UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 xQUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
 For the quarterly period ended September 30, 2010
 
 o 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.
 (Name of Registrant as specified in its charter)
  Nevada

98-0550699(State or other jurisdiction of incorporation of organization)

(I.R.S. Employer Identification No.)
 
 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)
 
 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 x No o
 
 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 o  No o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer
o
Accelerated filer
oNon-accelerated filer

(Do not check if smaller reporting company)
o
Smaller reporting company
x
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
  Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,160,161 shares of common stock are issued and outstanding as of November 15, 2010.
   
  
 CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES
 FORM 10-Q
 September 30, 2010
 
 TABLE OF CONTENTS
 
 Page No.PART I. - FINANCIAL INFORMATIONItem 1.
Financial Statements:Consolidated Balance Sheets at September 30, 2010 (unaudited) and December 31, 2009
1Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2010 and 2009 (unaudited)
2Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)
3Notes to Consolidated Financial Statements (unaudited)
4Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
24Item 3.
Quantitative and Qualitative Disclosure About Market Risk
37Item 4
Controls and Procedures.
37PART II - OTHER INFORMATIONItem 6.
Exhibits.
38











PART 1 - FINANCIAL INFORMATION
 
 Item 1.  Financial Statements.
 
 China Carbon Graphite Group, Inc. and subsidiariesConsolidated Balance SheetsSeptember 30,

2010


December 31,

2009(Unaudited)


(Audited)ASSETSCurrent AssetsCash and cash equivalents

$
9,092,008


$
2,709,127Trade accounts receivable, net


10,232,790



5,170,419Notes receivable


544,368



248,452Advance to suppliers, net


16,771,143



790,767Inventories


21,581,548



16,430,754Prepaid expenses


536,683



50,000Other receivables


390,050



1,130,795Total current assets


59,148,590



26,530,314Property and equipment, net


23,188,137



23,913,965Construction in progress


5,859,996



2,045,176Land use rights, net


8,765,909



3,548,273$
96,962,632


$
56,037,728LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable and accrued expenses

$
3,709,364


$
2,005,583Advance from customers


4,465,923



1,084,206Short term bank loans


32,859,150



8,573,901Long term bank loan - current portion


-



1,613,566Trade notes payable


7,485,000



-Taxes payable


-



370,777Other payables


1,725,830



922,109Dividends payable


16,604



-Total current liabilities


50,261,871



14,570,142Long Term LiabilitiesAccounts payable in long term


4,849,095



1,243,842Long term bank loan


-



1,613,566Warrant liabilities


355



708,091Total liabilities


55,111,321



18,135,641Stockholders' EquityConvertible series A preferred stock, par value $0.001 per share, authorized 20,000,000 shares, issued and outstanding 125,000 shares at December 31, 2009 and none at September 30, 2010, respectively

-


125Convertible series B preferred stock, par value $0.001 per share, authorized 3,000,000 shares, issued and outstanding 2,160,500 and 1,275,000 shares at December 31, 2009 and September 30, 2010, respectively


1,275



2,161Common stock, par value $0.001 per share, authorized 100,000,000 shares, issued and outstanding 20,160,161 and 18,121,661 shares at September 30, 2010 and December 31, 2009, respectively

20,160


18,122Deferred consulting fee


(166,100
)


-Additional paid-in capital


14,844,202



13,298,332Accumulated other comprehensive income


5,826,338



5,037,062Retained earnings


21,325,436



19,546,285Total stockholders' equity


41,851,311



37,902,087Total liabilities and stockholders' equity

$
96,962,632


$
56,037,728
 
 The accompanying notes are an integral part of these financial statements.
  1
  China Carbon Graphite Group, Inc and subsidiariesConsolidated Statements of Income and Comprehensive IncomeFor The Three and Nine Months Ended September 30, 2010 and 2009(Unaudited)Three months ended September 30,


Nine months ended September 30,2010


2009


2010


2009Sales

$
9,979,707


$
5,580,776


$
18,074,914


$
12,131,938Cost of Goods Sold


7,505,623



4,055,953



14,348,021



9,012,935Gross Profit


2,474,084



1,524,823



3,726,893



3,119,003Operating ExpensesSelling expenses


48,978



14,102



95,675



332,016General and administrative


706,235



218,522



2,097,959



675,932Depreciation and amortization


74,365



19,096



112,592



57,275829,578



251,720



2,306,226



1,065,223Operating Income Before Other Income (Expense)and Income Tax Expense


1,644,506



1,273,103



1,420,667



2,053,780Other Income (Expense)Interest expense


(308,489
)


(356,891
)


(782,760
)


(761,586
)Interest income


-



-



-



-Other expense


(16
)


-



(2,941
)


(1,462
)Other income


556,038



19,053



556,038



545,122Change in fair value of warrants


25,129



-



588,147



-272,662



(337,838
)


358,484



(217,926
)Income Before Income Tax Expense


1,917,168



935,265



1,779,151



1,835,854Income tax expense


-



-



-



-Net income

$
1,917,168


$
935,265


$
1,779,151


$
1,835,854Deemed preferred stock dividend


-



-



(132,778
)


-Dividend


(16,605
)


-



(68,038
)


-Net income available to common shareholders

$
1,900,563


$
935,265


$
1,578,335


$
1,835,854Other comprehensive incomeForeign currency translation loss


742,712



75,900



789,276



124,645Total Comprehensive Income

$
2,659,880


$
1,011,165


$
2,568,427


$
1,960,499Share dataBasic earnings per share

$
0.09


$
0.06


$
0.08


$
0.13Diluted earnings per share

$
0.09


$
0.06


$
0.08


$
0.13Weighted average common shares outstanding,Basic


20,160,161



15,002,785



19,577,342



13,800,052Weighted average common shares outstanding,Diluted


21,435,161



15,085,202



20,852,342



14,392,450
  The accompanying notes are an integral part of these financial statements.
  2
  China Carbon Graphite Group, Inc and subsidiariesConsolidated Statements of Cash Flows(Unaudited)Nine months ended September 30,2010


2009Cash flows from operating activitiesNet Income

$
1,779,151


$
1,835,854Adjustments to reconcile net cash provided by operating activitiesDepreciation and amortization


1,308,000



1,021,937Stock compensation


493,300



108,000Change in fair value of warrants


(588,147
)


-Convertible preferred stock value change


169,167



-Change in operating assets and liabilitiesAccounts receivable


(4,870,117
)


(1,966,455
)Notes receivable


(285,763
)


(266,331
)Other receivables


750,697



(1,214,925
)Advance to suppliers


(15,686,872
)


364,539Inventory


(4,729,792
)


(655,104
)Prepaid expenses


(44,504
)


(47,200
)Accounts payable and accrued liabilities


1,633,720



920,090Non-current accounts payable


3,066,461



773,324Trade notes payable


7,355,000



5,847,013Advance from customers


3,301,106



297,347Taxes payable


(806,317
)


(215,260
)Dividends payable


16,604



-Other payables


835,049



471,259Net cash provided by (used in) operating activities


(6,303,257
)


