UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 x QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
 For the quarterly period ended March 31, 2011
 
 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  þNo 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  oNo 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
þ
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes oNo þ
 
 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 22,522,120 shares of common stock are issued and outstanding as of May 16, 2011.
 
 
 
 
 CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES
 FORM 10-Q
 March 31, 2011
 
 TABLE OF CONTENTS
 
 
 PART I - FINANCIAL INFORMATION
Page No.Item 1.
Financial Statements:
1Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010
1Consolidated Statements of Income and Comprehensive Income for the Three months ended March 31, 2011 and 2010 (unaudited)
2Consolidated Statements of Cash Flows for the Three months ended March 31, 2011 and 2010 (unaudited)
3Notes to Unaudited Condensed Consolidated Financial Statements
4Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
21Item 3.
Quantitative and Qualitative Disclosure About Market Risk
29Item 4.
Controls and Procedures.
29PART II - OTHER INFORMATIONItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
30Item 6.
Exhibits.
30









PART 1 - FINANCIAL INFORMATION
 
 Item 1.  Financial Statements.






China Carbon Graphite Group, Inc.and subsidiariesConsolidated Balance SheetsMarch 31, 2011


December 31, 2010ASSETS(Unaudited)Current AssetsCash and cash equivalents

$
1,054,615


$
296,312Restricted cash


3,710,610



-Trade accounts receivable, net of allowance of $2,522,385 and $$2,505,867 as of March 31, 2011 and December 31, 2010


10,319,015



6,222,112Notes receivable


417,838



460,856Advance to suppliers


15,236,453



10,198,602Inventories


27,462,870



26,432,217Prepaid expenses


1,020,050



573,094Other receivables


386,657



335,986Total current assets


59,608,108



44,519,179Property and Equipment, net


23,902,797



24,127,189Construction In Progress


11,892,985



10,265,888Land Use Rights, Net


10,519,371



10,496,930Total Assets

$
105,923,261


$
89,409,186LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable and accrued expenses

$
5,709,985


$
5,452,743Advance from customers


3,850,973



1,060,147Short-term bank loans


38,633,100



33,298,150Notes payable


5,497,200



-Taxes payable


90,578



-Other payables


3,353,026



2,584,589Dividends payable


8,129



32,996Total current liabilities


57,142,991



42,428,625Amount Due to A Related Party


4,338,015



4,744,634Warrant Liabilities


31,962



73,121Total liabilities


61,512,968



47,246,380Stockholders' EquityConvertible series A preferred stock, par value $0.001 per share,authorized 20,000,000 shares, none issued and outstandingat March 31, 2011 and December 31, 2010


-



-Convertible series B preferred stock, par value $0.001 per share,authorized 3,000,000 shares, issued and outstanding 611,980 and1,225,000 shares at March 31, 2011 and December 31, 2010, respectively.


612



1,225Common stock, par value $0.001 per share, authorized 100,000,000shares, issued and outstanding 22,083,039 and 20,520,161 shares atMarch 31, 2011 and December 31, 2010, respectively


22,083



20,521Deferred consulting fee


-



(57,500
)Additional paid-in capital


16,754,161



15,158,291Accumulated other comprehensive income


6,612,662



6,344,414Retained earnings


21,020,774



20,695,855Total Stockholders' Equity


44,410,293



42,162,806Total Liabilities and Stockholders' Equity

$
105,923,261


$
89,409,186-The accompanying notes are an integral part of this statement.




-1-




China Carbon Graphite Group, Inc and subsidiariesConsolidated Statements of Income and Comprehensive Income(Unaudited)Three months ended March 31,2011


2010Sales

$
11,463,335


$
4,846,856Cost of Goods Sold


8,883,262



3,822,666Gross Profit


2,580,074



1,024,190Operating ExpensesSelling expenses


49,863



24,993General and administrative


1,554,062



403,936Depreciation and amortization


46,601



27,3401,650,526



456,269Income from Operations


929,547



567,921Other Income (Expenses)Interest expense


(713,531
)


(206,148
)Other income


60,880



-Change in fair value of warrants


56,152



(1,220,430
)(596,499
)


(1,426,578
)Income (Loss) Before Income Tax Expense


333,049



(858,657
)Income Tax Expense


-



-Net Income (Loss)


333,049



(858,657
)Other Comprehensive IncomeForeign currency translation gain (loss)


268,248



(99,522
)Total Comprehensive Income (loss)

$
601,297


$
(958,179
)Share DataBasic earnings (loss) per share

$
0.02


$
(0.06
)Diluted earnings (loss) per share

$
0.01


$
(0.06
)Weighted average common shares outstanding,basic


21,630,421



18,485,344Weighted average common shares outstanding,diluted


22,615,787



18,485,344The accompanying notes are an integral part of this statement.




