent International Investment Limited
(“Talent”), a British Virgin Islands corporation, which is the sole stockholder
of Xinghe Yongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws
of the People’s Republic of China (the “PRC”).
  Yongle is
a party to a series of contractual arrangements with Xinghe Xingyong Carbon Co.,
Ltd. (“Xingyong”), a corporation organized under the laws of the
PRC.  These agreements give the Company the ability to operate and
manage the business of Xingyong and to derive the profit (or sustain the loss)
from Xingyong’s business. As a result, the operations of Xingyong are
consolidated with those of the Company for financial reporting purposes. The
relationship among the above companies as follows:
  
  The
Company, through its subsidiaries and affiliates, manufactures graphite
electrodes, fine grain graphite, high purity graphite and other carbon derived
products.
 
 Stock
distribution
 
 On
January 22, 2008, the Company effected a 1.6-for-one stock distribution whereby
each share of common stock became converted into 1.6 shares of common stock. All
references to share and per share information in these financial statements
reflect this stock distribution.
 
 2.
              Basis
      of Preparation of Financial
Statements
 
 Management
acknowledges its responsibility for the preparation of the accompanying interim
condensed consolidated financial statements which reflect all adjustments,
consisting of normal recurring adjustments, considered necessary in its opinion
for a fair statement of its condensed consolidated financial position and the
results of its operations for the interim period presented. These condensed
consolidated financial statements should be read in conjunction with the summary
of significant accounting policies and notes to condensed consolidated financial
statements included in the Company’s Form 10-K annual report for the year ended
December 31, 2008.
  7
  The
accompanying unaudited condensed consolidated financial statements for China
Carbon Graphite Group, Inc., its subsidiaries and variable interest entity, have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results
for interim periods are not necessarily indicative of results that may be
expected for the fiscal year as a whole.
 
 The
Company maintains its books and accounting records in Renminbi (“RMB”), and its
reporting currency is United States dollars.
 
 The
financial statements have been prepared in order to present the financial
position and results of operations of the Company, its subsidiaries and
Xingyong, which is an affiliated company whose financial condition is
consolidated with the Company pursuant to FIN 46R, in accordance with accounting
principles generally accepted in the United States of America (“US
GAAP”).
 
 FIN 46R
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entity’s
residual returns. Variable interest entities are those entities in which the
Company, through contractual arrangements, bears the risks of, and enjoys the
rewards normally associated with ownership of the entities, and therefore the
Company is the primary beneficiary of these entities.
 
 Yongle is
a party to a series of contractual arrangements with Xingyong. These agreements
include a management agreement pursuant to which80% to 100% of
Xingyong’s net income after deduction of necessary expenses, if any, is paid to
Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in
connection with its business. For the years ended December 31, 2008 and 2007,
Xingyong paid 100% of net income to Yongle. In addition, Yongle manages and
controls all of the funds of Xingyong. Yongle also has the right to purchase
Xingyong’s equipment and patents and lease its manufacturing plants, land and
remaining equipment. This agreement is designed so that Yongle can conduct its
business in China. Pursuant to two other agreements, the sole stockholder of
Xingyong, who was, at the time of the transaction, the Company’s chief executive
officer, has pledged all of his equity in Xingyong as security for performance
of Xingyong’s obligations to Yongle. As a result, Xingyong is considered a
variable interest entity.
 
 According
to PRC rules and regulations, Talent is required to pay 20% of its capital
investment in Yongle, or $800,000, within three months and the remaining 80%, or
$3,200,000, within two years from the date of issuance of business
license.  Business license was issued on September 13, 2007 and
accordingly, Talent was required to pay $800,000 on or before December 12, 2007
and is required to pay $3,200,000 on or before September 12, 2009.  Talent
can apply for extension of time to pay up its investments with reasons
acceptable to the Government.  Failing this, Talent has to apply for the
investment to be cancelled and business license to be revoked.  The
Government can, if ever Talent does not apply for cancellation, give notice to
Talent and revoke the business license and thus cancel the
investment.
 
 Talent
has not paid the initial 20% or $800,000 nor applied for an extension of time to
effect this payment.  However, the Government issued a new business license
for Yongle expiring December 31, 2009.  Management assumes that the
Government will take no action and the investment can be paid up on or before
December 31, 2009, the expiration date of the new business license. 
Management is seeking capital to enable it to make this payment, and it believes
that the investment can be fully paid up on time. However, the Company has
no commitment from any party to make this payment, and failure to make payment
by December 31, 2009 could result in the loss its investment in
Yongle.  In this event, the Company would no longer be able to conduct
business through Yongle, and Yongle would no longer be in business.
  3.
                Summary
      of Significant Accounting Policies
 Use of estimates - The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affected 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 reported periods.
 
 Significant
estimates included 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.
  8
  Cash and cash equivalents -The Company considers all highly liquid debt instruments purchased with
maturity period of three 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.
 
 Inventory -Inventory is
stated at the lower of cost or market. 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 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.
 
 Accounts receivable -Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred.
  Property and equipment-
Property and equipment is stated at the historical cost, less accumulated
depreciation. Land use rights are being amortized to expense on a straight line
basis over the life of the rights. Depreciation on property, plant 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:
 
 Buildings
                
                
                25
      - 40 yearsMachinery
      and equipment
                
                
                10
      - 20 yearsMotor
      vehicles
                
                
                5
      years
 
 Expenditures
for renewals and betterments were 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 there was no
impairment recorded during the three months ended at March 31, 2009 and
2008.
 
 Construction in progress -
Construction in progress represents the costs incurred in connection with the
construction of buildings or additions to the Company’s plant facilities. No
depreciation is provided for construction in progress until such time as the
assets are completed and placed into service.
 
 Land use rights- There is no
private ownership of land in the PRC. The Company has acquired land use rights
to a total of 2,356,209 square feet, on which a 290,626 square feet facility is
located. The land use rights have terms of 50 years, with the land use right
relating to 1,207,388 square feet expiring in 2050 and the land use right with
respect to 1,148,821 square feet expiring in 2057. The cost of the land use
rights is amortized over the 50-year term of the land use right. The Company
evaluates the carrying value of intangible assets during the fourth quarter of
each year and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the intangible asset
below its carrying amount.
 
 Income recognition- Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, 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. The Company
believes that these criteria are satisfied when the goods are shipped pursuant
to a purchase order.
  9
  Interest
income is recognized when earned.
 
 Advertising - The Company
expenses all advertising costs as incurred. There was no advertising expense for
the three months ended March 31, 2009.
 
 Shipping and handling costs-
The Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting
for Shipping and Handling Fees and Costs.  The Company does not charge
its customers for shipping and handling. The Company classifies shipping and
handling costs as part of the operating expenses. For the three months ended
March 31, 2009 and 2008, shipping and handling costs were $300,787 and $12,967,
respectively.
  Segment reporting - Statement
of Financial Accounting Standards No 131 (“SFAS 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.
 
 The
Company only sells carbon graphite products and sells only to Chinese
distributors and end users and is in only one business segment.
 
 Taxation -Taxation on profits
earned in the PRC has been calculated on the estimated assessable profits for
the year at the rates of taxation prevailing in the PRC where the Company
operates after taking into effect the benefits from any special tax credits or
“tax holidays” allowed in the county of operations.
 
 The
Company does not accrue United States income tax since it has no significant
operating income 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 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 of
some degree of uncertainty due to tax law and policy changes by the state.
However, 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 December 31, 2008 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
December 31, 2008, 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 12 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 - On
March 16, 2007, the PRC’s parliament, the National People’s Congress, adopted
the Enterprise Income Tax Law, which took effect on January 1, 2008. The new
income tax law sets unified income tax rate for domestic and foreign companies
at 25% except a 15% corporation income tax rate for qualified high technology
and science enterprises. In accordance with this new income tax law, low
preferential tax rate in accordance with both the tax laws and administrative
regulations prior to the promulgation of this law shall gradually transit to the
new tax rate within five years after the implementation of this
law.
 
 The
Company has been recognized as a high technology and science company by the
Ministry of Science and Technology of the PRC. Therefore, Xing He District Local
Tax Authority in the Nei Mongol province granted tax holiday from 100% of
enterprises income tax for 10 years from 2008 through 2018. Afterwards, based on
the present tax law and the Company’s status as a high technology and science
company, the Company will be subject to a corporation income tax rate of 15%
effective in 2019.
 