7,274,088Cash flows from investing activitiesAcquisition of property and equipment


(2,942
)


(1,438,549
)Acquisition of land use rights


(5,164,713
)


-Construction in progress


(3,707,297
)


(2,635,286
)Net cash used in investing activities


(8,874,952
)


(4,073,835
)Cash flows from financing activitiesProceeds from issuing common stock


166,400



67,900Proceeds from issuing series B preferred stock


338,850



-Proceeds from short term loan


22,072,355



5,116,137Advance to related parties


-



290,965Repayment of bank loans


(1,618,100
)


(2,784,640
)Net cash provided by financing activities


20,959,505



2,690,362Effect of exchange rate fluctuation


601,585



105,563Net increase in cash


6,382,881



5,996,178Cash and cash equivalents at beginning of period


2,709,127



51,799Cash and cash equivalents at end of period

$
9,092,008


$
6,047,977Supplemental disclosure of cash flow informationInterest paid

$
782,760


$
761,586Income taxes paid

$
-


$
-Non-cash financing activities:Deemed preferred dividend reflected in paid-in capital

$
(132,778
)

$
-Reclassification of warrant liability from equity

$
169,167


$
-Issuance of common stock for consulting fee

$
493,300


$
108,000Deferred consulting fee reflected in paid-in capital

$
166,100


$
-
 
 The accompanying notes are an integral part of these financial statements.
  3
  China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 1. Organizations and Business
  China Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation, incorporated on February 13, 2003 under the name Achievers Magazine Inc. In connection with the reverse acquisition transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January 30, 2008.
  On December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement, dated as of December 14, 2007, with Sincere Investment (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation, which 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”). Pursuant to the share exchange agreement, the Company, then known as Achievers Magazine, Inc., issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding common stock of Talent, and Talent became the Company’s wholly-owned subsidiary. From and after December 17, 2007, the Company’s sole business became the business of Talent, its subsidiaries and its affiliated variable interest entities.
  Talent owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise under the laws of 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. Xingyong’s sole stockholder was, at the time of the transaction, the Company’s chief executive officer. 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 is as follows:




4


The Company 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 consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2009.
 
 The accompanying unaudited 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.
  5
 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 Accounting Standard Codification (ASC) Topic 810-10, formerly known as FIN 46R, in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
 
 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 nine months ended September 30, 2010 and 2009, Xingyong paid 100% of its net income to Yongle.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.
 
 3.    Summary of Significant Accounting Policies
 
 Use of estimates - The preparation of these financial statements in conformity with US GAAP 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.
 
 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. Most of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. The Company’s bank account in the United States is protected by FDIC insurance.
 
 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.
  6
 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 nine months ended at September 30, 2010 and 2009.
  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 6,356,209 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.
  7
 
 Income recognition- Revenue is recognized in accordance with ASC 605-25, Revenue Recognition of Financial Statements, formerly known as 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.
 
 Interest income is recognized when earned.
 
 Advertising - The Company expenses all advertising costs as incurred. There was no advertising expense for the nine months ended September 30, 2010 and 2009.
 
 Shipping and handling costs- The Company follows ASC 605-45, Handling Costs, Shipping Costs, formerly known as 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 its operating expenses. For the nine months ended September 30, 2010 and 2009, shipping and handling costs were $95,675 and $318,604, respectively, and for the three months ended September 30, 2010 and 2009, these costs were $50,034 and $9,867, respectively.
 
 Segment reporting - ASC 280, “Segment Reporting”, formerly known as Statement of Financial Accounting Standards (“SFAS”) No 131, “Disclosure about Segments of an Enterprise and Related Information,” requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
 
 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 operation in the United States. Its operating subsidiaries are organized and located in the PRC and do not conduct any business in the United States.
 
 In 2006, the Financial Accounting Standards Board (FASB) issued ASC Topic 740 Income Taxes, formerly known as  FIN 48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.
 The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.
  8
  Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September 30, 2010 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of September 30, 2010, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.
 
 Enterprise income tax - Effective 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 to the Company a 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.
 
 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.
  9
  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 remaining 15.5% to 21.5%. The Company has no other material obligation for the payment of retirement benefits beyond the annual contributions under this program.
 
 In addition, the Company is required by Chinese laws to cover employees in China with various types of social insurance. The Company believes that it is in material compliance with the relevant PRC laws.
  Fair value of financial instruments- On January 1, 2008, the Company began recording financial assets and liabilities subject to recurring fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. On January 1, 2009 the Company began recording non-recurring financial as well as all non-financial assets and liabilities subject to fair value measurement under the same principles. These fair value principles prioritize valuation inputs across three broad levels. The three levels are defined as follows:
 
 ·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
  ·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
  10
  ·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
  On January 13, 2010, the Company sold in a private placement a total of 320,000 shares of Series B Convertible Preferred Stock and five-year warrants to purchase 128,000 shares of common stock at an exercise price of $1.30 per share, for an aggregate purchase price of $384,000. The Company also paid the private placement agent $38,400 and issued a five-year warrant expiring on January 13, 2015 to purchase 16,000 shares of common stock at an exercise price of $1.32 per share.
 
 On March 29, 2010 and April 1, 2010, warrants to purchase 28,000 and 100,000 shares of common stock at $1.30 were exercised.
 
 As of September 30, 2010, the Company had the following warrants outstanding:
 Number of shares of common stock to purchase
Average exercise price“2007 Warrants”
125,000
$2.00“2009 Warrants”
300,000
$2.67“2009 Series B Warrants”
1,072,225
$1.30“2010 Series B Warrants”
116,000
$1.30
 
 The fair value of the 2007 Warrants to purchase 125,000 shares of common stock was $0, $13, $79,650 and $10,913 at September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009, respectively. The Company recognized a loss of $68,737 from the change in fair value of these warrants for the three months ended March 31, 2010 and a gain of $79,638 for the three months ended June 30, 2010 and a gain of $13 for the three months ended September 30, 2010.
 
 The fair value of the 2009 Warrants to purchase 300,000 shares of common stock was $120, $6,430, $132,040 and $22,190 at September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009, respectively. The Company recognized a loss of $109,850 from the change in fair value of these warrants for the three months ended March 31, 2010 and a gain of $125,610 for the three months ended June 30, 2010 and a gain of $6,310 for the three months ended September 30, 2010.
 
 The fair value of the 2009 Series B Warrants to purchase 1,072,225 shares of common stock was $211, $17,144, $1,329,191 and $508,205 at September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009, respectively. The Company recognized a loss of $945,126 from the change in fair value of these warrants for the three months ended March 31, 2010 and a gain of $1,312,047 for the three months ended June 30, 2010 and a gain of $16,933 for the three months ended September 30, 2010.
  Warrants to purchase 28,000 shares of common stock was exercised on April 1, 2010, the fair value of these warrants was $42,039 at the exercise date and $12,468 at December 31, 2009, respectively. As a result, the Company recognized a loss of $29,571 on these warrants.
 
