UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2024
or
☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-34577
IT TECH PACKAGING, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 20-4158835 | |
(State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) |
identification No.) |
Science Park, Juli Rd, Xushui District, Baoding City
Hebei Province, The People’s Republic of China 072550
(Address of principal executive offices and Zip Code)
011 - (86) 312-8698215
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Trading Symbol(s) | Name of each exchange on which registered | ||
| ITP | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
NumberAs of May 10, 2024, there were 10,065,920 shares of the registrant’s common stock, $0.001 par value outstanding as of November 9, 2017: 21,450,316.$0.001, outstanding.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORIENT PAPER,IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017MARCH 31, 2024 AND DECEMBER 31, 20162023
(Unaudited)(unaudited)
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 6,505,284 | $ | 2,332,646 | ||||
| Restricted cash | 6,026,910 | 2,162,318 | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $2,672 and $79,478 as of September 30, 2017 and December 31, 2016, respectively) | 130,928 | 3,894,436 | ||||||
| Inventories | 9,603,313 | 5,632,030 | ||||||
| Prepayments and other current assets | 55,899 | 455,892 | ||||||
| Total current assets | 22,322,334 | 14,477,322 | ||||||
| Property, plant, and equipment, net | 190,744,883 | 187,689,880 | ||||||
| Value-added tax recoverable | 3,015,460 | 2,945,575 | ||||||
| Deferred tax asset non-current | 5,494,443 | 3,264,841 | ||||||
| Total Assets | $ | 221,577,120 | $ | 208,377,618 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | $ | 10,245,747 | $ | 5,045,409 | ||||
| Current portion of long-term loans from credit union | 3,857,222 | - | ||||||
| Current obligations under capital lease | - | 8,786,528 | ||||||
| Accounts payable | 11,020 | 559,952 | ||||||
| Advance from customers | - | 28,831 | ||||||
| Notes payable | 6,026,910 | 2,162,318 | ||||||
| Due to a related party | 21,775 | 56,872 | ||||||
| Accrued payroll and employee benefits | 342,492 | 209,936 | ||||||
| Other payables and accrued liabilities | 1,561,476 | 2,424,778 | ||||||
| Income taxes payable | 1,260,633 | 1,310,967 | ||||||
| Total current liabilities | 23,327,275 | 20,585,591 | ||||||
| Loans from credit union | 3,616,146 | 4,843,592 | ||||||
| Loans from a related party | 10,547,093 | 10,090,817 | ||||||
| Deferred gain on sale-leaseback | - | 102,232 | ||||||
| Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $35,075,274 and $35,618,995 as of September 30, 2017 and December 31, 2016, respectively) | 37,490,514 | 35,622,232 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, 500,000,000 shares authorized, $0.001 par value per share, 21,450,316 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 21,450 | 21,450 | ||||||
| Additional paid-in capital | 50,635,243 | 50,635,243 | ||||||
| Statutory earnings reserve | 6,080,574 | 6,080,574 | ||||||
| Accumulated other comprehensive income | 2,593,708 | (5,441,391 | ) | |||||
| Retained earnings | 124,755,631 | 121,459,510 | ||||||
| Total stockholders’ equity | 184,086,606 | 172,755,386 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 221,577,120 | $ | 208,377,618 | ||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and bank balances | $ | 4,514,020 | $ | 3,918,938 | ||||
| Restricted cash | 903,540 | 472,983 | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $48,697 and $11,745 as of March 31, 2024 and December 31, 2023, respectively) | 2,386,177 | 575,526 | ||||||
| Inventories | 3,492,364 | 3,555,235 | ||||||
| Prepayments and other current assets | 17,677,417 | 18,981,290 | ||||||
| Due from related parties | 1,041,314 | 853,929 | ||||||
| Total current assets | 30,014,832 | 28,357,901 | ||||||
| Prepayment on property, plant and equipment | - | - | ||||||
| Operating lease right-of-use assets, net | 503,221 | 528,648 | ||||||
| Property, plant, and equipment, net | 160,205,120 | 163,974,022 | ||||||
| Value-added tax recoverable | 1,872,931 | 1,883,078 | ||||||
| Deferred tax asset non-current | - | - | ||||||
| Total Assets | $ | 192,596,104 | $ | 194,743,649 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | $ | 845,666 | $ | 423,567 | ||||
| Current portion of long-term loans | 8,116,984 | 6,874,497 | ||||||
| Lease liability | 102,154 | 100,484 | ||||||
| Accounts payable | 241,779 | 4,991 | ||||||
| Advance from customers | 110,787 | 136,167 | ||||||
| Notes payable | 246,501 | - | ||||||
| Due to related parties | 730,095 | 728,869 | ||||||
| Accrued payroll and employee benefits | 310,687 | 237,842 | ||||||
| Other payables and accrued liabilities | 13,869,095 | 12,912,517 | ||||||
| Total current liabilities | 24,573,748 | 21,418,934 | ||||||
| Long-term loans | 3,241,720 | 4,503,932 | ||||||
| Lease liability - non-current | 491,908 | 483,866 | ||||||
| Derivative liability | 20 | 54 | ||||||
| Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $21,648,803 and $20,084,995 as of March 31, 2024 and December 31, 2023, respectively) | 28,307,396 | 26,406,786 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, 50,000,000 shares authorized, $0.001 par value per share, 10,065,920 shares issued and outstanding as of March 31, 2024 and December, 31, 2023. | 10,066 | 10,066 | ||||||
| Additional paid-in capital | 89,172,771 | 89,172,771 | ||||||
| Statutory earnings reserve | 6,080,574 | 6,080,574 | ||||||
| Accumulated other comprehensive loss | (10,857,153 | ) | (10,555,534 | ) | ||||
| Retained earnings | 79,882,450 | 83,628,986 | ||||||
| Total stockholders’ equity | 164,288,708 | 168,336,863 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 192,596,104 | $ | 194,743,649 | ||||
See accompanying notes to condensed consolidated financial statements.