 The
enterprise income tax is calculated on the basis of the statutory profit as
defined in the PRC tax laws. This statutory profit computed differently from the
Company’s net income under U.S. GAAP.
  10
  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 of 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.
 
 The
Company has been granted an exemption from VAT by the Xing He County People’s
Government and Xing He Tax Authority on some products in which an exchange
agreement is in place for raw materials and fuel.
 
 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 it.
 
 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 was 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 balance
contribution of 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.
 
 In
addition, we are required by Chinese laws to cover employees in China with
various types of social insurance. We believe that we are in material compliance
with the relevant PRC laws.
  Fair value of financial instruments- In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements; rather, it
applies under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS
157 are effective for the fiscal years beginning after November 15,
2007.
 
 Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
157). The adoption of SFAS No. 157 did not have a material impact on the
Company’s fair value measurements. The carrying amounts of certain financial
instruments, including cash, accounts receivable, notes receivable, other
receivables, accounts payable, commercial notes payable, accrued expenses, and
other payables approximate their fair values as of March 31, 2009 and December
31, 2008 because of the relatively short-term maturity of these
instruments.
  11
  Foreign currency translation-
The reporting currency of the Company is the U.S. dollar. The functional
currency of the Company is the local currency, the Chinese Renminbi (“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
local currency financial statements into U.S. dollars are included in
determining comprehensive income. Translation adjustments for the three months
ended March 31, 2009 and 2008 are $44,914 and $1,252,143, respectively. The
cumulative translation adjustment and effect of exchange rate changes on cash
for the three months ended March 31, 2009 and 2008 was $95 and $60,847,
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.
 
 Asset and
liability accounts at March 31, 2009 and December 31, 2008 were translated at
6.8456 RMB to $1.00 and at 6.8542 RMB to $1.00, respectively. Equity accounts
were stated at their historical rate. The average translation rates applied to
income statements for the three months ended March 31, 2009 and 2008 were
6.84659 RMB and 7.177 RMB to $1.00, respectively. In accordance with Statement
of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows
from the Company's operations are calculated based upon the local currencies
using the average translation rate. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
 
 Earnings 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 has outstanding
warrants to purchase 3,000,000 shares of common stock at an exercise price of
$1.20 per share and 3,000,000 shares of common stock at an exercise price of
$2.00 per share. 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 three months ended March 31, 2009 and 2008.
 
 Three Months Ended March
31,2009
                  
                  
                  2008Weighted
      average shares of common stock outstanding (basic)
                  
                  
                  12,768,144
                  
                  
                  
                  13,218,412Shares
      issuable upon conversion of series A preferred stock
                  
                  
                  453,441
                  
                  
                  
                  923,460Shares
      issuable upon exercise of warrants
                  
                  
                  0
                  
                  
                  
                  4,615,385Weighted
      average shares of common stock outstanding (diluted)
                  
                  
                  13,221,585
                  
                  
                  
                  18,757,257Net
      income available to common shareholders
                  
                  $
                  471,040
                  
                  
                  $
                  388,881Net
      income per shares of common stock (diluted)
                  
                  $
                  .04
                  
                  
                  $
                  .02
 
 For the
three months ended March 31, 2009, the Company did not include any shares of
common stock issuable upon exercise of warrants, since such issuance would be
antidilutive.
 
 Accumulated other comprehensive
income- The Company follows Statement of Financial Accounting Standards
No. 130 (SFAS 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 three months ended March 31, 2009 and 2008 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.
  12
  Recent
accounting pronouncements
  In
December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and
SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160).
These new standards will significantly change the financial accounting and
reporting of business combination transactions and noncontrolling (or minority)
interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). The adoption of SFAS 141(R) and 160 does not have a
material effect on the Company’s condensed consolidated financial
statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No.
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). This Statement does not have an effect on the Company’s
condensed consolidated financial statements.
  In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No. 133”
(“SFAS No. 161”), which changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This statement will be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (that is, the year ended December 31, 2009 for the Company).
This Statement does not have an effect on the Company’s condensed consolidated
financial statements.
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP
APB 14-1 clarifies that convertible debt instruments that may be settled in cash
upon either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted FSP APB 14-1 beginning in the first
quarter of 2009, and this standard must be applied on a retroactive basis. This
Statement does not have an effect on the Company’s condensed consolidated
financial statements.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Management does not expect that this
Statement will have an effect on the Company’s condensed consolidated financial
statements.
  In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement
interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and
amends existing accounting pronouncements to clarify their application to the
financial guarantee insurance contracts included within the scope of this
Statement. This Statement requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. This Statement also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 (that is, fiscal 2009 for the Company), and all interim
periods within those fiscal years. This Statement does not have an effect on the
Company’s condensed consolidated financial statements.
  On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities,” to
address the question of whether instruments granted in share-based payment
transactions are participating securities prior to vesting. As provided in the
FSP, unvested share-based payment awards that contain rights to dividend
payments should be included in earnings per share calculations. The guidance
will be effective commencing in the year ended December 31, 2009. We are
currently evaluating the requirements of EITF 03-6-1 as well as the impact of
the adoption on our condensed consolidated financial statements.
   13
  In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain
Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”. This Issue is
effective for financial statements issued for fiscal years ending after December
15, 2008 and has no effect on the Company’s financial statements.
  In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
adoption of EITF 07-5 as of January 1, 2009 did not have any material effect on
the Company’s consolidated financial position, results of operations or cash
flows.
  In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.
   In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8
did not have any impact on the Company’s financial statements.
   In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1, which is effective for annual reporting periods ending after
December 15, 2008, does not have a material impact on the Company’s financial
statements.
  4.
              Concentrations
      of Business and Credit Risk
 
 Substantially
all 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 FDIC on funds
held in U.S. banks.
  The
Company is operating in the PRC, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese 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 Company's large number of diverse
customers in different locations in China. The Company does not require
collateral or other security to support financial instruments subject to credit
risk.
 
 For
      the three months ended March 31, 2009, two customers accounted for 10% or
      more of sales revenues, representing 27% and 26%, respectively of the
      total sales. No customer accounted for 10% or more of the Company’s
      revenue during the three months ended March 31,
  2008.
 
 For the
three months ended March 31, 2009 and 2008, the Company had insurance expense of
$0 and $5,281 respectively. Accrual for losses is not recognized until such time
a loss has occurred.
  14
  5.
              Income
      Taxes
 
 Under the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the PRC, which took effect on January 1, 2008,
domestic and foreign companies pay a unified corporate income tax of 25% except
a 15% corporation income tax rate for qualified high technology and science
enterprises.
 
 The
Company has been granted a 100% tax holiday from enterprises income tax from the
Xing He District Local Tax Authority for the ten years 2008 through 2018. This
tax holiday could be challenged by higher taxing authorities in the PRC, which
could result in taxes and penalties owed for those years. For the three months
ended March 31, 2009 and 2008, the enterprise income tax at the statutory rates
would have been approximately $70,656 and $186,477, respectively.
  A
reconciliation of the provision for income taxes with amounts determined by the
PRC statutory income tax rate to income before income taxes is as
follows:
  Three
      months ended March 31,2009
                              
                              
                              2008Computed
      tax at the PRC statutory rate of 15%
                              
                              $
                              70,656
                              
                              
                              $
                              186,477Benefit
      of tax holiday
                              
                              
                              (70,656
                              )
                              
                              
                              (186,477
                              )Income
      tax expenses per books
                              
                              $
                              -
                              
                              
                              $
                              -
 
 6.
              Trade
      Accounts Receivable - net
 
 As of
March 31, 2009 and December 31, 2008, trade accounts receivable consisted of the
following:
  March
      31, 2009
                              
                              
                              December
      31, 2008Amount
      outstanding
                              
                              $
                              4,631,577
                              
                              
                              $
                              4,928,354Bad
      debt provision
                              
                              
                              (610,624
                              )
                              
                              
                              (703,944
                              )Net
      amount
                              
                              $
                              4,020,953
                              
                              
                              $
                              4,224,410
 
 7.
              Advance
      to suppliers, net
 
 As of
March 31, 2009 and December 31, 2008, advance to suppliers consisted of the
following:
  March
      31, 2009
                                
                                
                                December
      31, 2008Amount
      outstanding
                                
                                $
                                718,284
                                
                                
                                $
                                1,186,640Bad
      debt provision
                                
                                
                                (174,711
                                )
                                
                                
                                (169,552
                                )Net
      amount
                                
                                $
                                543,573
                                
                                
                                $
                                1,017,088
 For the
three months ended March 31, 2009 and 2008, the reserve on advance to suppliers
was charged to expenses for $5,159 and $0, respectively.
 