 Warrants to purchase 100,000 shares of common stock was exercised on April 1, 2010, the fair value of these warrants was $124,140 at the exercise date and $44,530 at December 31, 2009, respectively. As a result, the Company recognized a loss of $79,610 on these warrants.
  11
 
 The fair value of 2010 Series B Warrants was $24, $1,898 and $178,715 at September 30, 2010, June 30, 2010 and March 31, 2010 and $76,810 at the issuance date, respectively. As a result, the Company recognized a loss of $101,905 for the three months ended March 31, 2010 and a gain of $142,013 for the three months ended June 30, 2010 and a gain of $1,874 for the three months ended September 30, 2010.
 
 In summary, the Company recorded a total amount of $588,147 of changes in fair value of warrants in the Consolidate statement of income and comprehensive income for the nine months ended September 30, 2010.
 
 Warrants referred to in the preceding paragraphs do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:
 
 September 30,

2010


June 30,

2010


March 31,

2010


December 31,

20092007 WarrantsAnnual dividend yield


-



-



-



-Expected life (years)


2.29



2.43



2.75



3Risk-free interest rate


0.18
%


0.18
%


0.16
%


0.06
%Expected volatility


16
%


21
%


22
%


19
%
 
 September 30,

2010


June 30,

2010


March 31,

2010


December 31,

20092009 WarrantsAnnual dividend yield


-



-



-



-Expected life (years)


3.96



4.3



4.5



4.75Risk-free interest rate


0.18
%


0.18
%


0.16
%


0.06
%Expected volatility


16
%


21
%


22
%


19
%
 
 September 30,

2010


June 30,

2010


March 31,

2010


December 31,

20092009 Series B WarrantsAnnual dividend yield


-



-



-



-Expected life (years)


4.23



4.5



4.75



5Risk-free interest rate


0.18
%


0.18
%


0.16
%


0.06
%Expected volatility


16
%


21
%


22
%


19
%
  12
  September 30,

2010


June 30,

2010


March 31,

2010


December 31,

20092010 Series B WarrantsAnnual dividend yield


-



-



-



-Expected life (years)


4.28



4.54



4.8



-Risk-free interest rate


0.18
%


0.18
%


0.16
%


-
%Expected volatility


16
%


21
%


22
%


-
%
 
 Expected volatility is based on the annualized daily historical volatility over a period of one year.  The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants.
 
 The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was accounted for at fair value on a recurring basis as of September 30, 2010.
  Carrying Value at

Fair Value Measurement atSeptember 30,
September 30, 20102010

Level 1
Level 2
Level 3Warrant liability

$
355

-
-
$
355
 
 
 The Company did not identify any other non-recurring assets and liabilities that are required to be presented on the balance sheet at fair value.
 
 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 1,613,225 shares of common stock at exercise prices ranging from $1.30- $3.00 per share. The Company uses the if-converted method to calculate the dilutive preferred stock and the treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.
  The following table sets forth the computation of the number of net income per share for the nine months ended September 30, 2010 and 2009.
  13
  Nine Months Ended September 302010


2009Weighted average shares of common stock outstanding (basic)


19,577,342



13,800,052Shares issuable upon conversion of series A preferred stock


-



125,000Shares issuable upon conversion of series B preferred stock


1,275,000



-Shares issuable upon exercise of warrants


-



467,398Weighted average shares of common stock outstanding (diluted)


20,852,342



14,392,450Net income available to common shareholders

$
1,578,335


$
1,835,854Net income per shares of common stock (Basic)

$
0.08


$
0.13Net income per shares of common stock (diluted)

$
0.08


$
0.13
 
 For the nine months ended September 30, 2010, the Company did not include any shares of common stock issuable upon exercise of warrants, since such issuance would be anti dilutive.
 
 Accumulated other comprehensive income- The Company follows ASC 220 “Comprehensive Income”, formerly known as SFAS No. 130, “Reporting Comprehensive Income”, to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the nine months ended September 30, 2010 and 2009 included net income and foreign currency translation adjustments.
 
 Related parties- Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions with related parties are disclosed in the financial statements.
  Recent accounting pronouncements
 
 In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2.  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
  In February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU 2010-09), "Subsequent Events (Topic 855)." The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. ASU 2010-09 is effective for interim or annual financial periods ending after June 15, 2010. The provisions of ASU 2010-09 did not have a material effect on the Company's consolidated financial statements.
   14
 
 In February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU 2010-10), "Consolidation (Topic 810)." The amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity's interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The deferral is primarily the result of differing consolidation conclusions reached by the International Accounting Standards Board ("IASB") for certain investment funds when compared with the conclusions reached under Statement 167. The deferral is effective as of the beginning of a reporting entity's first annul period that begins after November 15, 2009, and for interim periods within that first annual reporting period, which coincides with the effective date of Statement 167. Early application it not permitted. The provisions of ASU 2010-10 are effective for the Company beginning in 2010. The adoption of ASU 2010-10 did not have a material impact on the Company's consolidated financial statements.
  In March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11), "Derivative and Hedging (Topic 815)." All entities that enter into contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not only in the form of subordination of one financial instrument to another will be affected by the amendments in this Update because the amendments clarify that the embedded credit derivative scope exception in paragraph 815-15-15-8 through 15-9 does not apply to such contracts. ASU 2010-11 is effective at the beginning of the reporting entity's first fiscal quarter beginning after June 15, 2010. The adoption of such standard does not have a material impact on the Company's consolidated financial statements.
 
 In April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13), "Compensation - Stock Compensation (Topic 718)." This Update provides amendments to Topic 718 to clarity that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The provisions of ASU 2010-13 are not expected to have a material effect on the Company's consolidated financial statements.
  In July 2010, the FASB issued an accounting update to provide guidance to enhance disclosures related to the credit quality of a company's financing receivables portfolio and the associated allowance for credit losses. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its allowance for credit loss with the objective of facilitating users' evaluation of the nature of credit risk inherent in the company's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The revised disclosures as of the end of the reporting period are effective for the Company beginning in the second quarter of fiscal 2011, and the revised discourses related to activities during the reporting period are effective for the Company beginning in the third quarter of fiscal 2011. The Company is currently evaluating the impact of this accounting update on its financial disclosures.
 4.   Concentration of Business and Credit Risk
 
 Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the FDIC on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.
  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 nine months ended September 30, 2010, two customers accounted for 10% or more of sales revenues, representing 25.7% and 23.6%, respectively of the total sales. For the three months ended September 30, 2010, four customers accounted for 10% or more of sales revenues, representing 34.0%, 25.0%, 14.0%, and 11.0%, respectively of the total sales. As of September 30, 2010, there were two customers that constitute 23.3% and 14.3% of the accounts receivable. As of December 31, 2009, there were three customers that accounted for 17.6%, 15.4% and 14% respectively of the accounts receivable.
 