ORIENT PAPER,IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2024 AND 20162023
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 33,507,053 | $ | 37,462,066 | $ | 81,584,395 | $ | 103,368,291 | ||||||||
| Cost of sales | (26,285,765 | ) | (30,131,223 | ) | (65,244,521 | ) | (85,381,810 | ) | ||||||||
| Gross Profit | 7,221,288 | 7,330,843 | 16,339,874 | 17,986,481 | ||||||||||||
| Selling, general and administrative expenses | (2,848,699 | ) | (2,599,698 | ) | (8,319,590 | ) | (9,641,408 | ) | ||||||||
| Loss from disposal of property, plant and equipment | (1,653,039 | ) | - | (1,665,140 | ) | (25,774 | ) | |||||||||
| Income from Operations | 2,719,550 | 4,731,145 | 6,355,144 | 8,319,299 | ||||||||||||
| Other Income (Expense): | ||||||||||||||||
| Interest income | 5,503 | 14,832 | 29,259 | 95,226 | ||||||||||||
| Subsidy income | 410 | - | 41,223 | - | ||||||||||||
| Interest expense | (647,963 | ) | (677,576 | ) | (2,023,577 | ) | (2,094,448 | ) | ||||||||
| Income before Income Taxes | 2,077,500 | 4,068,401 | 4,402,049 | 6,320,077 | ||||||||||||
| Provision for Income Taxes | (505,165 | ) | (1,033,859 | ) | (1,105,928 | ) | (2,077,826 | ) | ||||||||
| Net Income | 1,572,335 | 3,034,542 | 3,296,121 | 4,242,251 | ||||||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Foreign currency translation adjustment | 3,790,338 | (1,263,906 | ) | 8,035,099 | (5,009,467 | ) | ||||||||||
| Total Comprehensive Income (Loss) | $ | 5,362,673 | $ | 1,770,636 | $ | 11,331,220 | $ | (767,216 | ) | |||||||
| Earnings Per Share: | ||||||||||||||||
| Basic and Diluted Earnings per Share | $ | 0.07 | $ | 0.14 | $ | 0.15 | $ | 0.20 | ||||||||
| Outstanding – Basic and Diluted | 21,450,316 | 21,450,316 | 21,450,316 | 21,404,627 | ||||||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | 6,863,841 | $ | 19,790,877 | ||||
| Cost of sales | (6,464,728 | ) | (20,067,876 | ) | ||||
| Gross Profit (Loss) | 399,113 | (276,999 | ) | |||||
| Selling, general and administrative expenses | (3,900,783 | ) | (2,495,362 | ) | ||||
| Loss from Operations | (3,501,670 | ) | (2,772,361 | ) | ||||
| Other Income (Expense): | ||||||||
| Interest income | 2,183 | 136,268 | ||||||
| Interest expense | (210,290 | ) | (249,169 | ) | ||||
| Gain (Loss) on derivative liability | 34 | 152,097 | ||||||
| Loss before Income Taxes | (3,709,743 | ) | (2,733,165 | ) | ||||
| Provision for Income Taxes | (36,793 | ) | - | |||||
| Net Loss | (3,746,536 | ) | (2,733,165 | ) | ||||
| Other Comprehensive (Loss) Income | ||||||||
| Foreign currency translation adjustment | (301,619 | ) | 2,502,756 | |||||
| Total Comprehensive Loss | $ | (4,048,155 | ) | $ | (230,409 | ) | ||
| Losses Per Share: | ||||||||
| Basic and Diluted Losses per Share | $ | (0.37 | ) | $ | (0.27 | ) | ||
Outstanding – Basic and Diluted | 10,065,920 | 10,065,920 | ||||||
See accompanying notes to condensed consolidated financial statements.
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | (3,746,536 | ) | $ | (2,733,165 | ) | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,481,788 | 3,686,243 | ||||||
| (Gain) Loss on derivative liability | (34 | ) | (152,097 | ) | ||||
| (Gain) Loss from disposal and impairment of property, plant and equipment | - | 12,926 | ||||||
| (Recovery from) Allowance for bad debts | 36,942 | (246,386 | ) | |||||
| Allowances for inventories, net | (2,951 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,847,112 | ) | (1,988,921 | ) | ||||
| Prepayments and other current assets | 1,276,805 | 9,461,336 | ||||||
| Inventories | 59,612 | (3,062,782 | ) | |||||
| Accounts payable | 236,603 | (5,101 | ) | |||||
| Advance from customers | (25,123 | ) | - | |||||
| Notes payable | 246,299 | - | ||||||
| Related parties | (187,484 | ) | (128,625 | ) | ||||
| Accrued payroll and employee benefits | 73,213 | 126,986 | ||||||
| Other payables and accrued liabilities | 1,022,398 | 263,712 | ||||||
| Income taxes payable | - | (424,198 | ) | |||||
| Net Cash Provided by Operating Activities | 624,420 | 4,809,928 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property, plant and equipment | (9,027 | ) | (295,018 | ) | ||||
| Net Cash Used in Investing Activities | (9,027 | ) | (295,018 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from short term bank loans | 422,488 | - | ||||||
| Proceeds from long term loans | - | 2,623,410 | ||||||
| Repayment of bank loans | - | (2,915 | ) | |||||
| Payment of capital lease obligation | - | (55,849 | ) | |||||
| Net Cash Provided by Financing Activities | 422,488 | 2,564,646 | ||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | (12,242 | ) | 146,516 | |||||
| Net Increase in Cash and Cash Equivalents | 1,025,639 | 7,226,072 | ||||||
| Cash, Cash Equivalents and Restricted Cash - Beginning of Period | 4,391,921 | 9,524,868 | ||||||
| Cash, Cash Equivalents and Restricted Cash - End of Period | $ | 5,417,560 | $ | 16,750,940 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest, net of capitalized interest cost | $ | 137,340 | $ | 84,040 | ||||
| Cash paid for income taxes | $ | 36,793 | $ | 424,198 | ||||
| Cash and bank balances | 4,514,020 | 16,750,940 | ||||||
| Restricted cash | 903,540 | - | ||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | 5,417,560 | 16,750,940 | ||||||
See accompanying notes to condensed consolidated financial statements.