-2-




China Carbon Graphite Group, Inc and subsidiariesConsolidated Statements of Cash Flows(Unaudited)Three months ended March 31,2011


2010Cash flows from operating activitiesNet Income (loss)

$
333,049


$
(858,657
)Adjustments to reconcile net cash provided by operating activitiesDepreciation and amortization


433,355



431,796Bad debt expenses






-Stock compensation


266,100



-Change in fair value of warrants


26,166



1,220,430Change in operating assets and liabilitiesTrade accounts receivable


(4,042,607
)


1,415,151Notes receivable


45,906



138,054Other receivables


(48,297
)


819,844Advance to suppliers


(4,954,347
)


(273,258
)Inventories


(853,608
)


(645,195
)Prepaid expenses


121,970



(50,762
)Accounts payable and accrued expenses


220,570



664,904Notes payable


5,479,200



-Advance from customers


2,774,722



(158,853
)Taxes payable


488,552



(176,050
)Other payables


737,742



578,628Net cash provided by operating activities


1,028,473



3,106,033Cash flows from investing activitiesAcquisition of property and equipment


(4,572
)


(2,926
)Acquisition of land use rights


-



(4,938,228
)Construction in progress


(1,554,319
)


(115,152
)Net cash used in investing activities


(1,558,891
)


(5,056,305
)Cash flows from financing activitiesProceeds from issuing series B preferred stock


-



338,850Proceeds from warrants exercise


371,398



36,400Dividends paid


(49,388
)


-Increase of restricted cash


(3,698,460
)


-Proceeds from short-term loans


5,783,600



658,270Payments from short-term loans


(684,900
)


-Proceeds from amount due to a related party


-



18,905Payments from amount due to a related party


(436,462
)


-Proceeds from notes payable


-



2,194,234Repayment of long term bank loans


-



-Net cash provided by financing activities


1,285,788



3,246,659Effect of exchange rate fluctuation


2,932



(754
)Net increase in cash


758,303



1,295,632Cash and cash equivalents at beginning of period


296,312



2,709,127Cash and cash equivalents at end of period

$
1,054,615


$
4,004,759Supplemental disclosure of cash flow informationInterest paid

$
713,531


$
206,148Income taxes paid

$
-


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

$
57,500


$
132,778Reclassfication of warrant liability with equity

$
14,993


$
34,770Issuance of common stock for consulting fee

$
266,100


$
-The accompanying notes are an integral part of this statement.






-3-
 
  China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)





1.  Organization and Business




China Carbon Graphite Group, Inc. (the “Company”, “us”, “we”, “our”), through its subsidiaries, is engaged in the manufacture of graphite-based products in the People’s Republic of China.  Our products are used in the manufacturing process for other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors.  We currently manufacture and sell primarily the following types of graphite products:





·
Graphite electrodes;





·
fine grain graphite; and





·
high purity graphite.




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-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)







Stock distribution





On January 22, 2008, the Company effected a 1.6-for-one stock distribution whereby each share of common stock became converted into 1.6 shares of common stock. All references to share and per share information in these financial statements reflect this stock distribution.





2.  Basis of Preparation of Financial Statements




Management acknowledges its responsibility for the preparation of the accompanying interim condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its condensed consolidated financial position and the results of its operations for the interim period presented. These condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2010. The results of the three-months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2011.




The accompanying unaudited condensed consolidated financial statements for China Carbon Graphite Group, Inc. and its subsidiaries and variable interest entity, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.





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





-5-
 
 China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)





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.




Restricted cash -Restricted cash represents amounts held by a bank as security for bank acceptance notes and therefore issubject to withdrawal restrictions. As of March 31, 2011 and December 31, 2010, these amounts totaled $3,710,610 and $0, respectively. The restricted cash is expected to be released within the next twelve months after bank notes matured.





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.





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.





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





Buildings


25 - 40 yearsMachinery and equipment


10 - 20 yearsMotor vehicles


5 years






-6-
 
 China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)




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





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





The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment recorded during the three months ended at March 31, 2011 and 2010.





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. The Company has not capitalized any interest expenses for the three months ended March 31, 2011 and 2010.





Land use rights- There is no private ownership of land in the PRC. The Company has acquired land use rights to a total of 386,853 square meters. The land use rights have terms of 50 years, with the land use right relating to 130,220 square meters expiring in 2052 and the land use right with respect to 256,633 square meters expiring in 2053. In addition to the land use right mentioned above, China government has also issued the Company a land use certificate of 387,838 square meters land, for which the Company has not signed a land use right agreement and has not paid. This 387,838 square meters land use right was used as collateral by the Company for its short term bank loan. The land use right has a term of 50 years, with expiration date of January 2060. The cost of this 387,838 square meters land is approximately $14,000,000. The cost of the land use rights is amortized over the 50-year term of the land use right using the straight-line method. 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. There were no impairments recorded during the three months ended at March 31, 2011 and 2010.





Revenue 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 three months ended at March 31, 2011 and 2010.






-7-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


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 three months ended March 31, 2011 and 2010, shipping and handling costs were $49,863 and $23,938, 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.





Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of March 31, 2011 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 March 31, 2011, 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% enterprise 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.






-8-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


The Company has been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. And therefore, the Company is subject to a 15% enterprise income tax. In addition, 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.





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.




-9-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


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.





▪
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 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, 2010 Series B warrants to purchase 28,000 shares of common stock at $1.30 and 2009 series B warrants to purchase 100,000 shares of common stock at $1.30 were exercised.





On June 1, 2010, 100,000 shares of 2009 warrants changed the exercise price from $2.00 to $1.30 and 100,000 shares of 2009 warrants changed the exercise price from $3.00 to $1.30.





As of March 31, 2011, 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”


200,000


$
3.00“2009 Series B Warrants”


804,200


$
1.30“2010 Series B Warrants”


100,000


$
1.30






-10-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


The fair value of the 2007 Warrants to purchase 125,000 shares of common stock was $3 and $54 at March 31, 2011 and December 31, 2010, 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 $51 for the three months ended March 31, 2011.





