The following discussion of the results of our operations and financial
condition should be read in conjunction with our financial statements and the
related notes, which appear elsewhere in this report. The following discussion
includes forward-looking statements. For a discussion of important factors that
could cause actual results to differ from our forward-looking statements, see
the section entitled "Cautionary Note Regarding Forward Looking Statements"
above.
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 subject to risks and uncertainties. Given these
uncertainties, undue reliance should not be placed on these forward-looking
statements. Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. This Annual Report should be
read in its entirety 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 research and development, small production and sales of
graphene and graphene oxide and graphite bipolar plates in the People's Republic
of China. We have developed our own graphene prototype and produces the products
by orders only, for which we sell domestically and export internationally. We
outsource the production of large orders to third parties as we have not
commercialized our product prototype. Starting in the second quarter of 2018, we
have started producing our graphene products on a regular basis and standardized
the packaging for our customers' commercial use. We also operate a
business-to-business and business-to-consumers Internet portal
(www.roycarbon.com) for graphite related products.
As of and for the nine months ended September 30, 2020, the Company has incurred
operating losses. The ability of the Company to continue as a going concern is
dependent on the Company obtaining adequate capital to fund operating losses
until it becomes profitable. If the Company is unable to obtain adequate
capital, it could be forced to cease operations. In order to continue as a going
concern, the Company will need, among other things, additional capital
resources. Management's plans to obtain such resources for the Company include
(i) obtaining capital from the sale of its equity securities, (ii) sales of its
products, and (iii) short-term or long-term borrowings from banks, stockholders
or other party(ies) when needed. However, management cannot provide any
assurance that the Company will be successful in accomplishing any of its plans.
The Company plans to look for opportunities to merge with or acquire other
graphite companies.
PRC regulations grant broad powers to the government to adjust the price of raw
materials and manufactured products. Although the government has not imposed
price controls on our raw materials or our products, it is possible that price
controls may be implemented in the future, thereby affecting our results of
operations and financial condition.
Results of Operations
Comparison of the Three Months Ended September 30, 2020 and 2019
Sales.
During the three months ended September 30, 2020, we had sales of $91,494
compared to sales of $200,018 for the three months ended September 30, 2019, a
decrease of $108,524 or approximately 54.26%. Sales decrease was mainly due to
economic impact of COVID-19.
24
Cost of goods sold.
Our cost of goods sold consists of the purchase cost. During the three months
ended September 30, 2020, our cost of goods sold was $52,551, compared to
$83,330 for the cost of goods sold for the three months ended September 30,
2019, a decrease of $30,779 or approximately 36.94%. The decrease in the cost of
sales was primarily attributable to the decrease in sales volume.
Gross profit.
Our gross profit decreased from $116,688 for the three months ended September
30, 2019 to $38,943 for the three months ended September 30, 2020. The decrease
of the gross profit is mainly attributed to decrease in the sales.
Gross profit Margin.
Our gross profit margin decreased from 58.3% for the three months ended
September 30, 2019 to 42.6% for the three months ended September 30, 2020 due to
more products with lower gross margin were sold.
Operating expenses.
Operating expenses totaled $85,473 for the three months ended September 30,
2020, compared to $95,977 for the three months ended September 30, 2019, a
decrease of $10,504, or approximately 10.94%.
Selling, general and administrative expenses.
Selling expenses decreased from $6,575 for the three months ended September 30,
2019 to $4,465 for the three months ended September 30, 2020, a decrease of
$2,110, or approximately 32.09%. The decrease is mainly attributed to decreased
sales.
Our general and administrative expenses consist of salaries, office expenses,
utilities, business travel, amortization expenses, public company expenses
(including legal expenses, accounting expenses and investor relations expenses)
and stock compensation. General and administrative expenses were $81,008 for the
three months ended September 30, 2020, compared to $89,402 for the three months
ended September 30, 2019, a decrease of $8,394 or 9.39%. The decrease of general
and administrative expenses is mainly due to decreased payroll expense and
decreased stock compensation.
Loss from operations.
As a result of the factors described above, operating loss was $46,530 for the
three months ended September 30, 2020, compared to operating income of $20,711
for the three months ended September 30, 2019, an increase in loss of
approximately $67,241, or 324.66%.
Other income and expenses.
Our interest expense was $10,422 for the three months ended September 30, 2020,
compared to interest expense of $3,734 for the three months ended September 30,
2019. The reason is due to more borrowings in the three months ended September
30, 2020 compared to the same period 2019.