 8.
              Inventories
  As of
March 31, 2009 and December 31, 2008, inventories consisted of the
following:
  15
  March
      31, 2009
                                  
                                  
                                  December
      31, 2008Raw
      materials
                                  
                                  $
                                  994,136
                                  
                                  
                                  $
                                  820,250Work
      in process
                                  
                                  
                                  13,670,537
                                  
                                  
                                  
                                  13,193,750Finished
      goods
                                  
                                  
                                  1,293,068
                                  
                                  
                                  
                                  1,821,719Repair
      Parts
                                  
                                  
                                  53,897
                                  
                                  
                                  
                                  53,830$
                                  16,011,638
                                  
                                  
                                  $
                                  15,889,549
  Raw
materials consist primarily of asphalt, petroleum coke, needle coke and other
materials used in production. Finished goods consist of graphite electrodes,
fine grain graphite and high purity graphite. The costs of finished goods
include direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production are also included in the cost of inventory.
 
 9.
              Property
      and Equipment, net
 
 As of
March 31, 2009 and December 31, 2008, property and equipment consist of the
following:
 
 March
      31, 2009
                  
                  
                  December
      31, 2008Building
                  
                  $
                  8,118,267
                  
                  
                  $
                  7,956,770Machinery
      and equipment
                  
                  
                  20,867,087
                  
                  
                  
                  19,515,684Motor
      vehicles
                  
                  
                  40,902
                  
                  
                  
                  40,85129,026,256
                  
                  
                  
                  27,513,305Less:
      Accumulated depreciation
                  
                  
                  6,827,195
                  
                  
                  
                  6,509,698$
                  22,199,061
                  
                  
                  $
                  21,003,607
 
 For the
three months ended March 31, 2009 and 2008, depreciation expense amounted to
$309,275 and $294,373 was charged to cost of goods sold.
 
 10.
              Land
      Use Right
 
 As of
March 31, 2009 and December 31, 2008, land use rights consist of the
following:
 
 March
      31, 2009
                  
                  
                  December
      31, 2008Land
      Use Right
                  
                  $
                  3,811,539
                  
                  
                  $
                  3,811,539Less:
      Accumulated amortization
                  
                  
                  221,769
                  
                  
                  
                  207,214$
                  3,589,770
                  
                  
                  $
                  3,604,325
  For the
three months ended March 31, 2009 and 2008, amortization expenses were $19,080
and $15,474 respectively.
 
 Future
amortization of the land use rights is as follows:
 
 Year ended December 31,2009
                      
                      $
                      76,3202010
                      
                      
                      76,3202011
                      
                      
                      76,3202012
                      
                      
                      76,3202013
                      
                      
                      76,3202014
      and thereafter
                      
                      
                      3,222,725Total
                      
                      $
                      3,604,325
 
 11.
              Stockholders’
      equity
  (a)
              Restated
      Articles of Incorporation
   16
 
 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 give the directors the authority to issue one or more series of
preferred stock and to designate the rights, preferences, privileges and
limitation of the holders of each set. The board of directors has designated the
rights, preferences, privileges and limitation of one series of preferred stock
-- the series A convertible preferred stock (“series A preferred
stock”).
 
 On
December 17, 2007, the Company issued its 3% promissory note in the amount of
$1,200,000. Pursuant to the agreement pursuant to which the note was issued,
upon the filing of a restated certificate of incorporation which provided for
the creation of a series of preferred stock and the filing of a certificate of
designation which created the series A preferred stock, the note would
automatically be converted into 1,200,499 shares of series A preferred stock and
warrants to purchase 3,000,00 shares of common stock at $1.20 per shares and
3,000,00 shares of common stock at $2.00 per share. On January 22, 2008, upon
the filing of a restated articles of incorporation and a statement of
designation for the series A convertible preferred stock, and the outstanding
convertible note was converted into such shares of series A preferred stock and
warrants.
 
 The
statement of designation for the series A preferred stock provides the
following:
 
 •
              Each
      share of series A preferred stock is convertible into one share of common
      stock, at a conversion price of $1.00, subject to
    adjustment.
  •
              While
      the series A preferred stock is outstanding, with certain exceptions, if
      the Company issues common stock at a price or warrants or other
      convertible securities at a conversion or exercise price which is less
      than the conversion price then in effect, the conversion price shall be
      adjusted on a formula basis.
  •
              While
      the Series A Preferred Stock is outstanding, without the approval of the
      holders of 75% of the outstanding shares of Series A Preferred Stock, the
      Company may not pay cash dividends or other distributions of cash,
      property or evidences of indebtedness, nor redeem any shares of Common
      Stock.
  •
              No
      dividends are payable with respect to the series A preferred
      stock.
  •
              Upon
      any voluntary or involuntary liquidation, dissolution or winding-up, the
      holders of the series A preferred stock are entitled to a preference of
      $1.00 per share before any distributions or payments may be made with
      respect to the common stock or any other class or series of capital stock
      which is junior to the series A preferred stock upon voluntary or
      involuntary liquidation, dissolution or
  winding-up.
  •
              The
      holders of the series A preferred stock have no voting rights. However, so
      long as any shares of series A preferred stock are outstanding, the
      Company shall not, without the affirmative approval of the holders of 75%
      of the outstanding shares of series A preferred stock then outstanding,
      (a) alter or change adversely the powers, preferences or rights given to
      the series A preferred stock or alter or amend the certificate of
      designation, (b) authorize or create any class of stock ranking as to
      dividends or distribution of assets upon liquidation senior to or
      otherwise pari passu with the series A preferred stock, or any of
      preferred stock possessing greater voting rights or the right to convert
      at a more favorable price than the series A preferred stock, (c) amend our
      articles of incorporation or other charter documents in breach of any of
      the provisions thereof, (d) increase the authorized number of shares of
      series A preferred stock, or (e) enter into any agreement with respect to
      the foregoing.
  (b)
              Warrants
 
 The
warrants have terms of five years, and expire December 3, 2012. The warrants
provide a cashless exercise feature; however, the holders of the warrants may
not make a cashless exercise only if the underlying shares are not covered by an
effective registration statement.  As of March 31, 2009, the
underlying shares were not covered by a registration statement.
  (c)
              Securities
      Purchase Agreement
 
 Pursuant
to the securities purchase agreement, as amended (see Note 16), relating to the
Company’s December 2007 private placement:
 
 •
              On
      January 22, 2008, the Company filed a restated certificate of
      incorporation which changed the Company’s authorized capital stock to
      120,000,000 shares of capital stock, of which 20,000,000 shares would be
      shares of preferred stock, par value $.001 per share, and 100,000,000
      shares would be shares of common stock, par value $.001 per share, and
      included a statement of designations of the rights of the holders of the
      series A preferred stock.
   17
  •
              The
      Company and the investor entered into a registration rights agreement
      pursuant to which we are required to have a registration statement filed
      with the SEC by December 31, 2010.  The Company is required to
      pay liquidated damages at the rate of 200 shares of series A preferred
      stock for each day after December 31, 2010 that the registration statement
      is not declared effective or for any period that we fail to keep the
      registration statement effective, up to a maximum of 100,000 shares. The
      number of shares of series A preferred stock issuable pursuant to the
      liquidated damages provision is subject to reduction based on the maximum
      number of shares that can be registered under the applicable SEC
      guidelines. The registration obligation does not apply to shares that can
      be sold pursuant to Rule 144 of the Securities and Exchange
      Commission.
  •
              The
      investor has a right of first refusal on future financings until December
      2010.
  (d)
              Cancellation
      of common stock
 
 In
connection with the acquisition of Talent, the Company purchased 1,000,000
shares of common stock from the then principal shareholder. The purchase price
was paid in installments, with the final installment being due and paid on June
30, 2008. The Company placed 1,000,000 of the shares of common stock in escrow,
and the shares were released from escrow and cancelled.
 