The fair value of the 2009 Warrants to purchase 200,000 shares of common stock was $2,907 and $8,357 at March 31, 2011 and December 31, 2010, respectively. The Company recognized a loss of $53,640 from the change in fair value of these warrants for the three months ended March 31, 2010 and a gain of $5,450 for the three months ended March 31, 2011.





The fair value of the 2009 Series B Warrants to purchase 804,200 shares of common stock was $25,782 and $70,914 at March 31, 2011, and December 31, 2010, respectively. The Company recognized a loss of $847,210 from the change in fair value of these warrants for the three months ended March 31, 2010 and a gain of $45,131 for the three months ended March 31, 2011.





Warrants to purchase 28,000 shares of common stock was exercised on March 29, 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.





2009 Series B 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.





The fair value of 2010 Series B warrants to purchase 100,000 shares of common stock was $3,270 and $8,789 at March 31, 2011 and December 31, 2010, respectively. The Company recognized a loss of $82,079 for the three months ended March 31, 2010 and $5,519 for the three months ended March 31, 2011.





In summary, the Company recorded a total amount of $56,152 of changes in fair value of warrants in the Consolidate statement of income and comprehensive income for the three months ended March 31, 2011.





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:





March 31,2011


December 31,20102007 WarrantsAnnual dividend yield


-



-Expected life (years)


1.79



2.04Risk-free interest rate


0.18
%


0.18
%Expected volatility


13
%


14
%





March 31,2011


December 31, 20102009 WarrantsAnnual dividend yield


-



-Expected life (years)


3.46



3.71Risk-free interest rate


0.18
%


0.18
%Expected volatility


13
%


14
%





-11-
 
 China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


March 31,2011


December 31, 20102009 Series B WarrantsAnnual dividend yield


-



-Expected life (years)


3.73



3.98Risk-free interest rate


0.18
%


0.18
%Expected volatility


13
%


14
%





March 31,2011


December 31, 20102010 Series B WarrantsAnnual dividend yield


-



-Expected life (years)


3.78



4.03Risk-free interest rate


0.18
%


0.18
%Expected volatility


13
%


14
%





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 March 31, 2011.





Carrying Value at

March 31,


Fair Value Measurement at

March 31, 20112011


Level 1


Level 2


Level 3Warrant liability

$
31,962



-



-

$

31,962





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 1,229,200 shares of common stock at an exercise price in the range of $1.3- $3.0 per share. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.







-12-
 
 China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


The following table sets forth the computation of the number of net income per share for the three months ended March 31, 2011 and 2010.





Three Months Ended March 312011


2010Weighted average shares of common stock outstanding (basic)


21,630,421



18,485,344Shares issuable upon conversion of series A preferred stock


-



-Shares issuable upon conversion of series B preferred stock


611,980



-Shares issuable upon exercise of warrants


373,386



-Weighted average shares of common stock outstanding (diluted)


22,615,787



18,485,344Net income (loss) available to common shareholders

$
324,920


$
(1,027,664
)Earnings (loss) per shares of common stock (Basic)

$
0.02


$
(0.06
)Earnings (loss) per shares of common stock (diluted)

$
0.01


$
(0.06
)





For the three months ended March 31, 2011, the Company included 985,366 shares of common stock issuable upon conversion of preferred stock and exercise of warrants, since such issuance would be anti dilutive.





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 three months ended March 31, 2011 and 2010 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.





Reclassification- Certain 2009 amounts have been reclassified to conform to the current year’s financial statements presentation. These reclassifications had no impact on previously reported financial position, results of operations or cash flows.





Recent accounting pronouncements





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.





The Company has reviewed the Accounting Standards Updates up through 2011-02.





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.







-13-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


The Company is operating in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between U.S. dollars and the Chinese RMB.





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





For the three months ended March 31, 2011, three customers accounted for 10% or more of sales revenues, representing 47%, 23% and 11%, respectively of the total sales. For the three months ended March 31, 2010, two customers accounted for 10% or more of sales revenues, representing 30.1% and 17.9%, respectively of the total sales. As of March 31, 2011, there were two customers that constitute 24% and 26%, respectively of the accounts receivable. As of December 31, 2010, there were two customers that constitute 41.5% and 29.5% respectively of the accounts receivable.





For the three months ended March 31, 2011 and 2010, the Company had insurance expense of $482 and $26,992, respectively. Accrual for losses is not recognized until such time a loss has occurred.





5.  Income Taxes





Under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC, which took effect on January 1, 2008, domestic and foreign companies pay a unified corporate income tax of 25% except a 15% corporation income tax rate for qualified high technology and science enterprises.





The Company has been granted a 100% tax holiday from enterprises income tax from the Xing He District Local Tax Authority for the ten years 2008 through 2018. This tax holiday could be challenged by higher taxing authorities in the PRC, which could result in taxes and penalties owed for those years. For the three months ended March 31, 2011 and 2010, without the consideration of adjustments on taxable income, the enterprise income tax at the statutory rates would have been approximately $127,325 and $86,674, respectively.





A reconciliation of the provision for income taxes with amounts determined by the PRC statutory income tax rate to income before income taxes is as follows:





Three months ended March 31,2011


2010Computed tax at the PRC statutory rate of 15%

$
127,325


$
86,674Benefit of tax holiday


(127,325
)


(86,674
)Income tax expenses

$
-


$
-





6.  Trade Accounts Receivable - net





As of March 31, 2011 and December 31, 2010, trade accounts receivable consisted of the following:





March 31, 2011


December 31, 2010Amount outstanding

$
12,841,400


$
8,727,979Bad debt provision


(2,522,385
)


(2,505,867
)Net amount

$
10,319,015


$
6,222,112






-14-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


7.  Advance to suppliers, net





As of March 31, 2011 and December 31, 2010, advance to suppliers consisted of the following:





March 31, 2011


December 31, 2010Advance to suppliers

$
15,236,453


$
10,198,602Bad debt provision


-



-Advance to suppliers, net

$
15,236,453


$
10,198,602





For the three months ended March 31, 2011 and 2010, no additional bad debt provision on advance to suppliers was charged to expenses.