Other income of $3 and other expense of $nil were recorded as other income for
the three months ended September 30, 2020 and 2019, respectively.
Income tax.
During the three months ended September 30, 2020 and 2019, we did not incur any
income tax due for these periods.
25
Net loss.
As a result of the factors described above, our net loss for the three months
ended September 30, 2020 was $56,949, compared to net income of $16,977 for the
three months ended September 30, 2019, an increase in loss of $73,926, or
approximately 435.45%.
Foreign currency translation.
Our consolidated financial statements are expressed in U.S. dollars but the
functional currency of our operating subsidiary is RMB. Results of operations
and cash flows are translated at average exchange rates during the period,
assets and liabilities are translated at the unified exchange rate at the end of
the period and equity is translated at historical exchange rates. Translation
adjustments resulting from the process of translating the financial statements
denominated in RMB into U.S. dollars are included in determining comprehensive
income. Our foreign currency translation loss for the three months ended
September 30, 2020 was $14,940, compared a translation gain of $13,622 for the
three months ended September 30, 2019, an increase in loss of $28,562.
Net loss available to common stockholders.
Net loss available to our common stockholders was $56,949, or $0.00 per share
(basic and diluted), for the three months ended September 30, 2020, compared to
net income of $16,977, or net income of $0.00 per share (basic and diluted), for
the three months ended September 30, 2019.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Sales.
During the nine months ended September 30, 2020, we had sales of $352,909
compared to sales of $258,856 for the nine months ended September 30, 2019, an
increase of $94,053 or approximately 36.33%. Significant sales increase was
mainly due to increased market demand, year-end delivery delays, as well as
COVID-19 and revenue recognition principles.
Cost of goods sold.
Our cost of goods sold consists of the purchase cost. During the nine months
ended September 30, 2020, our cost of goods sold was $191,803, compared to
$119,494 for the cost of goods sold for the nine months ended September 30,
2019, an increase of $72,309 or approximately 60.51%. The increase in the cost
of sales was primarily attributable to the significant increase in sales volume.
Gross profit.
Our gross profit increased from $139,362 for the nine months ended September 30,
2019 to $161,106 for the nine months ended September 30, 2020. The increase of
the gross profit is mainly attributed to increase in the sales.
Gross profit Margin.
Our gross profit margin decreased from 53.8% for the nine months ended September
30, 2019 to 45.7% for the nine months ended September 30, 2020 due to more
products with lower gross margin were sold.
Operating expenses.
Operating expenses totaled $292,285 for the nine months ended September 30,
2020, compared to $306,951 for the nine months ended September 30, 2019, a
decrease of $14,666, or approximately 4.78%.
Selling, general and administrative expenses.
Selling expenses increased from $17,689 for the nine months ended September 30,
2019 to $39,252 for the nine months ended September 30, 2020, an increase of
$21,563, or approximately 121.9%. The increase is mainly attributed to increased
sales.
26
Our general and administrative expenses consist of salaries, office expenses,
utilities, business travel, amortization expenses, public company expenses
(including legal expenses, accounting expenses and investor relations expenses)
and stock compensation. General and administrative expenses were $253,033 for
the nine months ended September 30, 2020, compared to $289,262 for the nine
months ended September 30, 2019, a decrease of $36,229 or 12.52%. The decrease
of general and administrative expenses is mainly due to decreased payroll
expense and decreased stock compensation.
Loss from operations.
As a result of the factors described above, operating loss was $131,179 for the
nine months ended September 30, 2020, compared to operating loss of $167,589 for
the nine months ended September 30, 2019, a decrease in loss of approximately
$36,410, or 21.73%.
Other income and expenses.
Our interest expense was $45,329 for the nine months ended September 30, 2020,
compared to interest expense of $6,512 for the nine months ended September 30,
2019. The reason is due to more borrowings in the nine months ended September
30, 2020 compared to the same period 2019.
Other income of $3,454 and other expense of $nil were recorded as other
income for the nine months ended September 30, 2020 and 2019, respectively.
Income tax.
During the nine months ended September 30, 2020 and 2019, we did not incur any
income tax due for these periods.
Net loss.
As a result of the factors described above, our net loss for the nine months
ended September 30, 2020 was $173,054, compared to net loss of $174,101 for the
nine months ended September 30, 2019, a decrease in loss of $1,047, or
approximately 0.60%.
Foreign currency translation.