 For the nine months ended September 30, 2010 and 2009, the Company had insurance expense of $75,070 and $2,132 respectively. Accrual for losses is not recognized until such time a loss has occurred.
  15
 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 nine months ended September 30, 2010 and 2009, the enterprise income tax at the statutory rates would have been approximately $401,362 and $310,041, respectively, and for the three months ended September 30, 2010 and 2009, the enterprise income tax at the statutory rates would have been approximately $365,265 and $137,784, 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:
  Nine months ended September 30,2010


2009Computed tax at the PRC statutory rate of 15%

$
401,362


$
310,041Benefit of tax holiday


(401,362
)


(310,041
)Income tax expenses per books

$
-


$
-
  Three months ended September 30,2010


2009Computed tax at the PRC statutory rate of 15%

$
365,265


$
137,784Benefit of tax holiday


(365,265
)


(137,784
)Income tax expenses per books

$
-


$
-
 
 6.    Trade Accounts Receivable - net
 
 As of September 30, 2010 and December 31, 2009, trade accounts receivable consisted of the following:
 
 September 30,

2010


December 31,

2009Amount outstanding

$
11,250,960


$
6,168,102Bad debt provision


(1,018,170
)


(997,683
)Net amount

$
10,232,790


$
5,170,419
  For the nine months ended September 30, 2010, no bad debt provision on account receivable. The difference between bad debt provision at September 30, 2010 and December 31, 2009 is solely due to the fluctuation of foreign currency exchange rates.
 
 For the nine months ended September 30, 2009, bad debt provision of approximately $26,810 was recovered.
  16
 7.    Advance to suppliers, net
 
 As of September 30, 2010 and December 31, 2009, advance to suppliers consisted of the following:
 
 September 30,

2010


December 31,

2009Amount outstanding

$
16,808,607


$
827,477Bad debt provision


(37,464
)


(36,710
)Net amount

$
16,771,143


$
790,767
 
 For the three and nine months ended September 30, 2010 and 2009, no additional bad debt provision on advance to suppliers was charged to expenses. The difference between bad debt provision at September 30, 2010 and December 31, 2010 is solely due to the fluctuation of foreign currency exchange rate.
  8.   Inventories
  As of September 30, 2010 and December 31, 2009, inventories consisted of the following:
  September 30,

2010


December 31,

2009Raw materials

$
5,458,291


$
1,953,374Work in progress


14,287,876



12,531,362Finished goods


1,779,143



1,891,706Repair Parts


56,238



54,312$
21,581,548


$
16,430,754
 
 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 September 30, 2010 and December 31, 2009, property and equipment consist of the following:
  17
  September 30,

2010


December 31,

2009Building

$
11,453,455


$
11,201,405Machinery and equipment


21,394,666



20,961,237Motor vehicles


41,916



41,073Construction in progress


5,859,996



2,045,17638,750,033



34,248,891Less: Accumulated depreciation


9,701,900



8,289,750$
29,048,133


$
25,959,141
 
 For the nine months ended September 30, 2010, depreciation expense amounted to $1,223,649 and $1,220,353 was charged to cost of goods sold.For the three months ended September 30, 2010, depreciation expense amounted to $414,503 and $411,207 was charged to cost of goods sold.
 
 For the nine months ended September 30, 2009, depreciation expense amounted to $635,329 and $601,822 was charged to cost of goods sold. For the three months ended September 30, 2009, depreciation expense amounted to $326,054 and $294,373 was charged to cost of goods sold.
  10.  Land Use Right
 
 As of September 30, 2010 and December 31, 2009, land use rights consist of the following:
 
 September 30,

2010


December 31,

2009Land Use Right

$
9,166,560


$
3,830,836Less: Accumulated amortization


400,651



282,563$
8,765,909


$
3,548,273
  For the nine months ended September 30, 2010 and 2009, amortization expenses were $109,296 and $57,275, respectively. For the three months ended September 30, 2010 and 2009, amortization expenses were $71,069 and $19,096, respectively.
 
 Future amortization of the land use rights is as follows:
 
 12-month period ended September 30,2011

$
184,1882012


184,1882013


184,1882014


184,1882015


184,1882016 and thereafter


7,844,969Total

$
8,765,909
  11.  Stockholders’ equity
  (a) Restated Articles of Incorporation
  18
  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 two series of preferred stock -- the series A convertible preferred stock (“series A preferred stock”) and the series B convertible preferred stock (“series B preferred stock”).
 
 (b) Stock Issuances; Warrants
 
 On January 13, 2010, the Company sold in a private placement a total of 320,000 shares of Series B Convertible Preferred Stock and five-year warrants to purchase 128,000 shares of common stock at an exercise price of $1.30 per share, for an aggregate purchase price of $384,000. The Company also paid the private placement agent $38,400 and issued a five-year warrant expiring on January 13, 2015 to purchase 16,000 shares of common stock at an exercise price of $1.32 per share. In connection with the private placement and pursuant to the transaction agreements, the Company deposited into escrow 16,000 shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and December 31, 2011.
 
 On March 29, 2010 and April 1, 2010, the Company issued 28,000 and 100,000 shares of common stock to Series B preferred stock shareholders upon exercise of warrants at $1.30.
 
 During the nine months ended 2010, the Company issued 420,000 shares of common stock pursuant to three consulting agreements for consulting and investor relation service. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation 506 of the SEC thereunder. The fair value of $659,400 was recorded. As of September 30, 2010, there was still $166,100 to be amortized during 2010 and it is recorded as deferred consulting fee in equity.
 
 (c) Deemed Preferred Stock Dividend
  Upon completion of the private placement on December 22, 2009, the Company issued (i) 2,160,500 shares of series B preferred stock, with each share of series B preferred stock being convertible into one share of common stock (ii) warrants to purchase 1,064,200 shares of common stock at $1.30 per share to investors and warrants to purchase 108,025 shares of common stock at $1.32 per share to the placement agent. At December 22, 2009, the fair value of the warrants used to calculate the intrinsic value of the conversion option was estimated at $286,801 and was computed using the Black-Scholes option-pricing model with the following assumptions (1) risk-free interest rate at the date of grant (0.06%), (2) expected warrant life of 5 years, (3) expected volatility of 19%, and (4) 0% expected dividend.  The Company used the market price of its common stock at December 22, 2009, $1.38 per share, and the computed fair value of the series B preferred stock at December 22, 2009 was $2,981,490 and the effective preferred stock conversion price used was $0.95 per share. The proceeds were allocated to the fair value of the warrant liability, the fair value of the conversion option and then the residual to the preferred stock. The difference between the face value of the preferred stock and the allocated value was recorded as an additional preferred stock dividend at the date of issuance as the preferred stock was convertible to common at issuance. The other preferred stock dividend amounted to $772,982 from the transactions.
  19
  As previously disclosed, we entered into a letter of inent to acquire China Carbon Graphite Ltd. Negotiations relating to the potential acquistion are still ongoing and it is not certain that this acquisition will be consummated in 2010 if at all.
  Upon completion of the private placement on January 13, 2010, the Company issued (i) 320,000 shares of series B preferred stock, with each share of series B preferred stock being convertible into one share of common stock (ii) warrants to purchase 128,000 shares of common stock at $1.30 per share to investors and warrants to purchase 16,000 shares of common stock at $1.32 per share to the placement agent. At January 13, 2010, the fair value of the warrants used to calculate the intrinsic value of the conversion option was estimated at $76,810 and was computed using the Black-Scholes option-pricing model with the following assumptions (1) risk-free interest rate at the date of grant (0.06%), (2) expected warrant life of 5 years, (3) expected volatility of 19%, and (4) 0% expected dividend. The Company used the market price of its common stock at January 13, 2010, $1.74 per share, and the computed fair value of the series B preferred stock at January 13, 2010 was $556,800 and the effective preferred stock conversion price used was $0.93 per share. The proceeds were allocated to the fair value of the warrant liability, the fair value of the conversion option and then the residual to the preferred stock. The difference between the face value of the preferred stock and the allocated value was recorded as an additional preferred stock dividend at the date of issuance as the preferred stock was convertible to common at issuance. The other preferred stock dividend amounted to $132,778 from the transactions.
  12.  Short-term bank loans
  As of September 30, 2010 and December 31, 2009, short term loans consisted of the following:
 