8.   Inventories





As of March 31, 2011 and December 31, 2010, inventories consisted of the following:





March 31, 2011


December 31, 2010Raw materials

$
3,411,477


$
2,995,663Work in process


22,667,131



22,247,789Finished goods


1,384,262



1,188,765$
27,462,870


$
26,432,217





Raw materials consist primarily of asphalt, petroleum coke, needle coke and other materials used in production. Finished goods consist of graphite electrodes, fine grain graphite and high purity graphite. The costs of finished goods include direct costs of raw materials as well as direct labor used in production. Indirect production costs such as utilities and indirect labor related to production are also included in the cost of inventory.





9.  Property and Equipment, net





As of March 31, 2011 and December 31, 2010, property and equipment consist of the following:





March 31, 2011


December 31, 2010Building

$
12,595,257


$
12,595,257Machinery and equipment


21,702,827



21,702,827Motor vehicles


31,857



31,857Constructions Progress


11,892,985



10,265,88846,222,926



44,595,829Less: accumulated depreciation


(10,658,034
)


10,202,752$
35,795,782


$
34,393,077





For the three months ended March 31, 2011 and 2010, depreciation expense amounted to $386,754 and $404,456 was charged to cost of goods sold.





-15-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


10.  Land Use Right





As of March 31, 2011 and December 31, 2010, land use rights consist of the following:





March 31, 2011


December 31, 2010Land Use Right

$
11,027,686


$
10,956,654Less: Accumulated amortization


508,315



459,724$
10,519,371


$
10,496,930





For the three months ended March 31, 2011 and 2010, amortization expenses were $46,601 and $27,340, respectively.





Future amortization of the land use rights is as follows:





12 -month period ending March 31,2011

$
186,4052012


186,4052013


186,4052014


186,4052015


186,4052016 and thereafter


9,587,344Total

$
10,519,371





As of March 31, 2011, all intangible assets are pledged as collateral for bank short term bank loans.





11.   Stockholders’ equity





(a)
Restated Articles of Incorporation





On January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value $0.001 per share. The restated articles of incorporation give the board of 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 the series B convertible preferred stock (“series B preferred stock”).





(b) Stock Issuances; Warrants





On January 11, 2011, the Company issued 50,000 shares of common stock upon conversion of 50,000 shares of Series B preferred stock.





On January 21, 2011, the Company issued 100,000 shares of common stock upon conversion of 100,000 shares of Series B preferred stock.






-16-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


On January 24, 2011, the Company issued 243,055 shares of common stock upon conversion of 243,055 shares of Series B preferred stock.





On January 25, 2011, the Company issued 69,444 shares of common stock upon conversion of 69,444 shares of Series B preferred stock.





On February 4, 2011, the Company issued 102,321 shares of common stock upon conversion of 102,321 shares of Series B preferred stock.





On March 4, 2011, the Company issued 2,500 shares of common stock upon conversion of 2,500 shares of Series B preferred stock.





On March 14, 2011, the Company issued 17,000 shares of common stock upon conversion of 17,000 shares of Series B preferred stock.





On March 21, 2011, the Company issued 28,700 shares of common stock upon conversion of 28,700 shares of Series B preferred stock.





On January 19, 2011, the Company issued 45,833 shares of common stock upon non cash exercise of 100,000 warrants.





On January 24, 2011, the Company issued 124,025 shares of common stock to upon exercise of warrants at $1.32.





On February 7, 2011, the Company issued 160,000 shares of common stock to upon exercise of warrants at $1.30.





During the quarter ended March 31, 2011, the Company issued 620,000 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 $1,240,100 was recorded. As of March 31, 2011, there was still $974,000 to be amortized during 2011 and it is recorded in prepaid expenses.





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 160,000 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 160,000 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.  The Company has met its targest for the year ended December 31, 2010.





On January 5, 2010, the Company issued 125,000 shares of common stock upon exercise of 125,000 shares of Series A preferred stock.





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.





In April 2010, the Company issued 1,032,500 shares of common stock upon exercise of 1,032,500 shares of Series B preferred stock.





In April 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 March 31, 2011, all consulting expenses were amortized.






-17-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


In November 2010, the Company issued total 100,000 shares of common stock to four directors. 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 $108,000 was recorded as stock compensation expense.





Pursuant to a consulting agreement dated November 2010, the Company issued 120,000 shares of common stock.  The fair value of $116,400 was recorded as expenses. Pursuant to a consulting agreement dated December 2010, the Company issued 90,000 shares of common stock. The fair value of $90,000 was recorded as expenses.  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.





(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 include (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, computed fair value of the series B preferred stock at December 22, 2009 was $2,981,490 and the effective preferred stock conversion price to be $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.





As previously disclosed, we entered into a letter of intent to acquire China Carbon Graphite Ltd. Negotiations relating to the potential acquisition 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.