ORIENT PAPER,IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2024 AND 20162023
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 3,296,121 | $ | 4,242,251 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 10,928,502 | 11,668,976 | ||||||
| Loss from disposal of property, plant and equipment | 1,665,140 | 25,774 | ||||||
| (Recovery from) Allowance for bad debts | (78,562 | ) | 20,833 | |||||
| Share-based compensation expenses | - | 1,417,395 | ||||||
| Deferred tax | (2,034,373 | ) | (1,515,689 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,928,087 | (1,041,625 | ) | |||||
| Prepayments and other current assets | 472,847 | 1,708,601 | ||||||
| Inventories | (3,631,641 | ) | 1,482,013 | |||||
| Accounts payable | (561,121 | ) | 1,064,764 | |||||
| Advance from customers | (29,446 | ) | - | |||||
| Notes payable | 3,680,693 | (11,392,982 | ) | |||||
| Due to a related party | (36,807 | ) | (341,790 | ) | ||||
| Accrued payroll and employee benefits | 120,250 | (252,632 | ) | |||||
| Other payables and accrued liabilities | (771,027 | ) | 911,234 | |||||
| Income taxes payable | (107,105 | ) | 632,911 | |||||
| Net Cash Provided by Operating Activities | 16,841,558 | 8,630,034 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property, plant and equipment | (7,628,798 | ) | (7,713,993 | ) | ||||
| Proceeds from sale of property, plant and equipment | 58,632 | 39,344 | ||||||
| Net Cash Used in Investing Activities | (7,570,166 | ) | (7,674,649 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from related party loans | - | 14,000 | ||||||
| Repayments of related party loans | - | (6,090,257 | ) | |||||
| Proceeds from short term bank loans | 10,011,484 | 3,493,848 | ||||||
| Proceeds from Rural Credit Union loans | 2,355,643 | - | ||||||
| Repayment of bank loans | (5,152,970 | ) | (3,038,129 | ) | ||||
| Payment of capital lease obligation | (8,973,845 | ) | (542,678 | ) | ||||
| (Increase in) Release of restricted cash | (3,680,693 | ) | 8,354,853 | |||||
| Net Cash (Used in) Provided by Financing Activities | (5,440,381 | ) | 2,191,637 | |||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 341,627 | (197,154 | ) | |||||
| Net Increase in Cash and Cash Equivalents | 4,172,638 | 2,949,868 | ||||||
| Cash and Cash Equivalents - Beginning of Period | 2,332,646 | 2,641,917 | ||||||
| Cash and Cash Equivalents - End of Period | $ | 6,505,284 | $ | 5,591,785 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest, net of capitalized interest cost | $ | 1,359,343 | $ | 1,746,568 | ||||
| Cash paid for income taxes | $ | 3,247,406 | $ | 2,960,604 | ||||
| Balance at December 31, 2021 | 10,065,920 | $ | 10,066 | $ | 89,172,771 | $ | 6,080,574 | $ | (7,514,540 | ) | $ | 93,575,021 | $ | 181,323,892 | ||||||||||||||
| Foreign currency translation adjustment | 2,502,756 | 2,502,756 | ||||||||||||||||||||||||||
| Net loss | (2,733,165 | ) | (2,733,165 | ) | ||||||||||||||||||||||||
| Balance at March 31, 2022 | 10,065,920 | $ | 10,066 | $ | 89,172,771 | $ | 6,080,574 | $ | (5,011,784 | ) | $ | 90,841,856 | $ | 181,093,483 | ||||||||||||||
| Balance at December 31, 2023 | 10,065,920 | $ | 10,066 | $ | 89,172,771 | $ | 6,080,574 | $ | (10,555,534 | ) | $ | 83,628,986 | $ | 168,336,863 | ||||||||||||||
| Foreign currency translation adjustment | (301,619 | ) | (301,619 | ) | ||||||||||||||||||||||||
| Net loss | (3,746,536 | ) | (3,746,536 | ) | ||||||||||||||||||||||||
| Balance at March 31, 2024 | 10,065,920 | $ | 10,066 | $ | 89,172,771 | $ | 6,080,574 | $ | (10,857,153 | ) | $ | 79,882,450 | $ | 164,288,708 |
See accompanying notes to condensed consolidated financial statements.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Business Background
Orient Paper,IT Tech Packaging, Inc. (the “Company”) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding OrientDongfang Paper Milling Company Limited (“Orient Paper HB”Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and effective December 21, 2007,2007.
Effective on August 1, 2018, we changed our corporate name to “Orient Paper,IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. In connection with the name change, our common stock began being traded under a new NYSE symbol, “ITP,” and a new CUSIP number, 46527C100, at such time.
On June 9, 2022, the Board of Directors of the Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-10 (the “Reverse Stock Split”). The Reverse Stock Split become effective on July 7, 2022 (the “Effective Date”), and the shares began trading on the split-adjusted basis on the NYSE American under the Company’s existing trading symbol “ITP” at market open on July 8, 2022. The new CUSIP number following the Reverse Stock Split is 46527C 209. All references made to more accurately describe our business.share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
On October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang ZhiyeDongfangZhiye Holding Limited (“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British Virgin Islands, and issued the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse stock split effected in November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders of Dongfang Holding in accordance with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement, Dongfang Holding owned all of the issued and outstanding stock and ownership of OrientDongfang Paper HB and such shares of OrientDongfang Paper HB were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Orient Paper HB)Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in OrientDongfang Paper HB on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Orient Paper HB’sDongfang Paper’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of Orient Paper HB’sDongfang Paper’s shares. As a result of the merger transaction, Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned subsidiary, OrientDongfang Paper, HB, became an indirectly owned subsidiary of the Company.
Dongfang Holding, as the 100% owner of OrientDongfang Paper, HB, was unable to complete the registration of Orient Paper HB’sDongfang Paper’s capital under its name within the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions described below, Dongfang Holding directed the trustees to return the shares of OrientDongfang Paper HB to their original shareholders, and the original OrientDongfang Paper HB shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Orient PaperBaoding Shengde”) to transfer the control of OrientDongfang Paper HB over to Orient PaperBaoding Shengde.
On June 24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued and outstanding shares of Shengde Holdings Inc,Inc., a Nevada corporation. Shengde Holdings IncInc. was incorporated in the State of Nevada on February 25, 2009. On June 1, 2009, Shengde Holdings IncInc. incorporated Orient PaperBaoding Shengde, a limited liability company organized under the laws of the PRC. Because Orient PaperBaoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc,Inc., it is regarded as a wholly foreign-owned entity under PRC law.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
To ensure proper compliance of the Company’s control over the ownership and operations of OrientDongfang Paper HB with certain PRC regulations, on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”) with OrientDongfang Paper HB and OrientDongfang Paper HB Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings IncInc. (“Shengde Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Orient PaperBaoding Shengde”), a wholly foreign-owned enterprise in the PRC with an original registered capital of $10,000,000 (subsequently increased to $60,000,000 in June 2010). Orient PaperBaoding Shengde is mainly engaged in production and distribution of digital photo paper and single-use face masks and is 100% owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Orient PaperBaoding Shengde shall provide exclusive technical, business and management consulting services to OrientDongfang Paper, HB, in exchange for service fees including a fee equivalent to 80% of Orient Paper HB’sDongfang Paper’s total annual net profits; (ii) Loan Agreement, which provides that Orient PaperBaoding Shengde will make a loan in the aggregate principal amount of $10,000,000 to OrientDongfang Paper HB Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Orient Paper HB;Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other things, that OrientDongfang Paper HB Equity Owners irrevocably grant to Orient PaperBaoding Shengde an option to purchase all or part of each owner’s equity interest in Orient Paper HB.Dongfang Paper. The exercise price for the options shall be RMB1 which Orient PaperBaoding Shengde should pay to each of OrientDongfang Paper HB Equity Owner for all their equity interests in Orient Paper HB;Dongfang Paper; (iv) Share Pledge Agreement, which provides that OrientDongfang Paper HB Equity Owners will pledge all of their equity interests in OrientDongfang Paper HB to Orient PaperBaoding Shengde as security for their obligations under the other agreements described in this section. Specifically, Orient PaperBaoding Shengde is entitled to dispose of the pledged equity interests in the event that OrientDongfang Paper HB Equity Owners breach their obligations under the Loan Agreement or OrientDongfang Paper HB fails to pay the service fees to Orient PaperBaoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that OrientDongfang Paper HB Equity Owners shall irrevocably entrust a designee of Orient PaperBaoding Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of OrientDongfang Paper HB or with respect to any equity owner action to be taken in accordance with the laws and Orient Paper HB’sDongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as long as OrientDongfang Paper HB Equity Owners continue to hold any equity interest in OrientDongfang Paper. A Dongfang Paper HB. An Orient Paper HB Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior approval of Orient PaperBaoding Shengde. As the Company had controlled OrientDongfang Paper HB since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009 and continuescontinued to control OrientDongfang Paper HB through Orient PaperBaoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements is considered as a business combination under common control.