 September 30,

2010


December 31,

2009Bank loans dated September 6, 2010, due September 5, 2011 with an interest rate of 5.41%, interest payable monthly.

$
5,988,000


$
-Bank loans dated August 23, 2010, due August 22, 2011 with an interest rate of 5.31%, interest payable monthly.


5,988,000



-Bank loans dated August 6, 2010, due August 5, 2011 with an interest rate of 5.31%, interest payable monthly.


5,988,000



-Bank loans dated September 16, 2010, due September 15, 2011 with an interest rate of 5.31%, interest payable monthly.


8,982,000



-Bank loan dated June 17, 2010, due June 10, 2011 with an interest rate of 6.903%, interest payable quarterly, secured by equipment and land use rights


5,239,500



-Bank loans dated February 11, 2010, due February 8, 2011 with an interest rate of 12.213%, interest payable monthly, secured by property and equipment and land use rights


673,650



-Bank loans dated June 17, 2009, due June 15, 2010 with an interest rate of 9.711%, interest payable monthly, secured by property and equipment and land use rights






5,173,072Bank loan dated June 16, 2009, due June 1, 2010 with an interest rate of 7.434%, interest payable quarterly, secured by equipment and land use rights






3,439,829$
32,859,150


$
8,573,901
  20
 
 We entered into four short-term bank loans with China Construction Bank for a total of $27 million between August 6 and September 16, 2010.  The first of these loans was for $5.988 million on August 6, 2010 at an interest rate of 5.31% per year and has a maturity date of August 5, 2011.  The second loan was for $5.988 million on August 23, 2010 at an interest rate of 5.31% per year and has a maturity date of August 22, 2011.  The third loan was for $5.988 million on September 6, 2010 at an interest rate of 5.41% per year and has a maturity date of September 5, 2011.  The fourth loan was for $8.982 million on September 16, 2010 at an interest rate of 5.31% per year and has a maturity date of September 15, 2011.  Interest on each loan is payable monthly.  Each of these loans will be renewable at the lender’s discretion.  The loan agreements provide for events of default and operating and financial covenants typical for loan transactions of this type. Proceeds of the loans will be used by us to purchase raw materials, specifically focusing on higher purity graphite and fine grain graphite materials.
 
 13.  Long-term bank loan
 
 September 30,

2010


December 31,

2009Bank loans dated October 10, 2008, due October 9, 2011 with an interest rate of 6.75%, interest payable monthly, secured by property and equipment and land use rights.

$
-


$
3,227,132Less: current portion


-



(1,613,566
)Non-current portion

$
-


$
1,613,566
 
 14.  Trade notes payable
 
 As of September 30, 2010 and December 31, 2009, trade notes payable were $7,485,000 and $0. The Company was requested by certain of its suppliers to settle trade liabilities incurred in the ordinary course of business by issuance of notes guaranteed by a bank acceptable to the supplier. The notes are interest-free with maturity of six months from date of issuance.
 
 15.  Subsequent Events
 
 There are no material subsequent events. The Company has evaluated subsequent events from the balance sheet date through the date the report is issued.
  21
  Item 2.   Management’s Discussion and Analysis Financial Condition and Results of Operations.
 
 Caution Regarding Forward-Looking Statements
  This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission.
  In some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
  Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.
  Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
  Overview
 
 We are engaged in the manufacture of graphite based products in the People’s Republic of China.  Our products are either used in the manufacturing process for other products, particularly metals, or for incorporation in various types of products or processes. Based on information we receive about our industry in the course of our business, we believe that we are the largest wholesale supplier of fine grain graphite and high purity graphite in China and one of China’’s largest producers and suppliers of graphite products overall.  We currently manufacture and sell the following types of graphite products:
 
 o
graphite electrodes;
  o
fine grain graphite ; and
  o
high purity graphite.
  Approximately 40% to 50% of our graphite electrodes are sold directly to end users in China, primarily consisting of steel manufacturers.  All other sales are made to over 200 distributors located throughout 22 provinces in China. Our distributors then sell our products to end customers both in China and in foreign countries, including, among others, Japan, the United States, Spain, England, South Korea and India.
  Until the third quarter of 2008, we experienced rapid growth in our operations.  From the fourth quarter of 2008 until the end of 2009, however, as a result of the global economic crisis, the steel industry in general slowed, which caused our revenues and gross margin to decline significantly. Specifically, we had a significant decline in sales of graphite electrodes. The industry started to recover in 2010, and in particular during the third quarter of 2010. We experienced increased sales of our different product types during the three months ended September 30, 2010 including a disproportionate increase in sales of lower margin semi-processed graphite products and graphite blanks, which would explain the decrease in our profit margins during the third quarter of 2010 as compared to 2009.
 
 We expect the increased demand in higher margin ultra graphite electrode and fine grain and high purity graphite products to extend through 2010, primarily due to anticipated growth in the iron and steel automobile, aerospace ad defense industries in the PRC. As dicussed below under "Recent Developments" we anticipate increasing our production capacity in the near future in order to take advantage of these industry trends. In addition, we have attempted to position ourselves during the period of increased market demand by obtaining short term loans in the aggregate of approximately $24 million from local bank in China during the nine months ended September 30, 2010.
  22
 
 As previously disclosed, we entered a letter of intent to acquire Chiyu Carbon Graphite Ltd. Negotiations relative to this potential acquisition are still ongoing. It is not certain that this acquistion wil be consumated in 2010, if at all.
 
 Recent Development
 
 The Company has started construction on new forming and baking plants with an initial budgeted investment outlay of approximately $13.5 million since beginning of September 2010. The expansion will further increase the company’s production capacity to meet the growing demand for high purity products in the global market. Construction for both plants is planned to be completed by the end of June 2011.  The budget for the forming and baking plants is $6 million and $7.5 million, respectively. The new forming plant will specialize in manufacturing large size ultra high graphite electrodes, high purity graphite and fine gain graphite. In addition, the new baking plant will have 36 furnaces, totaling 160 meters in length, and will include 30,000 tons capacity, making it the largest baking plant in China’s graphite industry.
 