 (e)
              Deemed
      Preferred Stock Dividend
  Upon
filing of the Company’s amended and restated articles of incorporation on
January 22, 2008, $1,200,000 of convertible notes were automatically converted
into (i) 1,200,499 shares of preferred stock, with each share of series A
preferred stock being convertible into one share of common stock (subject to
adjustment) and (ii) warrants to purchase 3,000,000 shares of the common stock
at $1.20 and 3,000,000 shares at $2.00 per share. At December 17, 2007, the fair
value of the warrants used to calculate the intrinsic value of the conversion
option was estimated at $3,831,900 and was computed using the Black-Scholes
option-pricing model based on the assumed issuance of the warrants on the date
the notes were issued. Variables used in the option-pricing model include
(1) risk-free interest rate at the date of grant (3.5%), (2) expected
warrant life of 5 years, (3) expected volatility of 100%, and
(4) 0% expected dividend.   The Company used the market price of
its common stock at December 17, 2007, $0.95 per share, and computed the
effective preferred stock conversion price to be $0.24 per share. The
resulting intrinsic value of the conversion feature was $854,300 reported as a
deemed dividend to the holder of the series A preferred
stock.
  As the
series A preferred stock does not provide for redemption by the Company or have
a finite life, upon the conversion to preferred stock, a one-time preferred
stock deemed dividend of $854,300 was recognized immediately as a non-cash
charge. The deemed preferred stock dividend of $854,300 has been recorded as
additional paid-in capital and a reduction to retained earnings in
2008.
 
 (f)
              Issuance
      of restricted common stock
 
 On February 9, 2009, the Company entered into a Consulting
Agreement with Ventana Capital Partners, Inc.  Pursuant to the Consulting
Agreement, the Company issued Ventana an aggregate of 750,000 shares of
restricted common stock as consideration for the investor and public relations
services.  The consulting agreement will expire on August 9,
2009.  The shares were valued at $0.12 per share, or $90,000, which
was the fair value of the shares at the date of exchange
agreement.  The value of the shares is expensed ratably over the term
of the agreement, with $25,220 being expensed during the three months ended
March 31, 2009.  The balance being reflected as a
prepayment.
 
 Pursuant
to a share purchase agreement dated March 10, 2009, the Company sold 70,000
shares of the Company's Common Stock, to one investor at a purchase price of
$1.00 per share, for a total of $70,000.  The Company paid $2,100 as a
commission to the finder. The restricted shares were issued on March 20,
2009.
 
 (g)  Issuance
of common stock on conversion of series A preferred stock
 
 In March
2009, 747,058 shares of common stock were issued upon conversion of 747,058
shares of series A preferred stock.  As a result of the conversion, on
March 31, 2009, there were 453,441 shares of series A preferred stock
outstanding.
 
 12.
              Short-term
      bank loans
  As of
March 31, 2009 and December 31, 2008, short term loans consisted of the
following:
 
 
 18
 
 March
      31, 2009
                  
                  
                  December
      31, 2008Bank
      loans dated July 17, 2008, due May 6, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                  
                  $
                  657,357
                  
                  
                  $
                  656,532Bank
      loans dated July 17, 2008, due May 25, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                  
                  
                  1,168,634
                  
                  
                  
                  1,167,167Bank
      loans dated July 17, 2008, due June 15, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                  
                  
                  1,168,634
                  
                  
                  
                  1,167,167Bank
      loans dated July 17, 2008, due July 1, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                  
                  
                  1,168,634
                  
                  
                  
                  1,167,167Bank
      loans dated July 17, 2008, due July 13, 2009 with an interest rate of
      9.711%, interest payable monthly, secured by property and equipment and
      land use rights
                  
                  
                  730,395
                  
                  
                  
                  729,481$
                  4,893,654
                  
                  
                  $
                  4,887,514
 
 13.
              Long-term
      bank loan
 March
      31, 2009
              
              December
      31, 2008Bank
      loans dated October 10, 2008, due October 9, 2011 with an interest rate of
      6.75%, interest payable monthly.
              
              $
              4,674,536
              $
              5,106,358Less:
      current portion
              
              
              (1,460,792)
              
              (1,896,647)Non-current
      portion
              
              $
              3,213,744
              $
              3,209,711
 
 
 14.
              Related
      party transactions
 
 In
October 2008, our VIE affiliate Xingyong advanced  RMB 35,000,000
(approximately $5.1 million) to Beijing Royal Yiyuan Inc (“Royal”), a company
owned by our principal shareholder, Dengyong Jin.
 
 Xingyong
had borrowed money from Dengyong Jin, who is the principal stockholder of
Xingyong. The amount due to Dengyong Jin was approximately $3,758,000 when
Xingyong made the $5.1 million advance to Royal. In a written agreement, with
the consent of three parties, Dengyong Jin, Xingyong and Royal, Royal agreed to
assume Xingyong’s debt to Dengyong Jin in the amount of approximately
$3,758,000. In exchange, Xingyong will reduce $3,758,000 from Royal’s debt
obligation of $5.1 million to Xingyong.
 
 Xingyong
had borrowed money from Fengying Xue, who was not a related party to Xingyong.
The amount due to Fengying Xue was approximately $1,058,000 when Xingyong made
the $5.1 million advance to Beijing Royal Yiyuan Inc. In a written agreement,
with the consent of three parties, Fengying Xue, Xingyong and Royal, Royal
agreed to assume Xingyong’s debt of approximately $1,058,000 to Fengying Xue. In
exchange, Xingyong will reduce the approximate amount of $1,058,000 from Royal’s
debt obligation of $5.1 million to Xingyong.
 
 The two
transactions above resulted in a deduction of Royal’s debt to Xingyong in the
total amount of $4,816,000. As a result, Royal’s remaining debt to Xingyong was
approximately $290,000 as of December 31, 2008 and at March 31, 2009 . This
balance was paid off on April 10, 2009.
  19
  The two
transactions above also resulted in a cancellation of Xingyong’s debt to
Dengyong Jin in the amount of approximately $3,758,000 and a cancellation of
Xingyong’s debt to Fengying Xue in the amount of approximately $1,058,000. As of
December 31, 2008, Xingyong had no payable to Dengyong Jin and Fengying
Xue.
 
 As of
March 31, 2009, Xingyong has a payable of $30,337 to Dengyong Jin.
 
 15.
              Contingencies
      and commitments
  As
mentioned in Note 2, as Talent failed to make the $800,000 capital investment in
Yongle by December 12, 2007 or obtain an extension to effect such payment, the
Government can give notice to Talent to cancel the business license of Yongle
and cancel the investment.  As such, Yongle would cease to be a subsidiary
and thus all VIEs would be detached.
  If ever
the Company fails to pay up the total investment of $4,000,000 on or before
September 12, 2009, the Government can also give notice to Talent to cancel the
business license of Yongle and cancel the investment.  Yongle has
received a new business license that expires on December 31,
2009.  The Company believes that the government will not take any
adverse action with respect to Yongle prior to December 31, 2009.  If
the Company is unable to make the payment, the Company will seek to obtain a
reduction in the stated capital.
  16.
                Subsequent
      Event
 On April
8, 2009, the Company entered into an amendment agreement with
XingGuang.  The agreement amended the securities purchase agreement
dated December 14, 2007, by and between the Company and XingGuang to eliminate
the Company’s obligation to have a majority of independent directors or
committees comprised of independent directors.  Also pursuant to the
amendment agreement, the registration rights agreement dated December 14, 2007,
by and between the Company and XingGuang was amended to postpone from August 13,
2008 to December 31, 2010, the date that a registration statement is to be
declared effective before liquidated damages start to accrue.
 
  20
  Item
2.                      Management’s
Discussion and Analysis Financial Condition and Results of
Operations.
 
 The following discussion of the
results of our operations and financial condition should be read in conjunction
with our financial statements and the related notes, which appear elsewhere in
this report. The following discussion includes forward-looking statements. For a
discussion of important factors that could cause actual results to differ from
results discussed in the forward-looking statements, see “Forward Looking
Statements.”
 