-18-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


12.  Amount Due To A Related Party





Amount due to a related party was $4,338,015 and $4,744,634 at March 31, 2011 and December 31, 2010, respectively. It was payable to Mr. Dengyong Jin, who is general manager of China operations, former chief executive officer, chief executive officer and principal shareholder of Xingyong. The payable has no interest rate and is for the Company’s business operating purpose.





13.  Short-term bank loans





As of March 31, 2011 and December 31, 2010, short term loans consisted of the following:





March 31, 2011


December 31, 2010Bank loan from China Construction Bank, dated January 11, 2011, due January 11, 2012 with an interest rate of 6.06%, interest payable quarterly, secured by property and equipment and land use rights

$
4,581,000


$
-Bank loan from China Construction Bank, dated September 6, 2010, due September 5, 2011 with an interest rate of 5.31%, interest payable quarterly, secured by land use rights


6,108,000



6,068,000Bank loan from China Construction Bank, dated August 23, 2010, due August 22, 2011 with an interest rate of 5.31%, interest payable quarterly, secured by land use rights


6,108,000



6,068,000Bank loan from China Construction Bank, dated August 6, 2010, due August 5, 2011 with an interest rate of 5.31%, interest payable quarterly, secured by land use rights.


6,108,000



6,068,000Bank loan from China Construction Bank, dated September 16, 2010, due September 15, 2011 with an interest rate of 5.31%, interest payable quarterly, secured by land use rights


9,162,000



9,102,000Bank loan from Huaxia Bank, 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


5,344,500



5,309,500Bank loan from Credit Union, dated February 1, 2011, due February 1, 2012 with an interest rate of 13.66%, interest payable monthly, secured by property and equipment and land use rights


1,221,600



682,650$
38,633,100


$
33,298,150





On January 11, 2011, we entered into a short-term bank loan with China Construction Bank for a total of $4.6 million. The loan has an interest rate of 6.06%, due in January 11, 2012, and secured by property and equipment and land use rights.






-19-


China Carbon Graphite Group, Inc. and Subsidiaries
 Notes to Condensed Consolidated Financial Statements
 For The Three Months Ended March 31, 2011
 (Unaudited)


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 of $6.108 million on August 6, 2010 at an annual interest rate of 5.31% and has a maturity date of August 5, 2011. The second loan was of $6.108 million on August 23, 2010 at an annual interest rate of 5.31% and has a maturity date of August 22, 2011.  The third loan was of $6.108 million on September 6, 2010 at an annual interest rate of 5.31% and has a maturity date of September 5, 2011. The fourth loan was of $9.162 million on September 16, 2010 at an annual interest rate of 5.31% 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.





As of March 31, 2011, all intangible assets and certain property and equipment are pledged as collateralfor short term bank loans.





14.  Subsequent Events





In May 2011, the Company issued 365,000 shares of common stock pursuant to one consulting agreement 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 was recorded based on the fair market price of when the shares were issued. The fair value will be amortized over the consulting term.





-20-




Item 2.   Management’s Discussion and Analysis Financial Condition and Results of Operations.
 
 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, 2010 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 used in the manufacturing process for other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors.  We currently manufacture and sell primarily the following types of graphite products:
 
 ·
Graphite electrodes;
 
 ·
fine grain graphite; and
 
 ·
high purity graphite.
  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.  Approximately 40% of our products 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. In 2010, our revenues and profits improved from 2009 due to an increase in demand for our products due to improved market conditions, increased sales prices and an increase in our production capacity, as discussed in greater detail below under the heading “Results of Operations.”
 
 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 since the third quarter of 2010. Our revenues and gross margins improved significantly in 2010, which trend has continued into 2011. As a result, our receivables have also increased. We expect the recovery and increasing demand in the fine grain, high purity and graphite electrode, and in particular ultra high power graphite electrode, market to continue in subsequent quarters in 2011.
 
 We expect the increased demand in high margin ultra high power  graphite electrode and fine grain and high purity graphite products to extend through 2011, primarily due to anticipated growth in the iron and steel automobile, aerospace ad defense industries in the PRC. Currently, steel plants in China have been upgrading their furnace facilities and created a high demand for large size ultra high power  graphite electrode, which are different products from general graphite electrode. The margin of large size ultra high power 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 power graphite electrode, high purity graphite and fine gain graphite.
 
 -21-
   In order to try and address this demand, in January 2011, we completed the exterior construction of a production plant, whose annual production capacity is expected to be 30,000 tons. We intend to start installation and shakedown testing of a 4200-ton compressor and 36 annular kilns in this facility in the near future. The new facilities are expected to begin production by August 2011, subject to potential further delays in the installation of equipment, the hiring of additional employees, orders from customers, or other delays involved in construction, installation or production in a new facility. The new plant is expected to be used to manufacture a new product, ultra high power graphite electrodes with a diameter ranging from 600 to 800mm, along with existing fine grain and high-purity graphite products. The industrial applications of the products to be manufactured in the new facility include aerospace, defense, automotive and clean tech end products currently carries the greatest demand of all forms of graphite. We believe that this expansion will make us China's first domestic producer of 800 mm diameter ultra high power electrodes and will further strengthen the Company's leading position in China's fine grain graphite market. After the expansion, the Company is expected to have a 60,000 ton production capacity. The Company is currently operating at 100% production capacity of 30,000 tons annually.
 