 Currently, steel plants in China have been upgrading their furnace facilities and created a high demand for large size ultra high graphite electrode, which are different products from general graphite electrode. The margin of large size ultra high graphite electrode is high due to the shortage of supply to the demand. We estimate the trend will continue for the near future. Our new forming plant will specialize in manufacturing high margin products including large size ultra high graphite electrode, high purity graphite and fine gain graphite.
 
 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 ASC 605-25, Revenue Recognition of Financial Statements, formerly known as 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.
  23
  Comprehensive Income
 
 We have adopted Statements of ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general-purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.
  Income Taxes
 
 We account for income taxes under the provisions of ASC 740 Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
 Effective January 1, 2008, the Chinese 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.
  We have 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 us a 100% tax holiday with respect to enterprise income tax for ten years 2008 through 2018. Afterwards, based on the present tax law and our status as a qualified high technology and science company, we 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 September 30, 2010 or December 31, 2009.
  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.
  24
 
 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 research and development expense for the nine months ended September 30, 2010 and 2009 has not been significant.
 
 Value added tax
 
 Pursuant to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice of the PRC, the Company 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. 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. We have 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.
 
 Recent accounting pronouncements
  In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2.  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
  In February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU 2010-09), "Subsequent Events (Topic 855)." The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. ASU 2010-09 is effective for interim or annual financial periods ending after June 15, 2010. The provisions of ASU 2010-09 did not have a material effect on the Company's consolidated financial statements.
 
 25
 
 In February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU 2010-10), "Consolidation (Topic 810)." The amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity's interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The deferral is primarily the result of differing consolidation conclusions reached by the International Accounting Standards Board ("IASB") for certain investment funds when compared with the conclusions reached under Statement 167. The deferral is effective as of the beginning of a reporting entity's first annul period that begins after November 15, 2009, and for interim periods within that first annual reporting period, which coincides with the effective date of Statement 167. Early application it not permitted. The provisions of ASU 2010-10 are effective for the Company beginning in 2010. The adoption of ASU 2010-10 did not have a material impact on the Company's consolidated financial statements.
 
 In March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11), "Derivative and Hedging (Topic 815)." All entities that enter into contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not only in the form of subordination of one financial instrument to another will be affected by the amendments in this Update because the amendments clarify that the embedded credit derivative scope exception in paragraph 815-15-15-8 through 15-9 does not apply to such contracts. ASU 2010-11 is effective at the beginning of the reporting entity's first fiscal quarter beginning after June 15, 2010. The adoption of such standard does not have a material impact on the Company's consolidated financial statements.
 
 In April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13), "Compensation - Stock Compensation (Topic 718)." This Update provides amendments to Topic 718 to clarity that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The provisions of ASU 2010-13 are not expected to have a material effect on the Company's consolidated financial statements.
 
 In July 2010, the FASB issued an accounting update to provide guidance to enhance disclosures related to the credit quality of a company's financing receivables portfolio and the associated allowance for credit losses. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its allowance for credit loss with the objective of facilitating users' evaluation of the nature of credit risk inherent in the company's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The revised disclosures as of the end of the reporting period are effective for the Company beginning in the second quarter of fiscal 2011, and the revised discourses related to activities during the reporting period are effective for the Company beginning in the third quarter of fiscal 2011. The Company is currently evaluating the impact of this accounting update on its financial disclosures.
 
 26
 
 RESULTS OF OPERATIONS
 
 Three Months Ended September 30, 2010 and 2009
 
 The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):
  Three months ended September 30,2010


2009US Dollars


Percentage


US Dollars


PercentageSales

$
9,980



100.00
%

$
5,581



100.0
%Cost of sales


7,506



75.21
%


4,056



72.68
%Gross  profit


2,474



24.79
%


1,525



27.32
%Operating expenses


830



8.32
%


252



4.51
%Income from operations


1,644



16.47
%


1,273



22.81
%Other income


556



5.57
%


19



0.34
%Change in fair value of warrants


25



0.25
%


-



-
%Other expense


-



-
%


-



-
%Interest expense


(308
)


(3.09)
%


(357
)


(6.40
)%Income before income tax expense


1,917



19.21
%


935



16.75
%Provision for income taxes


-



-
%


-



-
%Net income

$
1,917



19.21
%

$
935



16.75
%Dividend


(17)



(0.17)
%


-



-
%Net income available to common shareholders

$
1,900



19.04
%

$
-



-
%Foreign currency translation adjustment


743



7.44
%


76



1.36
%Comprehensive income

$
2,660



26.65
%

$
1,011



18.12
%
 
 Sales.
 
 During the three months ended September 30, 2010, we had sales of $9,980 as compared to sales of $5,581 for the three months ended September 30, 2009, an increase of $4,399, or approximately 78.82%. Our revenue was generated mainly from sales of fine grain graphite, graphite blanks and semi-processed graphite products. Sales increase was attributable primarily to new customer development and market recovery.
  For the three months ended September 30, 2010, four customers accounted for 10% or more of sales revenues, representing 34.0%, 25.0%, 14.0%, and 11.0%, respectively of the total sales.  As of September 30, 2010, there were two customers that constitute 23.3% and 14.3% of the accounts receivable. As of December 31, 2009, there were three customers that accounted for 17.6%, 15.4% and 14% respectively of the accounts receivable.
  Cost of sales; gross margin.
 
 During the three months ended September 30, 2010, our cost of sales was $7,506, as compared to $4,056 during the three months ended September 30, 2009, an increase of $3,450, or 85.05%. As a result of our increased sales, our gross profit increased $949, or 62.25%, for the three months ended September 30, 2010. Our gross margin decreased from 27.32% for the three months ended September 30, 2009 to 24.79% for the three months ended September 30, 2010. The decrease was associated with change in product mix as disclosed in the Overview, compared to the three months ended September 30, 2009. During the three months ended September 30, 2010, we increased sales of semi-processed graphite products that have lower gross margin.
  Selling, general and administrative expenses.
 
 Selling, general and administrative expenses totaled $830 for the three months ended September 30, 2010, as compared to $252 for the three months ended September 30, 2009, an increase of $578, or approximately 229.56%.The increase was due to higher shipping and handling expenses.
 
 Income from operations.
 
 As a result of the factors described above, operating income amounted to $1,644 for the three months ended September 30, 2010, as compared to operating income of $1,273 for the three months ended September 30, 2009, an increase of approximately $371, or 29.17%. Increase in operating income was primarily due to increase in sales, offset by the decline in gross margin.
  27
 Income tax.
 
 During the three months ended September 30, 2010 and 2009, we benefited from a 100% tax holiday from the PRC enterprise tax.  As a result, we had no income tax due for these periods..
 
 Net income.
 