On February 10, 2010, Orient PaperBaoding Shengde and the OrientDongfang Paper HB Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentionedabove- mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through Orient PaperBaoding Shengde instead of OrientDongfang Paper, HB, the $10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over OrientDongfang Paper HB and its businesses in the PRC.
An agreement was also entered into among OrientBaoding Shengde, Dongfang Paper Shengde, Orient Paper HB and the OrientDongfang Paper HB Equity Owners on December 31, 2010, reiterating that Orient PaperBaoding Shengde is entitled to 100% of the distributable profit of OrientDongfang Paper, HB, pursuant to the aboveabove- mentioned Contractual Agreements. In addition, OrientDongfang Paper HB and the OrientDongfang Paper HB Equity Owners shall not declare any of Orient Paper HB’sDongfang Paper’s unappropriated earnings as dividend, including the unappropriated earnings of OrientDongfang Paper HB from its establishment to 2010 and thereafter.
OrientOn June 25, 2019, Dongfang Paper entered into an acquisition agreement with the shareholder of Tengsheng Paper Co., Ltd. (“Tengsheng Paper”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper would acquire Tengsheng Paper. Full payment of the consideration in the amount of RMB320 million (approximately $45 million) was made on February 23, 2022.
QianrongQianhui Hebei Technology Co., Ltd, a wholly owned subsidiary of Shengde holding, was incorporated on July 15, 2021. It is a service provider of high quality material solutions for textile, cosmetics and paper production.
The Company has no direct equity interest in Orient Paper HB.Dongfang Paper. However, through the Contractual Agreements described above, Orient Paperthe Company is found to be the primary beneficiary (the “Primary Beneficiary”) of OrientDongfang Paper HB and is deemed to have the effective control over Orient Paper HB’sDongfang Paper’s activities that most significantly affect its economic performance, resulting in OrientDongfang Paper HBand its subsidiary, being treated as a controlled variable interest entity of Orient Paperthe Company in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial AccountingFinancialAccounting Standard Board (the “FASB”). The revenue generated from OrientDongfang Paper HBand Tengsheng Paper for the three months ended September 30, 2017March 31, 2024 and 20162023 was accounted for 100% and 99.83%, respectively,99.82% of the Company’s total revenue, for the same periods. The revenue of the Company generated from Orientrespectively. Dongfang Paper HB for the nine months ended September 30, 2017 and 2016 were 100% and 99.36%, respectively. OrientTengsheng Paper HB also accounted for 86.24%95.18% and 86.23%94.93% of the total assets of the Company as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, details of the Company’s subsidiaries and variable interest entities are as follows:
| Name | Date of Incorporation or Establishment | Place of Incorporation or Establishment | Percentage of Ownership | Principal Activity | |||||||
| Subsidiary: | |||||||||||
| February 25, 2009 | State of Nevada | 100% | Investment holding | ||||||||
| Baoding Shengde | June 1, 2009 | PRC | 100% | Paper production and distribution | |||||||
| Qianrong | July 15, 2021 | PRC | 100% | New material technology service | |||||||
| Variable interest entity (“VIE”): | |||||||||||
| March 10, 1996 | PRC | Paper | |||||||||
| Tengsheng Paper | April 07, 2011 | PRC | Control** | Paper production and distribution | |||||||
| * | Dongfang Paper is treated as a 100% controlled variable interest entity of the Company. |
* Orient Paper HB is treated as a 100% controlled variable interest entity of the Company.
| ** | Tengsheng Paper is 100% subsidiary of Dongfang Paper. |
However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the aforementioned agreements.
In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or being required to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has aggregated the financial information of OrientDongfang Paper HB in the table below. The aggregate carrying value of Orient Paper HB’sDongfang Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets as of September 30, 2017March 31, 2024 and December 31, 20162023 are as follows:
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 3,953,938 | $ | 2,005,288 | ||||
| Restricted cash | 6,026,910 | 2,162,318 | ||||||
| Accounts receivable | 130,928 | 3,894,435 | ||||||
| Inventories | 9,561,773 | 5,592,230 | ||||||
| Prepayments and other current assets | 51,229 | 451,349 | ||||||
| Total current assets | 19,724,778 | 14,105,620 | ||||||
| Property, plant, and equipment, net | 166,662,735 | 162,779,492 | ||||||
| Deferred tax asset non-current | 4,709,214 | 2,804,019 | ||||||
| Total Assets | $ | 191,096,727 | $ | 179,689,131 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | $ | 10,245,747 | $ | 5,045,409 | ||||
| Current portion of long-term loans from credit union | 3,766,819 | - | ||||||
| Current obligations under capital lease | 8,786,528 | |||||||
| Accounts payable | 11,020 | 559,952 | ||||||
| Advance from customers | 28,831 | |||||||
| Notes payable | 6,026,910 | 2,162,318 | ||||||
| Due to a related party | 21,775 | 56,872 | ||||||
| Accrued payroll and employee benefits | 337,957 | 206,642 | ||||||
| Other payables and accrued liabilities | 1,561,446 | 2,424,751 | ||||||
| Income taxes payable | 1,260,721 | 1,311,051 | ||||||
| Total current liabilities | 23,232,395 | 20,582,354 | ||||||
| Loans from credit union | 1,295,786 | 4,843,592 | ||||||
| Loans from a related party | 10,547,093 | 10,090,817 | ||||||
| Deferred gain on sale-leaseback | - | 102,232 | ||||||
| Total liabilities | $ | 35,075,274 | $ | 35,618,995 | ||||
The Company and its consolidated subsidiaries are not required to provide financial support to the VIE, and no creditor (or beneficial interest holders) of the VIE have recourse to the assets of Company unless the Company separately agrees to be subject to such claims. There are no terms in any agreements or arrangements, implicit or explicit, which require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE does require financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIE.