 Overview
 
 We
develop, manufacture and market graphite products. Our main products include
graphite electrode, fine grain graphite and high purity graphite. We produce all
of our products in China. Our products are generally used either as a component
in other products, as an element of a facility or in the manufacturing process
of other products. We sell our products to distributors who sell to producers of
in both the domestic Chinese market and the international market. We also sell
graphite electrodes directly to the end users.
  Our
relationships with Xingyong and its stockholders are governed by a series of
contractual arrangements between Yongle and Xingyong, the operating company in
the PRC. Under PRC laws, Xingyong is an independent legal person and is not
exposed to liabilities incurred by the other parties. Each of the contractual
arrangements and the rights and obligations of the parties thereto are
enforceable and valid in accordance with the laws of the PRC. Under PRC rules
and regulations, Talent, as the sole stockholder of Yongle, is required to make
payments totaling $4,000,000 as part of the capital of Yongle, with 20% being
due within three months from the date that Yongle’s business license was issued,
and the remaining 80% within two years of the issuance of the business
license.  Since the business license was issued on September 13, 2007,
the initial payment of $800,000 was due by December 13, 2007 and the remaining
$3,200,000 is due by September 13, 2009.  We have not made either
payment.  The government issued a new business license on Yongle
expiring December 31, 2009. Management assumes that the Government will take no
action before December 31, 2009, the expiration date of the new business
license.  We cannot assure you that we will be able to make that payment
before December 31, 2009 or that we will receive any further
extensions.
 
 Our
failure to make the payments on time may subject Talent subject of fines or
penalties by the PRC business bureau,   In addition, Talent may
not be permitted to exercise any decision-making rights as a shareholder in
Yongle, which may prevent us from consolidating Yongle’s financial results with
our financial statements.  Since our business is conducted through
Yongle and Xingyong, if we are not able to operate Yongle, which has the right
to operate Xingyong, we may not be able to continue in business.
 
 Although
our products are sold in the international market, substantially all of our
sales are to Chinese firms that may, in turn, sell the products in the
international market. We believe that our products are not subject to export
restrictions.
  In
accordance with the relevant Chinese rules and regulations on management of
foreign exchange, the foreign currency generated from sales of our products
outside of China is brought into China and sold to designated banks instead of
depositing it in banks out of the PRC without authorization. In addition, we
have to buy foreign currency from designated banks upon the strength of
commercial bills when paying current expenditures with foreign currency. In
addition, all of our transactions undertaken in the PRC are denominated in RMB,
which must be converted into other currencies before remittance out of China.
Both the conversion of RMB into foreign currencies and the remittance of foreign
currencies abroad require the approval of the Chinese government.
  Our
principal raw materials are coal asphalt, asphalt coke, metallurgy coke, needle
coke, metallurgy coke power, quartzose sand, coal, petroleum coke and calcined
coke, all of which are carbon rich and used in manufacturing graphite with a
high degree of purity. We purchase most of our raw materials from domestic
Chinese suppliers. Because we do not have any long-term contracts for raw
materials, any increase in prices of raw material will affect the price at which
we can sell our product. If we are not able to raise our prices to pass on
increased costs, we would be unable to maintain our margins. The laws of the PRC
give the government broad power to fix and adjust prices. Although the
government has not imposed price controls on our raw materials such as coal,
gas, oil, electricity and/or water or on our products, it is possible that such
controls may be implemented in the future. Since most of our sales are made to
domestic companies, our gross margins can be affected by any price controls
imposed by the government of the PRC.
 
 Our
internal financial statements are maintained in RMB. The financial statements
included in this Form 10-Q are expressed in United States dollars. The
translation adjustments in expressing the financial statements in United States
dollars is shown on the statements of operation as a translation adjustment, and
the cumulative translation adjustment is shown as an element of stockholders’
equity.
   21
  Our
business has been affected by the effects of the global economic downturn. Our
sales decreased in the first quarter of 2009 because we were required to close
Xingyong’s factory for almost two months because of the Beijing Olympics during
August 2008.  This shutdown affected our production in the fourth
quarter 2008 and first quarter 2009 since the production process takes three to
six months. The decrease in sales was also due to the global economic downturn.
Our graphite electrodes are sold mainly to steel manufacturers, who have been
significantly affected by the global economic downturn. Therefore, we believe
that there is a downturn in the graphite electrode market which will impact our
business, and we cannot determine when or whether the economic downturn will
cease to affect our business.
  Variable
Interest Entity
  Yongle
has an agreement with Xingyong pursuant to which it manages the business of
Xingyong and the profit of Xingyong is paid to Yongle.  Xingyong is
owned by Mr. Jin, who is Yongle’s controlling stockholder and was our chief
executive officer at the time of we entered into our agreements with
Xingyong.  Xingyong is treated as a variable interest entity and its
financial statements are included as part of our consolidated financial
statements under FASB Interpretation No. 46, “Consolidation of Variable Interest
Entities,” referred to as FIN 46.
  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 of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities. On an
on-going 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
 
 We
recognize revenue in accordance with Staff Accounting Bulletin No. 104,
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. 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”). We have been
granted an exemption from VAT by the Xinghe County People’s Government and
Xinghe Tax Authority on some products for which an exchange agreement is in
place for raw materials and fuel.
 
 Comprehensive
Income
 
 We have
adopted Statements of Financial Accounting Standards (“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 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.
With the approvals of the Xinghe County Government, we received a 100% tax
holiday from enterprise income taxes from 2008 through and including
2018.
  On March
16, 2007, China’s parliament, the National People’s Congress, adopted the
Enterprise Income Tax Law, which will take effect on January 1, 2008. The new
income tax law sets unified income tax rate for domestic and foreign companies
at 25% except a 15% corporate income tax rate for qualified high technology and
science enterprises. In accordance with this new income tax law, low
preferential tax rate in accordance with both the tax laws and administrative
regulations prior to the promulgation of this Law gradually becomes subject to
the new tax rate within five years after the implementation of this
law.
  22
  The
Company has been recognized as a high technology and science company by the
Ministry of Science and Technology of the PRC. The Xing He District Local Tax
Authority in the Nei Mongol province granted tax holiday from 100% of
enterprises income tax for ten years 2008 through 2018. Afterwards, based on the
present tax law and the Company’s status as a qualified high technology and
science company, the Company will be subject to a corporation income tax rate of
15% effective in 2019.
  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. Management believes that there was no
obsolete inventory as of March 31, 2009 and 2008.
 
 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.
  Land
Use Rights
 
 There is
no private ownership of land in China. All land ownership is held by the
government of China, its agencies and collectives. Land use rights are obtained
from government, and are typically renewable. Land use rights can be transferred
upon approval by the land administrative authorities of China (State Land
Administration Bureau) upon payment of the required transfer fee. We own the
land use right for 2,356,209square feet, of which
290,626 square is occupied by our facilities, for a term of 50 years, beginning
from issuance date of the certificates granting the land use right. We record
the property subject to land use rights as intangible asset.
  Each
intangible asset is reviewed periodically or more often if circumstances
dictate, to determine whether its carrying value has become impaired. We
consider assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. We also re-evaluate the
amortization periods to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.
 
 Research
and development
 
 Research
and development costs are expensed as incurred, and are included in general and
administrative expenses. These costs primarily consist of cost of material used
and salaries paid for the development of our products and fees paid to third
parties. Our total research and development expense for the three months ended
March 31, 2009 and 2008 has not been significant.
 