Our consolidated financial statements are expressed in U.S. dollars but the
functional currency of our operating subsidiary is RMB. Results of operations
and cash flows are translated at average exchange rates during the period,
assets and liabilities are translated at the unified exchange rate at the end of
the period and equity is translated at historical exchange rates. Translation
adjustments resulting from the process of translating the financial statements
denominated in RMB into U.S. dollars are included in determining comprehensive
income. Our foreign currency translation loss for the nine months ended
September 30, 2020 was $9,491, compared a translation gain of $14,245 for the
nine months ended September 30, 2019, an increase in loss of $22,689.
Net loss available to common stockholders.
Net loss available to our common stockholders was $173,054, or $0.01 per share
(basic and diluted), for the nine months ended September 30, 2020, compared to
net loss of $174,101, or net loss of $0.01 per share (basic and diluted), for
the nine months ended September 30, 2019.
Liquidity and Capital Resources
All of our business operations are carried out by Royal Shanghai, and all of the
cash generated by our operations has been held by that entity. In order to
transfer such cash to our parent entity, China Carbon Graphite Group, Inc.,
which is a Nevada corporation, we would need to rely on dividends, loans or
advances made by our PRC subsidiaries. Such transfers may be subject to certain
regulations or risks. To date, our parent entity has paid its expenses by
raising capital through private placement transactions. In the future, in the
event that our parent entity is unable to raise needed funds from private
investors, Royal Shanghai would have to transfer funds to our parent entity
through our wholly-owned subsidiaries, Royal Hongkong and BVI. Co,
27
PRC regulations relating to statutory reserves and currency conversion would
impact our ability to transfer cash within our corporate structure. The Company
Law of the PRC applicable to Chinese companies provides that net after tax
income should be allocated by the following rules:
1. 10% of after tax income to be allocated to a statutory surplus reserve until
the reserve amounts to 50% of the company's registered capital.
2. If the accumulate balance of statutory surplus reserve is not enough to make
up the Company's cumulative prior years' losses, the current year's after tax
income should be first used to make up the losses before the statutory surplus
reverse is drawn.
3. Allocation can be made to the discretionary surplus reserve, if such a reserve
is approved at the meeting of the equity owners.
Therefore, the Company is required to maintain a statutory reserve in China that
limits any equity distributions to its shareholders. The maximum amount of the
shareholders has not been reached. The company has never distributed earnings to
shareholders and has consistently stated in the Company's filings it has no
intentions to do so.
The RMB cannot be freely exchanged into the Dollars. The State Administration of
Foreign Exchange ("SAFE") administers foreign exchange dealings and requires
that they be conducted though designated financial institutions. Foreign
Investment Enterprises, such as Royal Shanghai, may purchase foreign currency
from designated financial institutions in connection with current account
transactions, including profit repatriation.
These factors will limit the amount of funds that we can transfer from Royal
Shanghai to our parent entity and may delay any such transfer. In addition, upon
repatriation of earnings of Royal Shanghai to the United States, those earnings
may become subject to United States federal and state income taxes. We have not
accrued any U.S. federal or state tax liability on the undistributed earnings of
our foreign subsidiary because those funds are intended to be indefinitely
reinvested in our international operations. Accordingly, taxes imposed upon
repatriation of those earnings to the U.S. would reduce the net worth of the
Company.
Our primary capital needs have been to fund our working capital requirements.
Our primary sources of financing will be cash generated from loans from banks,
equity investment from investors, and borrowings from unrelated parties.
The Company's consolidated financial statements are prepared using generally
accepted accounting principles in the United States of America applicable to a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As of and for the period ended
September 30, 2020, the Company has incurred operating losses and working
capital deficit from operating activities. The Company's sales revenue is not
sufficient to cover the company's expenses for the nine months ended September
30, 2020.
The ability of the Company to continue as a going concern is dependent on the
Company obtaining adequate capital to fund operating losses until it becomes
profitable. If the Company is unable to obtain adequate capital, it could be
forced to cease operations. At this point, there can be no assurance that the
Company is able to obtain such funding.
Our long-term goal is to develop our Royal Shanghai business. During the
interim, we expect that anticipated cash flows from future operations, loans and
equity investment from unrelated or related parties, provided that:
? we generate sufficient business so that we are able to generate substantial
profits, which cannot be assured;
? we are able to generate savings by improving the efficiency of our operations.
We may require additional equity, debt or bank funding to finance acquisitions
or to allow us to develop our Royal Shanghai business, which is one of our
primary growth strategies. We can provide no assurances that we will be able to
enter into any additional financing agreements on terms favorable to us, if at
all, especially considering the current global instability of the capital
markets.