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and bank balances | $ | 3,876,391 | $ | 2,807,608 | ||||
| Restricted cash | 903,539 | 472,983 | ||||||
| Accounts receivable | 2,386,176 | 575,526 | ||||||
| Inventories | 3,492,364 | 3,555,235 | ||||||
| Prepayments and other current assets | 17,207,523 | 18,617,351 | ||||||
| Due from related parties | 288,672 | 289,173 | ||||||
| Total current assets | 28,154,665 | 26,317,876 | ||||||
| Operating lease right-of-use assets, net | 503,221 | 528,648 | ||||||
| Property, plant, and equipment, net | 154,660,801 | 158,027,099 | ||||||
| Deferred tax asset non-current | - | - | ||||||
| Total Assets | $ | 183,318,687 | $ | 184,873,623 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | $ | 422,833 | $ | - | ||||
| Current portion of long-term loans | 4,029,598 | 2,780,014 | ||||||
| Lease liability | 102,154 | 100,484 | ||||||
| Accounts payable | 241,779 | 4,991 | ||||||
| Advance from customers | 110,787 | 136,167 | ||||||
| Accrued payroll and employee benefits | 277,891 | 231,568 | ||||||
| Other payables and accrued liabilities | 12,730,133 | 11,843,973 | ||||||
| Income taxes payable | - | - | ||||||
| Total current liabilities | 17,915,175 | 15,097,197 | ||||||
| Long-term loans | 3,241,720 | 4,503,932 | ||||||
| Lease liability - non-current | 491,908 | 483,866 | ||||||
| Total liabilities | $ | 21,648,803 | $ | 20,084,995 | ||||
ORIENT PAPER,
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 20162023 of Orient Paper, Inc. a Nevada corporation,the Company, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “Orient Paper”“the Company”, “we”, “us” or “our”).
Principles of Consolidation
Our unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of September 30, 2017March 31, 2024 and the results of operations for the three and nine months ended September 30, 2017March 31, 2024 are not necessarily indicative of the results to be expected for any future period.
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.
Valuation of long-lived asset
The Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Measurements
The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that the Company could realize in a current market exchange. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the carrying value of the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank of China.
The Company does not have any assetsManagement determined that liabilities created by beneficial conversion features associated with the issuance of certain warrants (see “Derivative liabilities” under Note (12)), meet the criteria of derivatives and liabilitiesare required to be measured at fair value. The fair value of these derivative liabilities was determined based on a recurring basis asmanagement’s estimate of September 30, 2017the expected future cash flows required to settle the liabilities. This valuation technique involves management’s estimates and December 31, 2016.judgment based on unobservable inputs and is classified in level 3.
Non-Recurring Fair Value Measurements
The Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the possibility of impairment. For the continuing operations, long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. For discontinued operations, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. The fair value of these assets were determined using models with significant unobservable inputs which were classified as Level 3 inputs, primarily the discounted future cash flow.
Share-Based Compensation
The Company uses the fair value recognition provision of ASC Topic 718,Compensation-Stock Compensation, which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments over the vesting period.
The Company also applies the provisions of ASC Topic 505-50,Equity Based Payments to Non-Employeesto account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of the instruments issued in exchange for such services, whichever is more reliably measurable.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Restricted Cash
(3) Restricted Cash
RestrictedOut of the restricted cash, of $6,026,910$431,376 as of September 30, 2017March 31, 2024 was presented for the cash deposited at the Bank of Cangzhou for purpose of securing the bank acceptance notes from thethis bank (see Note (9)(10)). The restriction will be lifted upon the maturity of the notes payable on January 5, 2018.
July 16, 2024. Restricted cash of $2,162,318472,163 and $472,983 as of March 31, 2024 and December 31, 20162023 was presented for the cash deposited at the Industrial and Commercial Bank of Hebei for purposeChina of securingTengsheng Paper. The deposit was restricted due to the bank acceptance notes from these banks. The restriction has been lifted uponpersonal legal proceeding of Mr. Ping, the maturityLegal Representative of the notes payable on February 1, 2017.
Tengsheng Paper.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Inventories
Raw materials inventory includes mainly recycled paper board and coal.recycled white scrap paper. Finished goods include mainly products of corrugating medium paper, offset printing paper and tissue paper products. Inventories consisted of the following as of September 30, 2017March 31, 2024 and December 31, 2016:2023:
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Raw Materials | ||||||||
| Recycled paper board | $ | 1,031,201 | $ | 198,744 | ||||
| Recycled white scrap paper | 10,629 | 10,647 | ||||||
| Gas | 33,083 | 21,428 | ||||||
| Base paper and other raw materials | 187,511 | 142,149 | ||||||
| 1,262,424 | 372,968 | |||||||
| Semi-finished Goods | 299,686 | 300,207 | ||||||
| Finished Goods | 1,930,254 | 2,885,019 | ||||||
| Total inventory, gross | 3,492,364 | 3,558,194 | ||||||
| Inventory reserve | - | (2,959 | ) | |||||
| Total inventory, net | $ | 3,492,364 | $ | 3,555,235 | ||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Raw Materials | ||||||||
| Recycled paper board | $ | 6,711,977 | $ | 3,337,649 | ||||
| Recycled white scrap paper | 838,086 | - | ||||||
| Recycled scrap binding margin | 831,968 | 547,803 | ||||||
| Coal & gas | 85,950 | 242,307 | ||||||
| Base paper and other raw materials | 222,062 | 265,464 | ||||||
| 8,690,043 | 4,393,223 | |||||||
| Finished Goods | 913,270 | 1,238,807 | ||||||
| Totals | $ | 9,603,313 | $ | 5,632,030 | ||||
(5) Prepayments and other current assets
Prepayments and other current assets consisted of the following as of September 30, 2017March 31, 2024 and December 31, 2016: 2023:
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Prepaid land lease | $ | - | $ | - | ||||
| Prepayment for purchase of materials | 4,175,436 | 5,446,823 | ||||||
| Value-added tax recoverable | 13,327,542 | 13,409,459 | ||||||
| Prepaid gas | 164,655 | 116,372 | ||||||
| Others | 9,784 | 8,636 | ||||||
| $ | 17,677,417 | $ | 18,981,290 | |||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Prepaid land lease | $ | 49,722 | $ | 432,464 | ||||
| Others | 6,177 | 23,428 | ||||||
| $ | 55,899 | $ | 455,892 | |||||
(6) Property, plant and equipment, net
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, property, plant and equipment consisted of the following:
| September 30, | December 31, | March 31, | December 31, | |||||||||||||
| 2017 | 2016 | 2024 | 2023 | |||||||||||||
| Property, Plant, and Equipment: | ||||||||||||||||
| Land use rights | $ | 12,286,700 | $ | 11,755,168 | $ | 81,363,310 | $ | 81,504,608 | ||||||||
| Building and improvements | 97,336,831 | 92,927,111 | 67,821,279 | 67,939,059 | ||||||||||||
| Machinery and equipment | 126,892,546 | 123,932,336 | 158,354,855 | 158,629,858 | ||||||||||||
| Vehicles | 584,085 | 590,619 | 347,605 | 348,209 | ||||||||||||
| Construction in progress | 33,797,507 | 25,084,416 | ||||||||||||||
| Totals | 270,897,669 | 254,289,650 | 307,887,049 | 308,421,734 | ||||||||||||
| Less: accumulated depreciation and amortization | (80,152,786 | ) | (66,599,770 | ) | (147,681,929 | ) | (144,447,712 | ) | ||||||||
| Property, Plant and Equipment, net | $ | 190,744,883 | $ | 187,689,880 | $ | 160,205,120 | $ | 163,974,022 | ||||||||
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, land use rights represented two parceltwenty three parcels of state-owned lands located in Xushui District and Wei County of Hebei Province in China, with lease terms of 50 years expiring fromin 2061 to 2066.and 2068, respectively.