 Value
added tax
 
 Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products, raw materials used in the production of the Company’s finished
products, and payment of freight expenses can be used to offset the VAT due on
sales of the finished product.  The amount of VAT liability is
determined by applying the applicable tax rate to the invoiced amount of goods
sold (output VAT) less VAT paid on purchases made with the relevant supporting
invoices (input VAT). Under the commercial practice of the PRC, the Company
paidVAT 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 of 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.
  23
  Recent
accounting pronouncements
  In
December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and
SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160).
These new standards will significantly change the financial accounting and
reporting of business combination transactions and noncontrolling (or minority)
interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). The adoption of SFAS 141(R) and 160 does not have a
material effect on the Company’s condensed consolidated financial
statements.
   In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No.
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). This Statement does not have an effect on the Company’s
condensed consolidated financial statements.
   In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No. 133”
(“SFAS No. 161”), which changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This statement will be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (that is, the year ended December 31, 2009 for the Company).
This Statement does not have an effect on the Company’s condensed consolidated
financial statements.
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP
APB 14-1 clarifies that convertible debt instruments that may be settled in cash
upon either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted FSP APB 14-1 beginning in the first
quarter of 2009, and this standard must be applied on a retroactive basis. This
Statement does not have an effect on the Company’s condensed consolidated
financial statements.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Management does not expect that this
Statement will have an effect on the Company’s condensed consolidated financial
statements.
  In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement
interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and
amends existing accounting pronouncements to clarify their application to the
financial guarantee insurance contracts included within the scope of this
Statement. This Statement requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. This Statement also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 (that is, fiscal 2009 for the Company), and all interim
periods within those fiscal years. This Statement does not have an effect on the
Company’s condensed consolidated financial statements.
  On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether
Instruments Granted in
Share-Based Payment Transactions Are Participating Securities,” to
address the question of whether instruments granted in share-based payment
transactions are participating securities prior to vesting. As provided in the
FSP, unvested share-based payment awards that contain rights to dividend
payments should be included in earnings per share calculations. The guidance
will be effective commencing in the year ended December 31, 2009. We are
currently evaluating the requirements of EITF 03-6-1 as well as the impact of
the adoption on our condensed consolidated financial statements.
  24
  In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain
Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”. This Issue is
effective for financial statements issued for fiscal years ending after December
15, 2008 and has no effect on the Company’s financial statements.
   In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
adoption of EITF 07-5 has no material effect on our financial condition, results
of operations or cash flows.
   In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.
   In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8
did not have any impact on the Company’s financial statements.
  In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1, which is effective for annual reporting periods ending after
December 15, 2008, does not have a material impact on the Company’s condensed
consolidated financial statements.
  RESULTS
OF OPERATIONS
 
 The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
 
 All
amounts, other than percentages, in thousands of U.S. dollars
   25
 
 Three
      Months Ended March 31,2009
                                                                
                                                                
                                                                2008US
      Dollars
                                                                
                                                                
                                                                Percentage
                                                                
                                                                
                                                                US
      Dollars
                                                                
                                                                
                                                                PercentageSales
                                                                
                                                                
                                                                
                                                                $
                                                                2,894
                                                                
                                                                
                                                                
                                                                100.0
                                                                
                                                                %
                                                                
                                                                
                                                                $
                                                                5,728
                                                                
                                                                
                                                                
                                                                100.0
                                                                
                                                                %Cost
      of sales
                                                                
                                                                
                                                                
                                                                
                                                                2,053
                                                                
                                                                
                                                                
                                                                70.9
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                4,366
                                                                
                                                                
                                                                
                                                                76.2
                                                                
                                                                %Gross
      profit
                                                                
                                                                
                                                                
                                                                
                                                                841
                                                                
                                                                
                                                                
                                                                29.1
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                1,362
                                                                
                                                                
                                                                
                                                                23.8
                                                                
                                                                %Operating
      expenses
                                                                
                                                                
                                                                
                                                                
                                                                464
                                                                
                                                                
                                                                
                                                                16.0
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                (185
                                                                )
                                                                
                                                                
                                                                (3.2
                                                                )
                                                                %Income
      from operations
                                                                
                                                                
                                                                
                                                                
                                                                377
                                                                
                                                                
                                                                
                                                                13.0
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                1,177
                                                                
                                                                
                                                                
                                                                20.5
                                                                
                                                                %Other
      income
                                                                
                                                                
                                                                
                                                                
                                                                292
                                                                
                                                                
                                                                
                                                                10.1
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                199
                                                                
                                                                
                                                                
                                                                3.5
                                                                
                                                                %Interest
      expense
                                                                
                                                                
                                                                
                                                                
                                                                (198
                                                                )
                                                                
                                                                
                                                                (6.8
                                                                )
                                                                %
                                                                
                                                                
                                                                
                                                                (133
                                                                )
                                                                
                                                                
                                                                (2.3
                                                                )
                                                                %Income
      before income tax expense
                                                                
                                                                
                                                                
                                                                
                                                                471
                                                                
                                                                
                                                                
                                                                16.3
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                1,243
                                                                
                                                                
                                                                
                                                                21.7
                                                                
                                                                %Provision
      for income taxes
                                                                
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                %Net
      income
                                                                
                                                                
                                                                
                                                                
                                                                471
                                                                
                                                                
                                                                
                                                                16.3
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                1,243
                                                                
                                                                
                                                                
                                                                21.7
                                                                
                                                                %Deemed
      preferred stock dividend
                                                                
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                (854
                                                                )
                                                                
                                                                
                                                                (14.9
                                                                )
                                                                %Net
      income available to common shareholders
                                                                
                                                                
                                                                
                                                                
                                                                471
                                                                
                                                                
                                                                
                                                                16.3
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                389
                                                                
                                                                
                                                                
                                                                6.8
                                                                
                                                                %Foreign
      currency translation adjustment
                                                                
                                                                
                                                                
                                                                
                                                                45
                                                                
                                                                
                                                                
                                                                1.5
                                                                
                                                                %
                                                                
                                                                
                                                                
                                                                1,252
                                                                
                                                                
                                                                
                                                                21.9
                                                                
                                                                %Total
      comprehensive income
                                                                
                                                                
                                                                
                                                                $
                                                                516
                                                                
                                                                
                                                                
                                                                17.8
                                                                
                                                                %
                                                                
                                                                
                                                                $
                                                                2,495
                                                                
                                                                
                                                                
                                                                43.6
                                                                
                                                                %
  Sales. During the three
months ended March 31, 2009, we had sales of $2,894,000, as compared to sales of
$5,728,000 for the three months ended March 31, 2008, a decrease of $2,834,000,
or approximately 49.5%.  The sales decrease reflects the effects of
the global economic downturn as well as the closure of Xingyong’s plant
facilities for almost two months for the Olympics in August 2008 as part of the
Chinese government’s program to reduce air pollution during that period.
 This shutdown reduced our sales in the first quarter of 2009 because
it takes about three months to six months to produce graphite
products.
 
 Cost of sales; gross margin.
During the three months ended March 31, 2009, our cost of sales was $2,053,000,
as compared to $4,366,000 during the three months ended March 31, 2008, a
decrease of $2,313,000, or 53.0%. The decrease in cost of sales was directly
associated with the decrease in sales. As a result, our gross profit decreased
$521,000, or 38.3%. Our gross margin increased from 23.8% for the three months
ended March 31, 2008 to 29.1% the three months ended March
31, 2009.  The improvement in gross profit margin was due to our
production focus shift from graphite electrodes to higher margin products – fine
grain graphite and high purity graphite.
 
 Depreciation and amortization
expense. Depreciation and amortization amounted to$328,000 for the
three months ended March 31, 2009 and $309,000 for the three months ended
March 31, 2008, of which $309,000 for 2009 and
$294,000 for 2008
were included in cost of sales and $19,000  for 2009 and
$15,000 for 2008 were included in operating expenses.
 
 Selling, general and administrative
expenses. Selling, general and administrative expenses totaled $445,000
for the three months ended March 31, 2009, as compared to $170,000 for the three
months ended March 31, 2008, an increase of $275,000 or
approximately 162.3%.
 
 Selling
expenses increased from $20,000 for the three months ended March 31, 2008 to
$309,000 for the three months ended March 31, 2009. The increase was
due to the effort to market our high margin products – fine grain graphite and
high purity graphite.
 
 26
  General
and administrative expense was $136,000 for the three months ended March 31,
2009, which remained flat compared to $149,000 for the same
period a year ago.
 
 Depreciation
and amortization increased from $15,000 for the three months March 31, 2008 to
$19,000 for the three months March 31, 2009.
 
 Income from
operations.As a result of the factors described above, income
from operations amounted to $377,000 for the three months ended March 31,
2009, as compared to $1,177,000 for the three months ended March 31, 2008, a
decrease of approximately $800,000, or 68.0%.
 
 Other income
(expenses).  Interest expense was $198,000 for the three months
ended March 31, 2009, as compared with $133,000 for the three months ended March
31, 2008 reflecting both increased borrowings and an increase in the interest
rate.  We had nominal interest income during the three months ended
March 31, 2009 and 2008. Other income, which consisted of government grants, was
$292,000 and $199,000 for the three months ended March 31, 2009 and 2008,
respectively.
 