28
At September 30, 2020, cash and cash equivalents were $1,951, compared to
$11,585 at December 31, 2019, a decrease of $9,634. Our working capital deficit
increased by $102,178 to a deficit of $2,642,877 at September 30, 2020
from $2,540,699 at December 31, 2019.
Accounts receivable, net of allowance, were $0 and $3,781 as of September 30,
2020 and December 31, 2019, respectively. Accounts receivable are recorded at
the invoiced amount and do not bear interest. Our management reviews the
adequacy of our allowance for doubtful accounts on an ongoing basis, using
historical collection trends and the aging of receivables. Management also
periodically evaluates individual customer's financial condition, credit
history, and the current economic conditions to make adjustments in the
allowance when it is considered necessary.
As of September 30, 2020, inventories were $15,964 compared to $17,583 at
December 31, 2019, a decrease of $1,619, or 9.21%. As of September 30, 2020 and
December 31, 2019, the Company has not made provision for inventory in regards
to slow moving or obsolete items.
The following table sets forth information about our net cash flow for the nine
months indicated:
For the Nine Months Ended
September 30,
2020 2019
Net cash flows provided by (used in) operating activities $ (101,892 ) $ 20,689
Net cash flows used in investing activities
$ (1,658 ) $ (22,080 )
Net cash flows provided by financing activities $ 93,900 $ -
Net cash flow used in operating activities was $101,892 for the nine months
ended September 30, 2020, compared to $20,689 provided by operating activities
for the nine months ended September 30, 2019, a decrease of $122,581. The
decrease in net cash flow provided by operating activities was mainly due to due
to an increase of $7,350 in inventory, an increase of $32,118 in other
receivables and an increase of $1,047 in net loss available to common
shareholders, offset by a decrease of $88,783 in advance from customers, a
decrease of $126,047 in accounts payable and accrued liabilities and a decrease
of $22,122 in prepaid expenses.
Net cash flow used in investing activities was $1,658 for the nine months ended
September 30, 2020, compared to $22,080 for the nine months ended September 30,
2019, a decrease of $20,422, or 92.49%. The decrease is mainly due to decrease
acquisitions of plant and equipment in the nine months ended September 30, 2020.
Net cash flow used in financing activities was $93,900 and $nil for the nine
months ended September 30, 2020 and 2019.
Concentration of Business and Credit Risk
Most of the Company's bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the Federal
Deposit Insurance Corporation ("FDIC") on funds held in U.S. banks. The
Company's bank account in the United States is covered by FDIC insurance.
Because the Company's operations are located in the PRC, this may give rise to
significant foreign currency risks due to fluctuations in and the volatility of
foreign exchange rates between U.S. dollars and RMB.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash, trade accounts receivables and
inventories, the balances of which are stated on the balance sheet. The Company
places its cash in banks located in China. Concentration of credit risk with
respect to trade accounts receivables is limited due to the diversity of the
Company's customers who are located in different regions of China. The Company
does not require collateral or other security to support financial instruments
subject to credit risk.
29
Significant Accounting Estimates and Policies
The discussion and analysis of our financial condition and results of operations
is based upon our financial statements that have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities. On an
ongoing basis, we evaluate our estimates including the allowance for doubtful
accounts, the salability and recoverability of our products, income taxes and
contingencies. We base our estimates on historical experience and on other
assumptions that we believe to be reasonable under the circumstances, the
results of which form our basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Revenue Recognition
The Company derives revenues from distribution of graphite-based products. We
recognize revenue in accordance with ASC 605-25, Revenue Recognition, which
states that revenue should be recognized when the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) the service has been
rendered; (3) the selling price is fixed or determinable; and (4) collection of
the resulting receivable is reasonably assured. Sales represent the invoiced
value of goods, net of value added tax ("VAT"), if any, and are recognized upon
delivery of goods and passage of title according to shipping terms.
The Company is subject to VAT, which is levied on a majority of the products, at
a rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is
borne by customers in addition to the invoiced value of sales and input VAT is
borne by the Company in addition to the invoiced value of purchases to the
extent not refunded for export sales.
The Company recognizes revenue upon delivery of goods and passage of title
according to shipping terms. The Company does not provide chargeback or price
protection rights to the customers. The customer only places purchase orders
with the Company once it has confirmed the sale with a third party because this
is a specialized business, which dictates that the Company will not sell the
products until the purchase order is received. The Company allows its customers
to return products only if its products are later determined by the Company to
be defective. Based on the Company's historical experience, product returns have
been insignificant throughout all of its product lines. Therefore, the Company
does not record an allowance for sales returns. If sales returns occur, they are
taken against revenue when products are returned from customers. Sales are
presented net of any discounts given to customers. Interest income is recognized
when earned. The Company experienced no returns for the nine months ended
September 30, 2020 and 2019.