 As a result of the factors described above, our net income for the three months ended September 30, 2010 was $1,917, as compared to $935 for the three months ended September 30, 2009, an increase of $982, or 104.99%.
 
 Foreign currency translation gain
 
 Our foreign currency translation gain for the three months ended September 30, 2010 was $743, as compared to $76 for the three months ended September 30, 2009, an increase of $667, or 878.54%. The reason for the increased foreign currency translation gain is due to increased equity and increased value of RMB currency during the three months ended September 30, 2010 compared to the same period last year.
 
 Dividend.
 
 Pursuant to the terms of a private offering we consummated on December 22, 2009 and January 13, 2010, the Series B preferred stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010. As a result, we incurred dividend expense of $17 for the three months ended September 30, 2010.
 
 Net income available to common shareholders.
 
 Net income available for common shareholders was $1,900, or $0.09 per share (basic and diluted), for the three months ended September 30, 2010 compared to net income of $935, or $0.06 per share (basic and diluted), for the three months ended September 30, 2009.
 
 Nine Months Ended September 30, 2010 and 2009
 
 The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):


28
  Nine months ended September 30,2010


2009US Dollars


Percentage


US Dollars


PercentageSales

$
18,075



100.00
%

$
12,132



100.0
%Cost of sales


14,348



79.38
%


9,013



74.29
%Gross  profit


3,727



20.62
%


3,119



25.71
%Operating expenses


2,306



12.76
%


1,065



8.78
%Income from operations


1,421



7.86
%


2,054



16.93
%Other income


556



3.08
%


545



4.49
%Change in fair value of warrants


588



3.25
%


-



-
%Other expense


(3)



(0.02)
%


(1)



(0.01)
%Interest expense


(783)



(4.33)
%


(762
)


(6.28
)%Income before income tax expense


1,779



9.84
%


1,836



15.13
%Provision for income taxes


-



-
%


-



-
%Net income

$
1,779



9.84
%

$
1,836



15.13
%Deemed preferred stock dividend


(133)



(0.74)
%


-



-
%Dividend


(68)



(0.38)
%


-



-
%Net income available to common shareholders


1,578



8.73
%


1,836



15.13
%Foreign currency translation adjustment


789



4.37
%


125



1.03
%Comprehensive income

$
2,567



14.20
%

$
1,961



16.16
%
 
 Sales.
 
 During the nine months ended September 30, 2010, we had sales of $18,075, as compared to sales of $12,132 for the nine months ended September 30, 2009, an increase of $5,943 or approximately 48.99%. We experienced a significant increase in the demand during the nine months ended September 30, 2010 resulting from the market recovery and new clients development, especially during the third quarter ended September 30, 2010.
 
 For the nine months ended September 30, 2010, two customers accounted for 10% or more of sales revenues, representing 25.7% and 23.6%, respectively of the total sales.
 
 Cost of sales; gross margin.
 
 During the nine months ended September 30, 2010, our cost of sales was $14,348, as compared to $9,013 during the nine months ended September 30, 2009, an increase of $5,335, or 59.19%. As a result of our increased revenues, our gross profit increased $608, or 19.49%, for the nine months ended September 30, 2010. Our gross margin decreased from 25.71% for the nine months ended September 30, 2009 to 20.62% for the nine months ended September 30, 2010. The decrease of gross profit is due to the variance in production mix, as in the nine months ended September 30, 2010 we sold a greater proportion of lower margin semi-processed products.
  Selling, general and administrative expenses.
 
 Selling, general and administrative expenses totaled $2,306 for the nine months ended September 30, 2010, as compared to $1,065 for the nine months ended September 30, 2009, an increase of $1,241, or approximately 116.50%.
 
 Selling expenses decreased from $332 for the nine months ended September 30, 2009 to $96 for the nine months ended September 30, 2010, or 71.08%. The decrease was due to a decrease in shipping and handling fees in the first three quarters of 2010 compared to the same period in 2009. In the first three quarters of 2010 more products were picked up by customers, which caused less shipping and handling fee.
  General and administrative expenses were $2,098 for the nine months ended September 30, 2010, compared to $676 for the nine months ended September 30, 2009. The increase in general administrative expense was primarily due to the increase in costs associated with a private offering, public company expenses, stock compensations and higher expenses to develop more sales.
 
 29
  Income from operations.
 
 As a result of the factors described above, operating income amounted to $1,421 for the nine months ended September 30, 2010, as compared to operating income of $2,054 for the nine months ended September 30, 2009, a decrease of approximately $633, or 30.83%.
 
 Income tax.
 
 During the nine months ended September 30, 2010 and 2009, we benefited from a 100% tax holiday from the PRC enterprise tax.  As a result, we had no income tax due for these periods.
 
 Net income.
 
 As a result of the factors described above, our net income for the nine months ended September 30, 2010 was $1,779, as compared to net income of $1,836 for the nine months ended September 30, 2009, a decrease of $57, or 3.09%.
 
 Foreign currency translation gain
 
 Our foreign currency translation gain for the nine months ended September 30, 2010 was $789, as compared to $125 for the three months ended September 30, 2009, an increase of $664, or 533.22%. The reason for the increased foreign currency translation gain is due to increased equity and increased value of RMB currency during the nine months ended September 30, 2010 compared to the same period last year.
 
 Deemed preferred dividend.
 
 As a result of the private placement on January 13, 2010, we incurred a preferred stock deemed dividend of $133, of which $86 representing the intrinsic value of the conversion feature of the warrants issued with the preferred stock and $47 representing the allocated value of the warrants. The deemed preferred stock dividend is a non-cash charge which did not affect our operations or cash flow for the nine months ended September 30, 2010. There was no comparable item in the nine months ended September 30, 2009.
 
 Dividend.
 
 Pursuant to the terms of private offering, the Series B preferred stock offers a 6% coupon. The preferred stock dividend is payable quarterly commencing April 1, 2010. As a result, we incurred dividend expense of $68 for the nine months ended September 30, 2010.
 
 Net income available to common shareholders.
 
 Net income available for common shareholders was $1,578, or $0.08 per share (basic and diluted), for the nine months ended September 30, 2010 compared to net income of $1,836, or $0.13 per share (basic and diluted), for the nine months ended September 30, 2009.
 
 Liquidity and Capital Resources
 
 General
 30
 
 Our primary capital needs have been to fund our working capital requirements. Our primary sources of financing have been cash generated from operations, short-term and long-term loans from banks in China, and loans from a related party. At September 30, 2010, we had short term loans in the aggregate amount of $32.86 million outstanding, as described below.
 
 We have short term bank loans of $0.66 million which are due in February 2011 and bear interest at an annual rate of 12.213% and of $5.239 million bearing interest at 6.903% and due in June 2011. The short-term bank loans are secured by a security interest in certain equipment, property and land use rights.
 