ORIENT PAPER,
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 2024 and December 31, 2023, certain property, plant and equipment of Dongfang Paper with net values of $nil, have been pledged pursuant to a long-term loan from credit union of Dongfang Paper. Land use right of Tengsheng Paper with net value of $4,872,632 and $4,910,034, respectively, as of March 31, 2024 and December 31, 2023 was pledged for a long-term loan from credit union of Baoding Shengde. In addition, land use right of Tengsheng Paper with net value of $3,749,419 and $3,781,366, respectively, as of March 31, 2024 and December 31, 2023 was pledged for another long-term loan from credit union of Baoding Shengde. Land use right of Dongfang Paper with net value of $ 5,092,797 and $5,135,132, respectively, as of March 31, 2024 and December 31, 2023 was pledged for a long-term loan from credit union of Tengsheng Paper. Certain property, plant and equipment of Dongfang Paper with net values of $ 306,528 was pledged for a short-term loan from Bank of Cangzhou. See “Short-term bank loans” under Note (8), Loans Payable, for details of the transaction and asset collaterals.
Depreciation and amortization of property, plant and equipment was $3,481,788 and $3,686,243 for the three months ended March 31, 2024 and 2023, respectively.
(7) Leases
Financing with Sale-Leaseback
The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with a leasing company in ChinaTAC Leasing Co., Ltd.(“TLCL”) on June 16, 2013August 6, 2020, for a total financing proceeds in the amount of RMB 15016 million (approximately US$232.3 million). Under the sale-leaseback arrangement, OrientTengsheng Paper HB sold certain of its paper manufacturing equipmentthe Leased Equipment to the leasing companyTLCL for an amount of RMB 15016 million (approximately US$232.3 million). Concurrent with the sale of equipment, OrientTengsheng Paper HB leases back all of the equipment (“Leased Equipment”) sold to the leasing companyTLCL for a lease term of three years. At the end of the lease term, OrientTengsheng Paper HB may pay a nominal purchase price of RMB 15,000100 (approximately $2,260)$14) to the leasing companyTLCL and buy back all of the Leased Equipment. The sale-leaseback was treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment was included as part of the property, plant and equipment of the Company during the lease preiod. As a result of the sale, a deferred gain on sale of Leased Equipment in the amount of $1,379,282$2,349,452 was created at the closingrecorded as right of the transaction and presented as a non-current liability. The deferred gain has been amortized by the Company during the lease term and used to offset the depreciation of the Leased Equipment. See ”Financing with Sale-Leaseback”under Note (7), Loans Payable, for details of the transaction and asset collaterals.
On July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into the 2015 Agreement, to amend and restate the Lease Financing Agreement entered into in 2013. The 2015 Agreement sets forth a modified and extended payment schedule with respect to the remaining payment obligation, with the final repayment date extended to June 21, 2017. In accordance with ASC 840-30-35, the present balances of the capital leaseuse assets and obligations under capital lease were adjusted by an amount equal to the difference between thenet present value of the future minimum lease payments under the revised agreement (computed using thewas recorded as lease liability and calculated with TLCL’s implicit interest rate used to recognizeof 15.6% per annum and stated at $567,099 at the inception of the lease initially) and the present balance of the obligation, which was approximately $1,617,574 at the date of the 2015 Agreement. As a result, the capital lease asset cost was recorded at the new cost of $27,599,774 at the date of the 2015 Agreement.on August 17, 2020.
Tengsheng Paper made payments due according to the schedule. On August 24, 2017,July 17, 2023, the Company made a final payment on outstanding obligations and bought back all of the Lease Equipment at nominal price according to the agreement. The lease assets were reclassified as own assets and capital lease costbalance of Leased Equipment net of amortization were $nil and $24,328,940$nil as of September 30, 2017March 31, 2024 and December 31, 2016, respectively.2023.
Construction in progress mainly represents payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue paper workshops and general infrastructure and administrative facilities in the Wei County Industrial Park. The tissue paper development project at the Wei County Industrial Park is expected to be completed in 2017. For the three months ended September 30, 2017 and 2016, the amount of interest capitalized is $nil and $10,839, respectively. For the nine months ended September 30, 2017 and 2016, the amount of interest capitalized is $9,761 and $43,786, respectively.
As of September 30, 2017 and December 31, 2016, certain property, plant and equipment of Orient Paper HB with net values of $8,579,118 and $9,813,294, respectively, have been pledged pursuant to a long-term loan from credit union of Orient Paper HB. In addition, plant and equipment of Orient Paper Shengde with net values of $15,461,557 and $nil as of September 30, 2017 and December 31, 2016 respectively, and another land use right with net values of $5,053,152 and $nil as of September 30, 2017 and December 31, 2016 were pledged for the bank loan from Bank of Cangzhou. See ”Short-term bank loans ” under Note (7), Loans Payable, for detailsAmortization of the transactionLeased Equipment was $nil and asset collaterals.
Depreciation and amortization of property, plant and equipment was $3,729,002 and $3,716,022$38,865 for the three months ended September 30, 2017March 31, 2024 and 2016, respectively. Depreciation2023. Total interest expenses for the sale-leaseback arrangement was $nil and amortization$4,490 for the three months ended March 31, 2024 and 2023.
Operating lease lessor
The Company has a non-cancellable agreement to lease plant to tenant under operating lease for 1 year from November 2023 to November 2024. The lease does not contain contingent payments. The rental income of property,the year was paid in advance by the tenant in December 2023.
Operating lease as lessee
The Company leases space under non-cancelable operating leases for plant and equipment was $10,928,502production equipment. The lease does not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the lease does not contain contingent rent provisions. The lease include option to renew in condition that it is agreed by the landlord before expiry. Therefore, the majority of renewals to extend the lease terms are not included in its right-of-use assets and $11,668,976 forlease liabilities as they are not reasonably certain of exercise. The Company regularly evaluate the nine months ended September 30, 2017renewal options and 2016, respectively.when they are reasonably certain of exercise, the Company includes the renewal period in its lease term.