 The initial budgeted investment outlay for the construction was approximately $13.5 million in the aggregate. The new forming plant will specialize in manufacturing large size ultra high power  graphite electrodes, high purity graphite and fine gain graphite. In addition, the new baking plant will have 36 furnaces, totaling 160 meters in length.
  Some of our expansion plans, including the expansion of our product offerings to include nuclear, solar and semiconductor products and pursuing an acquisition, would likely require us to obtain additional funds from equity or debt markets, or to borrow additional funds from local banks.  We currently have no commitments from any financing source.  There is no assurance that we will be able to raise any funds on terms favorable to us, or at all.  In the event that we issue shares of equity or convertible securities, holdings of our existing stockholders would be diluted.  In addition, there is no assurance that we will successfully manage and integrate the production and sale of new products.
 
 At March 31, 2011, we had short-term bank loans of approximately $38.6 million.  These bank loans, which are secured by a lien on our fixed assets and land use rights, are due between February 2011 and February 2012, including approximately $32 million owed to the Construction Bank of China. Historically, we have generally rolled over our short-term loans when they became due.  However, we cannot assure you that our lenders, including the Construction Bank of China, will not demand payment on the maturity date of these loans.  If the lenders demand payment when due, we may not be able to obtain the necessary funds to pay off these loans, which could result in the imposition of penalties such as a 50% increase in interest rates and a request from the banks for additional security for the loans. Our cash reserves, which at March 31, 2011 were $4.76 million, are insufficient to pay off our loans when due.
 
 We purchase all of our raw materials from domestic Chinese suppliers. Because we do not have any long-term contracts with our suppliers, any increase in the prices of our raw materials would affect the price at which we can sell our products. If we are not able to pass on increased costs to our customers, we would be unable to maintain our profit margins. Raw material prices increased significantly in 2010 and kept increasing in the first three months of March 31, 2011. While we anticipate this trend to continue in the rest of 2011, we have been improving the gross margin by improving the sales prices. The average prices of our products have been increasing since April 2011 to this report date. In particular, prices of large size fine grain graphite and high purity graphite products have notably increased.
 
 In times of decreasing prices, we may have to sell our products at prices, which are lower than the prices at which we purchased our raw materials. Furthermore, PRC regulations grant broad powers to the government to adjust prices of raw materials and manufactured products.  Although the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be implemented in the future, thereby affecting our results of operations and financial condition.
 
 -22-
 RESULTS OF OPERATIONS
 
 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 March 31,2011


2010US Dollars


Percentage


US Dollars


PercentageSales

$
11,463



100
%

$
4,847



100
%Cost of sales


(8,883
)


77.5
%


(3,823
)


78.9
%Gross  profit


2,580



22.5
%


1,024



21.1
%Operating expenses


(1,650
)


14.4
%


(456
)


9.4
%Income from operations


930



8.1
%


568



11.7
%Other income


61



0.5
%


-



-
%Change in fair value of warrants


56



0.5
%


(1,220
)


(25.2
)%Interest expense


(714
)


(6.2
)%


(206
)


(4.3
)%Income before income tax expense


333



2.9
%


(859
)


(17.8
)%Provision for income taxes


-



-
%


-



-
%Net income

$
333



2.9
%

$
(859
)


(17.8
)%Deemed preferred stock dividend


-



-
%


(133
)


(2.7
)%Dividend


(8)



(0.1
)%


(36
)


(0.7
)%Net income available to common shareholders


325



2.8
%


(1,028
)


(21.2
)%Foreign currency translation adjustment


268



2.3
%


(100
)


(2.1
)%Comprehensive income

$
601



5.3
%

$
(958
)


(19.9
)%
 
 Sales.
 
 During the three months ended March 31, 2011, we had sales of $11,463,335 as compared to sales of $4,846,856 for the three months ended March 31, 2010, an increase of $6,616,479, or approximately 136.5%. Our revenue was generated mainly from sales of graphite electrodes, fine grain graphite, high purity graphite, and semi-processed graphite products. Sales increase was mainly attributable to a significant increase in the demand of our products during the three months ended March 31, 2011 resulting from the market recovery, new customer developments, and change of product mix to include more high purity graphite products which average unit price increased 75% in the three months ended March 31, 2011 compared to the same period last year. The fast development of manufacturing of solar and mold products increased the demand of our products as raw material. Approximately 30% of total sales during the three months ended March 31, 2011 were revenue from approximately 40 new customers developed subsequent to March 31, 2010. Increased production capacity and increased unit prices also contributed to the increase of total sales. The increased unit price of high purity graphite is due to a large demand for such products in the market. We also had a decrease in the demand of high purity graphite in the first quarter of 2010. Since then, the company has been successful to optimize its product mixes to achieve the highest profit by increasing sales of fine grain graphite and high purity graphite products which generate a better margin.
 
 The breakdown of revenues for each of our products during the three months ended March 31, 2011 and 2010, respectively, was as follows:
  March 31, 2011

Sales


% of Total

Sales


March 31, 2010

Sales


% of

Total SalesGraphite Electrodes

$
1,801,803



15.7
%

$
2,400,928



49.5
%Fine Grain Graphite


4,715,264



41.1
%


2,109,080



43.5
%High Purity Graphite


4,637,133



40.5
%


123,903



2.6
%Others (1)


309,135



2.7
%


212,946



4.4
%Total

$
11,463,335






$
4,846,856
 
 (1) “Other” sales represent revenue generated by sales of semi-processed products and other types of products
  -23-
 
 Cost of sales; gross margin.
 