 Net income. As a result of
the factors described above, our net income for the three months ended March 31,
2009 was $471,000, as compared to $1,243,000 for the three months ended
March 31, 2008, a decrease of $772,000.
 
 Deemed preferred dividend. As
a result of the automatic conversion of our 3% convertible notes into shares of
series A preferred stock and warrants in January 2008, we incurred a preferred
stock deemed dividend of $854,300, representing the intrinsic value of the
beneficial conversion feature of the series A preferred stock resulting from the
warrant issuance. The deemed preferred stock dividend was a non-cash charge
which did not affect our operations or cash flow for the three months ended
March 31, 2008.
 
 Net income available to common
shareholders.  Net income available for common shareholders was
$471,000 ($0.04 per share - basic and diluted) for the three months ended March
31, 2009 and $389,000 for the three months ended March 31, 2008 ($0.03 per share
- basic and $0.02 per share - diluted).
 
 Liquidity
and Capital Resources
 
 Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing
basis.  At March 31, 2009, we had a cash balance of $244,000, of which
$241,000 was located in banks in China.
 
 The
following table sets forth information as to the principal changes in the
components of our working capital from December 31, 2008 to March 31,
2009
 
 All
amounts, other than percentages, in thousands of U.S. dollars
   27
  Category
                    
                    March 31, 2009
                    
                    
                    December 31,2008
                    
                    
                    Change
                    
                    
                    Percent ChangeCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    244
                    
                    
                    $
                    52
                    
                    
                    $
                    192
                    
                    
                    
                    369.2
                    %Trade
      accounts receivable
                    
                    
                    4,021
                    
                    
                    
                    4,224
                    
                    
                    
                    (203
                    )
                    
                    
                    (4.8
                    )%Notes
      receivable
                    
                    
                    66
                    
                    
                    
                    28
                    
                    
                    
                    38
                    
                    
                    
                    135.7
                    %Other
      receivables
                    
                    
                    233
                    
                    
                    
                    151
                    
                    
                    
                    82
                    
                    
                    
                    54.3
                    %Advances
      to suppliers
                    
                    
                    544
                    
                    
                    
                    1,017
                    
                    
                    
                    (473
                    )
                    
                    
                    (46.5
                    )%Advances
      to related party
                    
                    
                    291
                    
                    
                    
                    291
                    
                    
                    
                    --
                    
                    
                    
                    --Prepaid
      expenses
                    
                    
                    85
                    
                    
                    
                    --
                    
                    
                    
                    85
                    
                    
                    
                    100.0
                    %Inventories
                    
                    
                    16,012
                    
                    
                    
                    15,890
                    
                    
                    
                    122
                    
                    
                    
                    0.8
                    %Current
      liabilities:Accounts
      payable and accrued expenses
                    
                    
                    808
                    
                    
                    
                    1,253
                    
                    
                    
                    (445
                    )
                    
                    
                    35.5
                    %Advances
      from customers
                    
                    
                    787
                    
                    
                    
                    640
                    
                    
                    
                    147
                    
                    
                    
                    23.0
                    %Taxes
      payable
                    
                    
                    237
                    
                    
                    
                    362
                    
                    
                    
                    (125
                    )
                    
                    
                    (34.5
                    )%Short
      term bank loan
                    
                    
                    4,894
                    
                    
                    
                    4,888
                    
                    
                    
                    6
                    
                    
                    
                    0.1
                    %Long
      term bank loan – current portion
                    
                    
                    1,461
                    
                    
                    
                    1,897
                    
                    
                    
                    (436
                    )
                    
                    
                    (23.0
                    )%Loan
      from shareholder
                    
                    
                    30
                    
                    
                    
                    --
                    
                    
                    
                    30
                    
                    
                    
                    100.0
                    %Other
      payables
                    
                    
                    545
                    
                    
                    
                    551
                    
                    
                    
                    (6
                    )
                    
                    
                    (1.1
                    )%Working
      capital:Total
      current assets
                    
                    
                    21,495
                    
                    
                    
                    21,652
                    
                    
                    
                    (157
                    )
                    
                    
                    (0.7
                    )%Total
      current liabilities
                    
                    
                    8,762
                    
                    
                    
                    9,591
                    
                    
                    
                    (829
                    )
                    
                    
                    (8.6
                    %)Working
      capital
                    
                    
                    12,733
                    
                    
                    
                    12,061
                    
                    
                    
                    672
                    
                    
                    
                    5.6
                    %
 
 Our
working capital position increased $672,000 to $12,733,000 at March
31, 2009 from a working capital of $12,061,000 at December 31,
2008.
 
 We have
financed our operations principally through bank loans. At March 31, 2009, we
have bank loans totaling $9,568,000 outstanding.  Short term bank
loans in the total amount of $4,894,000 are due in May 2009 through July 2009,
bear interest at 9.711% per annum and are secured by a security interest on our
fixed assets and land use rights.  A long-term note, in the amount of
$4,675,000 is due October 9, 2011, and bears interest at 6.75% per annum. The
current portion of the long term bank loan is $1,461,000. Although we believe
that we will be able to obtain extensions of these loans when they mature, we
cannot assure you that such extensions will be granted.
  We are
required to make payments totaling $4,000,000 as part of the capital of
Yongle.  We did not make the first payment, in the amount of $800,000,
which was due by December 13, 2007.  The second payment, in the amount
of $3,200,000 is due by September 13, 2009.  The government issued to
Yongle a new business license expiring December 31, 2009 and management assumes
that the Government will take no action before December 31, 2009, the expiration
date of the new business license.  However, we cannot assure you that the
government will not take action prior to December 31, 2009, that we will be able
to make that payment before December 31, 2009, that we will receive any further
extensions or that we will be able to reduce the capitalization which would
reduce the amount of our payment.   Although we expect that we
will be able to make these payments, we have no commitment from any funding
source to provide us with the necessary funds.  Because of our stock
price and the lack of any active trading in our stock, it may be difficult for
us to raise the necessary funds through the sale of equity securities, and the
terms of any equity securities which we may issue may results in significant
dilution to our stockholders.  Our failure to make the payments on
time may subject Talent subject of fines or penalties by the PRC business
bureau,   In addition, Talent may not be permitted to exercise
any decision-making rights as a shareholder in Yongle, which may prevent us from
consolidating Yongle’s financial results with our financial statements. If
Yongle loses its business license it would no longer be permitted to continue in
business and it would have to terminate its operations.  In such
event, we would be unable to continue in business.  Further, our
banks’ perception of our ability to make the capital contribution may affect
both the willingness of the banks to make or extend loans to us as well as the
terms of any loans that they are willing to make.
 
 At March
31, 2009 and 2008, we owed Mr.  Dengyong Jin $30,000 and $4,893,000,
respectively.  These loans bear no interest and are due on
demand.
  We
believe that our working capital, together with the cash flow from our ongoing
business and our bank financing will be sufficient to enable us to meet our
normal cash requirements for the next twelve months provided that:
  •
              We
      generate sufficient business so that we are able to generate a profit,
      which cannot be assured;
   28
  •
              We
      are able to generate or obtain from third parties funding to enable us to
      make the $4,000,000 capital contribution to Yongle in a timely
      manner;
  •
              Our
      banks continue to provide us with the necessary working capital
      financing;
  •
              We
      are able to generate savings by improving the efficiency of our
      operations.
  We will
require additional working capital if we are going to make any acquisitions or
to purchase equipment to expand our production capacity. Further, we expect that
both revenue and the results of our operations will decline as a result of the
effects of the global economic downturn.  We cannot assure you that
funding will be available if and when we require funding. Further, in the event
that any of our lenders demand payment at the time the loans are due in May 2009
through July 2009, we would require additional financing in order to repay those
loans, and we cannot assure you that we will be able to obtain the necessary
funding either from another bank or from other sources.
 
 Net cash
flow provided by operating activities was $832,000 for the three
months ended March 31, 2009 as compared to $95,000 for the three months
ended March 31, 2008, an increase of $737,000 . Net cash flow provided by
operating activities in the three months ended March 31, 2009 was mainly due to
our net income of $471,000, a decrease in account receivable of $209,000, a
decrease in advance to suppliers of $475,000 and the add-back of non-cash
items of depreciation and amortization of $328,000, offset by a decrease in
accounts payable and accrued expenses of $446,000 and a decrease in taxes
payable of $126,000.
  Net cash
flow used in investing activities was $300,000 for the three months ended March
31, 2009 to purchase properties and equipments.   Cash flow use
in investing activities for the three months ended March 31, 2008, was not
significant.
 