In May 2014, the FASB issued Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers (Topic 606), amending revenue
recognition guidance and requiring more detailed disclosures to enable users of
financial statements to understand the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. We adopted this
ASU on January 1, 2018 for all revenue contracts with our customers using the
modified retrospective approach.
There is no impact of applying this ASU.
Comprehensive Income
We have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
presentation of comprehensive income (loss) and its components in a full set of
general purpose financial statements. We have chosen to report comprehensive
income (loss) in the statements of operations and comprehensive income.
Income Taxes
We account for income taxes under the provisions of ASC 740, Income Tax,
formerly known as SFAS No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the consolidated financial
statements or tax returns. Deferred tax assets and liabilities are recognized
for the future tax consequence attributable to the difference between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are measured using the enacted
tax rate expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
30
Effective January 1, 2008, the new Chinese income tax law sets unified income
tax rates for domestic and foreign companies at 25%, except for a 15% corporate
income tax rate for qualified high technology and science enterprises. In
accordance with this new income tax law, low preferential tax rates in
accordance with both the tax laws and administrative regulations prior to the
promulgation of this law gradually become subject to the new tax rate within
five years after the implementation of this law.
Accounts Receivable and Allowance For Doubtful Accounts
Accounts receivables are recognized and carried at the original invoice amount
less allowance for any uncollectible amounts. An estimate for allowance for
doubtful accounts is made when collection of the full amount is no longer
probable. Bad debts are written off as incurred. Accounts receivable are
recorded at the invoiced amount and do not bear interest. Management reviews the
adequacy of the allowance for doubtful accounts on an ongoing basis, using
historical collection trends and aging of receivables. Management also
periodically evaluates individual customer's financial condition, credit
history, and the current economic conditions to make adjustments in the
allowance when it is considered necessary. The allowance for doubtful accounts
amounted to $nil as of September 30, 2020 and December 31, 2019.
Inventories
Inventories are stated at the lower of cost, determined on a weighted average
basis, and net realizable value. Net realizable value is the estimated selling
price, in the ordinary course of business, less estimated costs to complete and
dispose. The cost of inventories comprises all costs of purchases, costs of
conversion and other costs incurred in bringing the inventories to their present
location and condition. For the nine months ended September 30, 2020 and 2019,
the Company has not made provision for inventory in regards to slow moving or
obsolete items.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major expenditures for
betterments and renewals are capitalized while ordinary repairs and maintenance
costs are expensed as incurred. Depreciation and amortization is provided using
the straight-line method over the estimated useful life of the assets after
taking into account the estimated residual value. The Company reviews the
carrying value of property, plant, and equipment for impairment whenever events
and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows
are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. The factors
considered by management in performing this assessment include current operating
results, trends and prospects, the manner in which the property is used, and the
effects of obsolescence, demand, competition, and other economic factors. Based
on this assessment, no impairment expenses for property, plant, and equipment
was recorded in operating expenses during the nine months ended September 30,
2020 and 2019.
Research and Development
Research and development costs are expensed as incurred, and are included in
general and administrative expenses. These costs primarily consist of the cost
of material used and salaries paid for the development of our products and fees
paid to third parties. Our research and development expense for the nine months
ended September 30, 2020 and 2019 were not significant.
31
Value Added Tax
Pursuant to China's VAT rules and regulations, as an ordinary VAT taxpayer we
are subject to a tax rate of 17% ("output VAT"). The output VAT is payable after
offsetting VAT paid by us on purchases ("input VAT"). Under the commercial
practice of the PRC, the Company paid VAT and business tax based on tax invoices
issued.
The tax invoices may be issued subsequent to the date on which revenue is
recognized, and there may be a considerable delay between the date on which the
revenue is recognized and the date on which the tax invoice is issued. In the
event that the PRC tax authorities dispute the date on which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes that
are determined to be late or deficient. In the event that a tax penalty is
assessed on late or deficient payments, the penalty will be expensed as a period
expense if and when a determination has been made by the taxing authorities that
a penalty is due.
Fair Value of Financial Instruments
On January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009, the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:
? Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
? Level 2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for
the assets or liabilities, either directly or indirectly, for substantially the
full term of the financial instruments.
? Level 3 inputs to the valuation methodology are unobservable and significant to
the fair value.