 During the three months ended March 31, 2011, our cost of sales was $8,883,262, as compared to $3,822,666 during the three months ended March 31, 2010, an increase of $5,060,596, or 132.4%. The increase in cost of sales was directly associated with the increase in sales. Our gross margin increased from 21.1% for the three months ended March 31, 2010 to 22.5% for the three months ended March 31, 2011. The increase reflects the variance in production mix, as the percentage of our sales of high purity graphite products, a higher margin product compared to graphite electrodes, increased significantly. Fine grain graphite products decreased its margin due to the market demand shifts more to purity graphite electrodes during the three months ended March 31, 2011. The increased sales and increased margin of high purity graphite products offset the decreased sales of graphite electrodes and decreased margin and unit price of fine grain graphite products.
  Operating expenses - Selling, general and administrative expenses.
 
 Selling, general and administrative expenses totaled $1,603,925 for the three months ended March 31, 2011, as compared to $428,929 for the three months ended March 31, 2010, an increase of $1,174,996, or approximately 273.9%.
 
 Selling expenses increased from $24,993 for the three months ended March 31, 2010 to $49,863 for the three months ended March 31, 2011, an increase of $24,870, or 99.5%. The increase was due to higher shipping and handling expenses in the first quarter 2011 compared to 2010 related to higher sales.
 
 Our general and administrative expenses consist of salaries, office expenses, utility, business travel, amortization expenses and public company expenses such as legal, accounting, investor relations as well as stock compensation. General and administrative expenses were $1,554,062 for the three months ended March 31, 2011, compared to $403,936 for the three months ended March 31, 2010, an increase of $1,150,126, or 284.7%.  The increase of the general and administrative expenses was due primarily to increased taxes and professional expenses as a public company. The Company has incurred approximately $750,000 land use taxes and $266,100 consulting expenses by stock issuance in the three months ended March 31, 2011.  The increased land use tax is because the land use right we acquired in 2010 was first subject to land use tax during the three months ended March 31, 2011 pursuant to China’s tax regulations.
 
 Income from operations.
 
 As a result of the factors described above, income from operations amounted to $929,547 for the three months ended March 31, 2011, as compared to $567,921 for the three months ended March 31, 2010, an increase of approximately $361,626, or 63.7%.
 
 Other income and expenses.
 
 Interest expense was $713,531 for the three months ended March 31, 2011, as compared with $206,148 for the three months ended March 31, 2010, reflecting increased interest payments on loans from banks. Other income, which consisted of government subsidy for research expenses, was $60,880 for the three months ended March 31, 2011 as compared to $0 for the three months ended March 31, 2010. Expenses from change in fair value of warrants as a result of adopting ASC 820-10, Fair value measurement for non-financial assets and liabilities, was $56,152 for the three months ended March 31, 2011, as compared to $1,220,430 of loss from change in fair value of warrants for the three months ended March 31, 2010.
   -24-
 
 Income tax.
 
 During the three months ended March 31, 2011 and 2010, we benefited from a 100% tax holiday from the PRC enterprise tax.  As a result, we had no income tax due for these periods. The enterprise income tax at the statutory rates would have been approximately $0, for both the three months ended March 31, 2011 and 2010 without the consideration of adjustments on taxable income.
 
 Net income.
 
 As a result of the factors described above, our net income for the three months ended March 31, 2011 was $333,049, as compared to net loss of $858,657 for the three months ended March 31, 2010, an increase of $1,191,706, or 138.79%.
 
 Foreign currency translation.
 
 Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the three months ended March 31, 2011 was $268,248 as compared to loss of $99,522 for the three months ended March 31, 2010, an increase of $367,770, or 369.5%.
 
 Deemed preferred stock dividend.
 
 As a result of the private placement on January 13, 2010, during the three months ended March 3, 2010, we incurred a preferred stock deemed dividend of $132,778, of which $86,227 represented the intrinsic value of the conversion feature of the warrants issued with the preferred stock and $46,551 represented 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 three months ended March 31, 2011 and 2010.
 
 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 $8,129 and $36,229 for the three months ended March 31, 2011and 2010, respectively.
 
 Net income available to common shareholders.
 
 Net income available for common shareholders was $324,920, or $0.02 and $0.01 per share (basic and diluted), for the three months ended March 31, 2011 compared to net loss of $1,027,664, or $0.06 per share (basic and diluted), for the three months ended March 31, 2010.
 
 Liquidity and Capital Resources
 
 General
 
 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. In addition, in December 2009 and January 2010, we raised an aggregate of approximately $3 million in a private placement transaction. At March 31, 2011, we had short term loans in the aggregate amount of $38.63 million outstanding, as described below. In addition, on January 11, 2011, we entered into a short-term bank loan with China Construction Bank for a total of $4.6 million. The loan has an interest rate of 6.06%, is due in January 2012 and is secured by property, equipment and land use rights.
 
 We have short term bank loans of $0.69 million that were due in February 2011 and bear interest at an annual rate of 12.213% and of $5.345 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. The $0.69 short term bank loan that was due in February 2011 was paid back in February 2011.
 
  -25-
  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 $6.108 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 $6.108 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 $6.108 million on September 6, 2010 at an interest rate of 5.31% per year and has a maturity date of September 5, 2011. The fourth loan was for $9.162 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 quarterly.  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 were used by us in the third and fourth quarters of 2010 for working capital purposes, including primarily the purchase of inventory and the payment of advances to suppliers to lock in raw material prices. As of March 31, 2011, the balance for these four short-term bank loans was $27,486,000.
 