 Net cash
flow used in financing activities was $340,000 for the three months ended March
31, 2009. We received $68,000 from investor by issuing 70,000 shares of
restricted common stocks pursuant to a share purchase agreement. We received
$30,000 proceeds from related party and repaid $438,000 bank loan.
 
 Contractual
Obligations and Off-Balance Sheet Arrangements
  Contractual
Obligations
  We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
 
 The
following tables summarize our contractual obligations as of March 31, 2009, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
 
 Payments Due by
      PeriodTotal
                                
                                Less than 1
      year
                                
                                1-3
Years
                                
                                3-5
                                  Years
                                
                                5 Years
                                  +Contractual Obligations :Bank indebtedness
    (1)
                                
                                $
                                9,568,190
                                
                                
                                $
                                6,354,446
                                
                                
                                $
                                3,213,7431
                                
                                
                                $
                                -
                                
                                
                                $
                                -Total Contractual
      Obligations:
                                
                                $
                                9,568,190
                                
                                
                                $
                                6,354,446
                                
                                
                                $
                                3,213,7431
                                
                                
                                $
                                -
                                
                                
                                $
                                -
  (1)
              A
      bank loan in the amount of  $4,893,654, of which
      $657,357  is due on May 6, 2009, three installments of
      $1,168,634 are due on May 25, 2009, June 15, 2009 and July 1, 2009 and
      $730,395 due on July 13, 2009. The bank loans bore interest at 9.711% per
      annum and were secured by a security interest on our fixed assets and land
      use rights. Another loan, in the amount of $4,674,536 is due October 9,
      2011, and bears interest at 6.75% per annum. The current portion of this
      bank loan is $ 1,460,792.
  29
  Off-balance
Sheet Arrangements
  We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
 
 We do not
use derivative financial instruments in our investment portfolio and we have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
  Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At March
31, 2009, we had $243,697 in cash and cash equivalents. A hypothetical 2%
increase or decrease in interest rates would not have a material impact on our
earnings or loss, or the fair market value or cash flows of these
instruments.
  Foreign Exchange Rates. All
of our sales are denominated in Renminbi (“RMB”). As a result, changes in the
relative values of U.S. Dollars and RMB affect our reported levels of revenues
and profitability as the results are translated into U.S. Dollars for reporting
purposes. In particular, fluctuations in currency exchange rates could have a
significant impact on our financial stability due to a mismatch among various
foreign currency-denominated sales and costs. Fluctuations in exchange rates
between the U.S. dollar and RMB affect our gross and net profit margins and
could result in foreign exchange and operating losses.
 
 Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We have not used any forward contracts, currency options
or borrowings to hedge our exposure to foreign currency exchange risk. We cannot
predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the future. As our sales
denominated in foreign currencies, such as RMB and Euros, continue to grow, we
will consider using arrangements to hedge our exposure to foreign currency
exchange risk.
 
 Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is RMB. The value of your investment in our
stock will be affected by the foreign exchange rate between U.S. dollars
and RMB. To the extent we hold assets denominated in U.S. dollars,
including the net proceeds to us from this offering, any appreciation of the RMB
against the U.S. dollar could result in a change to our statement of
operations and a reduction in the value of our U.S. dollar denominated
assets. On the other hand, a decline in the value of RMB against the
U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our company and the dividends
we may pay in the future, if any, all of which may have a material adverse
effect on the price of our stock.
 
 Item
3.  Quantitative and Qualitative Disclosures About Market
Risk
 
 Not
applicable to smaller reporting companies.
 
 Item
4.  Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
  30
  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,
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 our chief financial officer.
Based on that evaluation, our chief executive and financial officers concluded
that because of the significant deficiencies in internal control over financial
reporting described below, our disclosure controls and procedures were not
effective as of March 31, 2009.
  Management’s
Report of Internal Control over Financial Reporting.
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.  Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”).  Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2008.  In
making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework.  During our assessment of the effectiveness
of internal control over financial reporting as of December 31, 2008,
management identified significant deficiencies related to (i) the U.S. GAAP
expertise of our internal accounting staff, (ii) our internal audit functions
and, and (iii) a lack of segregation of duties within accounting
functions.
 
 A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A significant deficiency is a deficiency, or a
combination of deficiencies, in internal control over financial reporting that
is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of the company's financial
reporting.
 
 We became
a reporting company in December 2007.  Prior to December 2007, our
operations were conducted by Xingyong, which is a company organized under the
laws of the PRC and owned by our largest stockholders, who was formerly our
chief executive officer. We began preparing to be in compliance with the
internal control obligations, including Section 404, for our fiscal year ending
December 31, 2007. During almost all of 2007 our internal accounting staff was
primarily engaged in ensuring compliance with PRC accounting and reporting
requirements for our operating affiliates and was not required to meet or apply
U.S. GAAP requirements.  As a result, with the exception of certain
additional persons hired at the end of 2007 to address these deficiencies, our
current internal accounting department responsible for financial reporting of
the Company, on a consolidated basis, is relatively new to U.S. GAAP and the
related internal control procedures required of U.S. public companies. Although
our accounting staff is professional and experienced in accounting requirements
and procedures generally accepted in the PRC, management has determined that
they require additional training and assistance in US GAAP matters.
 Management has determined that our internal audit function is also
significantly deficient due to insufficient qualified resources to perform
internal audit functions.  Finally, management determined that the lack of
an Audit Committee of the board of directors of the Company also contributed to
insufficient oversight of our accounting and audit functions.
 
 In order
to correct the foregoing deficiencies, we are seeking to engage an experienced
accountant or firm to assist us in establishing procedures that will enable us
to have, on an ongoing basis, personnel who understand US GAAP and the
disclosure obligations under the Securities Exchange Act. We are committed to
the establishment of effective internal audit functions, however, due to the
scarcity of qualified candidates with extensive experience in US GAAP reporting
and accounting in the region, we were not able to hire sufficient internal audit
resources in order to enable us to have such procedures and controls established
by March 31, 2009.
 
 We also
intend to elect additional directors, who will be independent and one of whom
could serve as the audit committee financial expert. We believe that the
appointment of such directors will strongly influence our management in
establishing the necessary controls.
 
 However,
due to our size and nature, the segregation of all conflicting duties may not
always be possible and may not be economically feasible.  However, to
the extent possible, we will implement procedures to assure that the initiation
of transactions, the custody of assets and the recording of transactions will be
performed by separate individuals.
 
 We
believe that the foregoing steps will remediate the significant deficiency
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate.
  31
  This
quarterly report does not include an attestation report of our registered
independent accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this quarterly
report.
 Changes
in Internal Control over Financial Reporting
 
 No
changes in the internal control over our financial reporting have come to
management's attention during our last fiscal quarter that have materially
affected, or are likely to materially affect, our internal control over
financial reporting.
 
 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, not absolute, 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
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.
 
 Pursuant
to a share purchase agreement dated March 10, 2009, on March 20, 2009, the
Company sold 70,000 shares of the common stock, to one investor at a purchase
price of $1.00 per share, for a total of $70,000.  The Company paid
$2,100 as a commission to the finder. The shares were issued to the purchaser,
who is a Chinese citizen and resident, pursuant to Regulation S of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended.
 
 In March
2009, the Company issued 747,058 shares of common stock upon the conversion of
747,058 shares of series A preferred stock.  The Company did not
receive any additional consideration for the issuance of the
shares.  The transaction is exempt from registration pursuant to
Section 3(a)(9) of the Securities Act.
  Item 6. Exhibits
 
 31.1           Rule
13a-14(a)/15d-14(a) certification of Chief Executive Officer
 31.2           Rule
13a-14(a)/15d-14(a) certificate of Principal Financial Officer
 32.1           Section
1350 certification of Chief Executive Officer and Chief Financial
Officer
 
 
 
 32
 
 
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  CHINA
      CARBON GRAPHITE GROUP, INC.Date:
      May 15, 2009
                By:
                /s/ Donghai
      YuDonghai
      YuChief
      Executive Officer
 Date:
      May 15, 2009
                  By:
                  /s/ Ting
      ChenTing
      ChenChief
      Financial Officer