As the Company’s leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
As the Company’s leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) Loans PayableThe components of the Company’s lease expense are as follows:
Short-term bank loans
| September 30, | December 31, | |||||||||
| 2017 | 2016 | |||||||||
| Bank of Hebei | (a) | $ | - | $ | 2,162,318 | |||||
| Industrial and Commercial Bank of China (“ICBC”) Loan 1 | (b) | - | 2,883,091 | |||||||
| Bank of Cangzhou | (c) | 6,026,910 | - | |||||||
| ICBC Loan 2 | (d) | 4,218,837 | - | |||||||
| Total short-term bank loans | $ | 10,245,747 | $ | 5,045,409 | ||||||
| Three Months Ended | ||||
2024 | ||||
| 35,236 | ||||
| Short-term lease cost | - | |||
| Lease cost | 35,236 | |||
Supplemental cash flow information related to its operating leases was as follows for the period ended March 31, 2024:
Cash paid for amounts included in the measurement of lease liabilities:
| Three Months Ended | ||||
| March 31, 2024 | ||||
| RMB | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash outflow from operating leases | - | |||
Maturities of its lease liabilities for all operating leases are as follows as of March 31, 2024:
| March 31, | Amount | |||
| 2025 | 140,944 | |||
| 2026 | 140,944 | |||
| 2027 | 140,944 | |||
| 2028 | 140,944 | |||
| 2029 | 140,944 | |||
| Thereafter | - | |||
| Total operating lease payments | $ | 704,722 | ||
| Less: Interest | (110,660 | ) | ||
| Present value of lease liabilities | 594,062 | |||
| Less: current portion, record in current liabilities | (102,154 | ) | ||
| Present value of lease liabilities | 491,908 | |||
The weighted average remaining lease terms and discount rates for all of its operating leases were as follows as of March 31, 2024:
| March 31, | ||||
| 2024 | ||||
| RMB | ||||
| Remaining lease term and discount rate: | ||||
| Weighted average remaining lease term (years) | 4.4 | |||
| Weighted average discount rate | 7.56 | % | ||
(8) Loans Payable
Short-term bank loans
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Bank of Cangzhou 1 | $ | 140,944 | $ | - | ||||
| Bank of Cangzhou 2 | 281,889 | - | ||||||
| Industrial and Commercial Bank of China (“ICBC”) Loan 1 | 2,819 | 2,824 | ||||||
| ICBC Loan 2 | 70,472 | 70,594 | ||||||
| ICBC Loan 3 | 349,542 | 350,149 | ||||||
| Total short-term bank loans | $ | 845,666 | $ | 423,567 | ||||
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 31, 2023, the Company entered into a working capital loan agreement with the Bank of Cangzhou, to borrow $140,944 at a fixed interest rate of 5.5% per annum. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $306,528 as of March 31, 2024. The loan will be due by December 30, 2024.
(Unaudited)
On December 31, 2023, the Company entered into a working capital loan agreement with the Bank of Cangzhou, to borrow $281,889 at a fixed interest rate of 5.5% per annum. The loan will be due by December 30, 2024.
On September 15, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,819 and $2,824 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 14, 2024.
On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $70,472 and $70,594 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024.
On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $349,542 and $350,149 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024.
As of September 30, 2017,March 31, 2024, there were guaranteed short-term borrowings of $10,245,747$nil and unsecured bank loans of $nil.$704,722. As of December 31, 2016,2023, there were guaranteed short-term borrowings of $5,045,409$nil and unsecured bank loans of $nil.$423,567.
The average short-term borrowing rates for the three months ended September 30, 2017March 31, 2024 and 20162023 were approximately 5.30%4.48% and 8.19%, respectively. The average short-term borrowing rates for the nine months ended September 30, 20174.72%.
Long-term loans
As of March 31, 2024 and 2016December 31, 2023, long-term loans were approximately 5.28%$11,358,704 and 8.53%,$11,378,429, respectively.
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Rural Credit Union of Xushui District Loan 1 | $ | 3,522,200 | $ | 3,528,315 | ||||
| Rural Credit Union of Xushui District Loan 2 | 2,255,109 | 2,259,026 | ||||||
| Rural Credit Union of Xushui District Loan 3 | 1,832,276 | 1,835,458 | ||||||
| Rural Credit Union of Xushui District Loan 4 | 2,536,998 | 2,541,404 | ||||||
| Rural Credit Union of Xushui District Loan 5 | 1,212,121 | 1,214,226 | ||||||
| Total | 11,358,704 | 11,378,429 | ||||||
| Less: Current portion of long-term loans | (8,116,984 | ) | (6,874,497 | ) | ||||
| Long-term loans | $ | 3,241,720 | $ | 4,503,932 | ||||
Long-term loans from credit union
As of September 30, 2017 and DecemberMarch 31, 2016, loans payable to Rural Credit Union of Xushui County, amounted to $7,473,368 and $4,843,592, respectively.2024, the Company’s long-term debt repayments for the next coming years were as follows:
On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is payable in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.72% per month. In August 2015, after giving the required notice to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the loan in an amount of $188,341, of which $82,870 was paid ahead of its original repayment schedule as of September 30, 2017. As of September 30, 2017 and December 31, 2016, total outstanding loan balance was $1,295,786 and $1,239,729, respectively, which is presented as non-current liabilities in the condensed consolidated balance sheet.
| Amount | ||||
| Fiscal year | ||||
| Remainder of 2024 | $ | 8,116,984 | ||
| 2025 | 2,114,165 | |||
| 2026 & after | 1,127,555 | |||
| Total | 11,358,704 | |||
On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui CountyDistrict for a term of 5 years, which iswas originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and was due and payable in various installments from December 21, 2018 to June 20, 2023. On August 24, 2023, the loan was extended for another 3 years and will be due and payable on August 24, 2026. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $8,579,118 and $9,813,294$nil as of September 30, 2017March 31, 2024 and December 31, 2016, respectively.2023. Interest payment is due quarterlymonthly and bearsbore a fixed rate of 0.72%7.68% per month. In August 2015, after givingannum. Effective from November 15, 2022, the required noticeinterest rate was reduced to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the loan in an amount of $195,875, of which $75,336 was paid ahead of its original repayment schedule as of September 30, 2017.7% per annum. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the total outstanding loan balance was $3,766,818$3,522,200 and $3,603,863 respectively.$3,528,315. Out of the total outstanding loan balance, current portion amounted were $3,766,818was $1,267,090 and $nil as of September 30, 2017 and December 31, 2016, respectively,$1,269,290, which areis presented as current liabilities in the condensed consolidated balance sheet and the remaining balance of $nil$2,255,110 and $3,603,863 are$2,259,025 is presented as non-current liabilities in the condensed consolidated balance sheet as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On April 20, 2017,17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui CountyDistrict for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on April 16, 2024 according to the new schedule. The loan is secured by Tengsheng Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bore a rate of 7.68% per annum. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of March 31, 2024 and December 31, 2023, the total outstanding loan balance was $2,255,109 and $2,259,026, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023.