The carrying amounts of financial assets and liabilities, including cash and
cash equivalents, accounts receivable, notes receivable, advances to suppliers,
other receivables, short-term bank loans, notes payable, accounts payable,
advances from customers and other payables, approximate their fair values
because of the short maturity period for these instruments.
Stock-based Compensation
Stock-based compensation includes (i) common stock awards granted to employees
and directors for services which are accounted for under FASB ASC 718,
Compensation-Stock Compensation, and (ii) common stock awards granted to
consultants which are accounted for under FASB ASC 505-50, Equity-Equity-Based
Payments to Non-Employees.
All grants of common stock awards and stock options to employees and directors
are recognized in the financial statements based on their grant date fair
values. The Company has elected to recognize compensation expense using the
straight-line method for all common stock awards and stock options granted with
service conditions that have a graded vesting schedule, with a corresponding
charge to additional paid-in capital.
Common stock awards are granted to directors for services provided.
Common stock awards issued to consultants represent common stock granted to
non-employees in exchange for services at fair value. The measurement dates for
such awards are set at the dates that the contracts are entered into as the
awards are non-forfeitable and vest immediately. The measurement date fair value
is then recognized over the service period as if the Company has paid cash for
such service. The Company did not make significant grants to consultants for any
of the periods presented.
The Company estimates fair value of common stock awards based on the number of
shares granted and the quoted price of the Company's common stock on the date of
grant.
$7,200 and $8,188 of stock compensation expenses were amortized and recognized
as general and administrative expenses for the nine months ended September 30,
2020 and 2019, respectively.
32
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements will have a material impact on its financial condition or the
results of its operations.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", to
increase the transparency and comparability about leases among entities. The new
guidance requires lessees to recognize a lease liability and a corresponding
lease asset for virtually all lease contracts. It also requires additional
disclosures about leasing arrangements. ASU 2016-02 is effective for interim and
annual periods beginning after December 15, 2018, and requires a modified
retrospective approach to adoption. Early adoption is permitted. The Company
does not expect that the adoption of this guidance will have a material impact
on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments, to address
diversity in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows". The amendments provide guidance on
the following eight specific cash flow issues: (1) Debt Prepayment or Debt
Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other
Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation
to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration
Payments Made after a Business Combination; (4) Proceeds from the Settlement of
Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life
Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7)
Distributions Received from Equity Method Investees; (8) Beneficial Interests in
Securitization Transactions; and Separately Identifiable Cash Flows and
Application of the Predominance Principle. The amendments are effective for
public business entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. The amendments should be applied using
a retrospective transition method to each period presented. If it is
impracticable to apply the amendments retrospectively for some of the issues,
the amendments for those issues would be applied prospectively as of the
earliest date practicable. The Company does not expect that the adoption of this
guidance will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740):
Intra-Entity Transfer of Assets Other than Inventory", which requires the
recognition of the income tax consequences of an intra-entity transfer of an
asset, other than inventory, when the transfer occurs. ASU 2016-06 will be
effective for the Company in its first quarter of 2019. The Company does not
expect that the adoption of this guidance will have a material impact on its
consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, "Consolidation (Topic 810):
Interests Held through Related Parties That Are under Common Control". The
amendments affect reporting entities that are required to evaluate whether they
should consolidate a variable interest entity in certain situations involving
entities under common control. Specifically, the amendments change the
evaluation of whether a reporting entity is the primary beneficiary of a
variable interest entity by changing how a reporting entity that is a single
decision maker of a variable interest entity treats indirect interests in the
entity held through related parties that are under common control with the
reporting entity. The amendments are effective for public business entities for
fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. Early adoption is permitted. The Company does not expect
that the adoption of this guidance will have a material impact on its
consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic
805): Clarifying the Definition of a Business". The amendments in this ASU
clarify the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. Basically these amendments
provide a screen to determine when a set is not a business. If the screen is not
met, the amendments in this ASU first, require that to be considered a business,
a set must include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create output and second,
remove the evaluation of whether a market participant could replace missing
elements. These amendments take effect for public businesses for fiscal years
beginning after December 15, 2017 and interim periods within those periods, and
all other entities should apply these amendments for fiscal years beginning
after December 15, 2018, and interim periods within annual periods beginning
after December 15, 2019. The Company does not expect that the adoption of this
guidance will have a material impact on its consolidated financial statements.
Management does not believe that any recently issued, but not yet effective
accounting pronouncements, when adopted, will have a material effect on the
accompanying financial statements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
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