 We entered into four short-term bank loans with China Construction Bank for a total of $27 million between August 6 and September 16, 2010.  The first of these loans was for $5.988 million on August 6, 2010 at an interest rate of 5.31% per year and has a maturity date of August 5, 2011.  The second loan was for $5.988 million on August 23, 2010 at an interest rate of 5.31% per year and has a maturity date of August 22, 2011.  The third loan was for $5.988 million on September 6, 2010 at an interest rate of 5.41% per year and has a maturity date of September 5, 2011.  The fourth loan was for $8.982 million on September 16, 2010 at an interest rate of 5.31% per year and has a maturity date of September 15, 2011.  Interest on each loan is payable monthly.  Each of these loans will be renewable at the lender’s discretion.  The loan agreements provide for events of default and operating and financial covenants typical for loan transactions of this type.  Proceeds of the loans will be used by us to purchase raw materials, specifically focusing on higher purity graphite and fine grain graphite materials.
 
 We have also obtained a long-term bank loan, in the principal amount of $3.2 million, $1.6 million of which was due in October 2010 and the remainder of which is due in October 2011. This loan bears interest at an annual rate of 6.75%.   This loan was paid in full by September 30, 2010.
 
 Historically we had rolled over our short term loans on an annual basis. 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.  In the event the loans are not extended and we default in our obligations the lenders could call the loans, foreclose on the collateral securing the loans and seek other remedies.  In such an event, our operations and financial conditions would be materially adversely affected and we would be forced to cease operations if alternative funding is not obtained.
 
 We expect that anticipated cash flows from operations, short-term and long-term bank loans and loans from a related party will be sufficient to fund our operations through at least the next twelve months, provided that:
  ooo
We generate sufficient business so that we are able to generate substantial profits, which cannot be assured;
  ooo
Our banks continue to provide us with the necessary working capital financing; and
  ooo
We are able to generate savings by improving the efficiency of our operations.
  In December 2009 and January 2010, we raised an aggregate of approximately $3 million in a private placement transaction.  We may require additional equity, debt or bank funding to finance acquisitions or to allow us to produce graphite for the nuclear industry, which are our primary growth strategies.  We can provide no assurances that we will be able to enter into any financing agreements on terms favorable to us, if at all, especially considering the current global instability of the capital markets.  In addition, although we expect to refinance our bank loans when they mature, we can provide no assurances that we will be able to refinance such loans on terms favorable to us, if at all.
  31
 
 At September 30, 2010, cash and cash equivalents were $9,092,008, as compared to $2,709,127 at December 31, 2009, an increase of $6,382,881. Our working capital decreased by $3,073,453 to $8,886,719 at September 30, 2010 from a working capital of $11,960,172 at December 31, 2009. Our cash position increased significantly due in part to the capital raise of $3.0 million in a private placement transaction in December 2009 and January 2010, additional borrowing from banks, as well as additional notes guarantee to certain suppliers.
 
 As of September 30, 2010, accounts receivable, net of allowance, was $10,232,790, as compared to $5,170,419 at September 30, 2009, an increase of $5,062,371, or 97.91%. The increase was due to increased sales of high purity graphite and fine grain graphite  products.
 
 As of September 30, 2010, inventories were $21,581,548, as compared to $16,430,754 at September 30, 2009, an increase of $5,150,794, or 31.35%. The Company has prepared more inventories to be better prepared for increased demand of the slaes.
 
 As of September 30, 2010, prepaid expenses were $536,683, as compared to $50,000 at September 30, 2009, an increase of $468,683, or 973.37%. The increased prepaid expenses are mainly prepaid VAT taxes.
 
 Advance to suppliers increased from $790,767 at December 31, 2009 to $16,771,143 at September 30, 2010, an increase of $15,980,376. The increase reflects new notes guaranteeing future payable obligations as requested by certain of our suppliers to settle trade liabilities in respect of future deliveries to be incurred in the ordinary course; the notes are guaranteed by a bank acceptable to the supplier. The notes are interest-free with maturity of six months from date of issuance.
  Trade notes payable reflect our obligations to bank lenders who have guaranteed our future payable obligations as requested by certain of our suppliers.
 
 Accounts payable increased from $2,005,583 at December 31, 2009 to $3,709,364 at September 30, 2010, an increase of $1,703,781. The increase is also associated with the notes guarantee obtained from bank for payables not yet paid to the suppliers, and the increasing of vendor payments due to the economic reocvery.
 
 First Three Quarters Ended September 30, 2010 Compared to First Three Quarters Ended September 30, 2009
  The following table sets forth information about our net cash flow for the years indicated (in thousands of dollars):


32
  Cash Flows Data:For First Three Quarters

Ended September 302010


2009Net cash flows provided by (used in) operating activities


(6,303,257
)


7,274,088Net cash flows used in investing activities


(8,874,952
)


(4,073,835
)Net cash flows provided by financing activities


20,959,505



2,690,362
 
 Net cash flow used in operating activities was $6,303,257 in the first three quarters of 2010 as compared to net cash flow provided by operating activities of $7,274,088 in the first three quarters 2009, a decrease of $13,577,345. The decrease is mainly due to increased advance to suppliers.
  Net cash flow used in investing activities was $8,874,952 for the first three quarters of 2010 and $4,073,835 for the first three quarters of 2009. The increase is mainly because in the first three quarters 2010, approximately $5 million was used in acquisition of land use rights in connection with the construction of our new plants.
  Net cash flow provided by financing activities was $20,959,505 for the first three quarters of 2010, compared to $2,690,362 provided by financing activities for the first three quarters of 2009.  The increase is mainly due to increased loan and an equity financing.
 
 Off-Balance Sheet Arrangements
 
 We have not entered into any off-balance sheet arrangements.
  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
 
 Our management, including Donghai Yu, our chief executive officer, and Zhen Fang Yang, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2010.
  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 previously disclosed in our SEC reports, our disclosure controls and procedures were not effective as of September 30, 2010.
  33
 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 5. Other Information
 
 Form 8-K Item 1.01 Entry into a Material Definitive Agreement.
  As described more fully in Part I Item 2 under the heanding “Liquidity and Capital Resources”, in the third quarter of 2010 the Company entered into four loan agreements with China Construction Bank under which the Company may borrow up to a total of $27 million.
  Item 6. Exhibits
 
 10.1
Loan Agreement, dated August 6, 2010, between China Carbon Graphite Group Inc. and China Construction Banks10.2
Loan Agreement, dated August 23, 2010, between China Carbon Graphite Group Inc. and China Construction Banks10.3
Loan Agreement, dated September 6, 2010, between China Carbon Graphite Group Inc. and China Construction Banks10.4
Loan Agreement, dated September 16, 2010, between China Carbon Graphite Group Inc. and China Construction Banks31.1
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer31.2
Rule 13a-14(a)/15d-14(a) certificate of Interim Chief Financial Officer32.1
Section 1350 certification of Chief Executive Officer32.2
Section 1350 certification of Interim Chief Financial Officer
 
 34
 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 CHINA CARBON GRAPHITE GROUP, INC.Date: November 15, 2010
By:
/s/ Donghai YuDonghai YuChief Executive Officer
 
 Date: November 15, 2010
By:
/s/ ZhenfangYangZhenfang YangInterim Chief Financial Officer