 Historically we have 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:
 
 ●
We generate sufficient business so that we are able to generate substantial profits, which cannot be assured;
 
 ●
Our banks continue to provide us with the necessary working capital financing; and
 
 ●
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.
 
 At March 31, 2011, cash and cash equivalents were $1,054,615, as compared to $296,312 at December 31, 2010.  Our working capital increased by $374,563 to $2,465,117 at March 31, 2011 from a working capital of $2,090,554 at December 31, 2010.  Our cash position increased due to the positive cash flow from operations as well as additional borrowing from banks.
 
 As of March 31, 2011, accounts receivable, net of allowance, was $10,319,015, as compared to $6,222,112 at December 31, 2010, an increase of $4,096,903, or 65.84%. The increase was in line with our increased sales.
 
 As of March 31, 2011, inventories were $27,462,870, as compared to $26,432,217 at December 31, 2010, an increase of $1,030,653, or 3.90%. The Company has purchased increased levels of inventories to be better prepared for increased demand for our products once our new facility is operational.  Since we expect raw material prices to increase, we already purchased inventory in order to lock in current raw material prices.
 
 As of March 31, 2011, prepaid expenses were $1,020,050, as compared to $573,094 at December 31, 2010, an increase of $446,956, or 77.99%. The increased prepaid expenses are mainly prepaid consulting expenses.
 
 Advance to suppliers increased from $10,198,602 at December 31, 2010 to $15,236,453 at March 31, 2011, an increase of $5,037,851, or 49.40%. 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. The Company has increased advance to suppliers to be better prepared for increased demand for our products once our new facility is operational.
 
 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 and accrued expenses increased from $5,452,743 at December 31, 2010 to $5,709,985 at March 31, 2011, an increase of $257,242, or 4.72%. The increase reflects increased payables for vendor payments due to increased production. The production increased as the market recovered and the demand for our products increased.
   -26-
 
 First Quarter Ended March 31, 2011 Compared to First Quarter Ended March 31, 2010
 
 The following table sets forth information about our net cash flow for the years indicated:
 
 Cash Flows Data:

For First Quarter Ended March 312011


2010Net cash flows provided by operating activities


1,028,473



3,106,033Net cash flows used in investing activities


(1,558,891
)


(5,056,305
)Net cash flows provided by financing activities


1,285,788



3,246,659
 
 Net cash flow provided by operating activities was $1,028,473 in first quarter 2011 as compared to net cash flow provided by operating activities of $3,106,033 in first quarter 2010, a decrease of $2,077,560, or 66.9%.   The decrease in net cash flow provided by operating activities in first quarter 2011 was mainly due to more advances to suppliers to lock in better price and a larger accounts receivable in line with our increased sales.
 
 Net cash flow used in investing activities was $1,558,891 for first quarter 2011 and $5,056,305 for first quarter 2010, a decrease of $3,497,414, or 69.2%. The decrease in net cash used in investing activities was mainly because in the three months ended March 31, 2010,  $5 million was spent to acquire land use right.
 
 Net cash flow provided by financing activities was $1,285,788 for first quarter 2011, compared to $3,246,659 provided by financing activities for first quarter 2010, a decrease of $1,960,871, or 60.4%.  The decrease in net cash provided by financing activities was mainly due to a larger amount of restricted cash required to be put as deposit toward notes payable during the three months ended March 31, 2011.
 
 Off-Balance Sheet Arrangements
 
 We have not entered into any off-balance sheet arrangements.
 
 Significant Accounting Estimates and Policies
 
 The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States 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.
 
 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.
  -27-
  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 March 31, 2011 or December 31, 2010.
 
 Property, Plant and Equipment
 
 Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets after taking into account the estimated residual value.
 
 Land Use Rights
 
 There is no private ownership of land in China. All land ownership is held by the government of China, its agencies and collectives. Land use rights are obtained from government, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required transfer fee. We have the land use rights to an area of 386,853 square meters in Xinghe County, Inner Mongolia, China,  for a term of 50 years, beginning from issuance date of the certificates granting the land use right. In addition to the land use right mentioned above, China government has also issued the Company a land use certificate of 387,838 square meters land, for which the Company has not signed a land use right agreement and has not paid. This 387,838 square meters land use right was used as collateral by the Company for its short term bank loan. The land use right has a term of 50 years, with expiration date of January 2060. The cost of this 387,838 square meters land is approximately $14,000,000. 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 three months ended March 31, 2011 and 2010 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 paid VAT and business tax based on tax invoices issued.
 
 The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date 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.
   -28-
  Recent accounting pronouncements
 
 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.
 
 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 our chief executive officer and our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011.
 
 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, our disclosure controls and procedures were not effective as of March 31, 2011.
 
 However, we believe that the remedial steps we are taking will remediate the significant deficiency identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
 
 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.
  -29-
 
 PART II – OTHER INFORMATION
 
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
 During the quarter ended March 31, 2011, we issued 620,000 shares of common stock pursuant to three consulting agreements for consulting and investor relation services. Based on representations made by these consultants, the issuances of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation 506 of the SEC thereunder.
 
 Item 6. Exhibits
 
 31.1      Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
 31.2      Rule 13a-14(a)/15d-14(a) certificate of Principal Financial Officer
 32.1      Section 1350 certification of Chief Executive Officer
 32.2      Section 1350 certification of Chief Financial Officer
 
 -30-
 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: May 16, 2011
By:
/s/ Donghai YuDonghai YuChief Executive Officer
 
 Date: May 16, 2011
By:
/s/ Zhenfang YangZhenfang YangChief Financial Officer