On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on December 11, 2024 according to the new schedule. The loan is secured by Tengsheng Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bore a rate of 7.56% per annum. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of March 31, 2024 and December 31, 2023, the total outstanding loan balance was $1,832,276 and $1,835,458, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023.
On February 26, 2023, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from August 26, 201721, 2023 to April 19, 2019.February 24, 2025. The loan is guaranteedsecured by Hebei TengshengDongfang Paper with its land use right pledged as collateral for the benefit of the bank.credit union. Interest payment is due quarterlymonthly and bearsbore a fixed rate of 0.6%7% per month.annum. As of September 30, 2017March 31, 2024 and December 31, 2023, the total outstanding loan balance was $2,410,764, out$2,536,998 and $2,541,404. Out of the total outstanding loan balance, current portion amounted was $2,536,998 and $1,284,820, which $90,404 and $2,320,360 areis presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,256,584 is presented as non-current liabilities in the condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.
On December 5, 2023, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 3 years, which was due in various installments from June 21, 2024 to December 5, 2026. The loan was guaranteed by an independent third party. Interest payment was due monthly and bore a rate of 7% per annum. As of March 31, 2024 and December 31, 2023, total outstanding loan balance was $1,212,121 and $1,214,226, respectively. Out of the total outstanding loan balance, current portion amounted $225,511 and $225,903, which is presented as current liabilities and the remaining balance of $986,610 and $988,323 is presented as non-current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.
Total interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2017March 31, 2024 and 20162023 were $320,077$209,586 and $354,011,$244,679, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2017 and 2016 were $907,785 and $1,172,692, respectively.
(9) Related Party Transactions
Financing with Sale-Leaseback
The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013, for a total financing proceeds inMr. Zhenyong Liu, the amount of RMB 150 million (approximately US$23 million). Under the sale-leaseback arrangement, Orient Paper HB sold the Leased Equipment to CNFTFL for RMB 150 million (approximately US$23 million). Concurrent with the sale of equipment, Orient Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,260) to CNFTFL and buy back all of the Leased Equipment. The sale-leaseback was treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment were included as part of the property, plant and equipment of the Company for the periods presented; while the net present value of the minimum lease payment (including a lease service charge equal to 5.55% of the amount financed, i.e. approximately US$1.36 million) was recorded as obligations under capital lease and was calculated with CNFTFL’s implicit interest rate of 6.15% per annum and stated at $25,750,170 at the inception of the lease on June 16, 2013.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Orient Paper HB made all payments due according to the schedule prior to December 15, 2014. On December 15, 2014, Orient Paper HB stopped making principal payments and entered into negotiations with the CNFTFL regarding a modified payment schedule for the remaining obligations. On July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into an agreement (the “2015 Agreement”), to amend and restate the Lease Financing Agreement entered into in 2013 (the “2015 Agreement”). The 2015 Agreement sets forth a modified and extended payment schedule with respect to the remaining payment obligation, with the final repayment date extended to June 21, 2017. Under the 2015 Agreement, the interest accrues at a rate of 15% per annum starting on June 16, 2015, and is payable on the 20th of every March, June, September and December until the principal is paid off, except for the first payment, which is due on July 31, 2015. Orient Paper HB made all payments due according to the modified schedule prior to June 20, 2016. Orient Paper HB made partial payments in the following payment obligations as well as interests on overdue balance in accordance with the 2015 Agreement until August 24, 2017, when the remaining overdue amount was fully paid off. All the Lease Equipment was bought back at the nominal price according to the agreement. The balance of the long-term obligations under capital lease were $nil as of September 30, 2017 and December 31, 2016, and its current portion in the amount of $nil and $8,786,528, respectively.
Total interest expenses for the sale-leaseback arrangement for the three months ended September 30, 2017 and 2016 were $213,571 and $237,053, respectively. Total interest expenses for the sale-leaseback arrangement for the nine months ended September 30, 2017 and 2016 were $789,322 and $526,912, respectively.
As a result of the sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The deferred gain was amortized over the lease term and as an offset to depreciation of the Leased Equipment. In term of the extension of the new payment schedule, the deferred gain was amortized over the remaining lease term up to June 21, 2017.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) Related Party Transactions
The Company’s CEO has loaned money to OrientDongfang Paper HB for working capital purposes over a period of time. On January 1, 2013, OrientDongfang Paper HB and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $386,225$361,289 and $369,517$361,915 of interest were outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $9,040,365 and $8,649,272 as of September 30, 2017 and December 31, 2016,$8,742,278 to OrientDongfang Paper HB for working capital purpose with an interest rate of 5.25%4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. Mr. Zhenyong Liu agreed to extendIn February 2018, the loan for additional 3 years andCompany paid off the remaining balance, will be due on December 2, 2020.together with interest of $20,400. As of September 30, 2017March 31, 2024 and December 31, 2016, the2023, approximately $42,283 and $42,357 of interest, respectively. were outstanding loan balance was $3,013,455 and $2,883,090, respectively and the accrued interest was $143,516 and $43,246, respectively,to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows OrientDongfang Paper HB to borrow from the CEO an amount up to $18,080,730$17,201,342 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,348,267$4,324,636 was drawn from the facility, which carried an interest rate of 5.25%.facility. On October 14, 2016 an unsecured amount of $2,898,845$2,883,091 was drawn from the facility, which carried an interest rate of 4.35%.facility. In February 2018, the Company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the company paid off the remaining balance, together with interest of 94,636. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the outstanding loan balance were $7,533,638 and $7,207,727, respectively and the accrued interest was $354,552$193,710 and $104,062,$194,047, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, total amount of loans due to Mr. Zhenyong Liu were $10,547,093 and $10,090,817, respectively.$nil. The interest expensesexpense incurred for such related party loans are $114,315 and $97,351were $nil for the three months ended September 30, 2017March 31, 2024 and 2016, respectively. The interest expenses incurred for such related party loans are $336,231 and $438,630 for the nine months ended September 30, 2017 and 2016, respectively. On October 20, 2017, the Company’s CEO agreed to permit the Company to postpone the repayment of the loan and accrued interest on his loan to Orient Paper HB until the earliest date on which the Company’s quarterly or annual financial statements filed with the SEC show a satisfactory working capital level.2023. The accrued interest oweowing to Mr. Zhenyong Liu was approximately $884,293$597,282 and $516,825$598,319, as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively, which was recorded in other payables and accrued liabilities (see Note (10) below) as partliabilities.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In October 2022 and November 2022, the Company entered into two agreements with Mr. Zhenyong Liu, which allowed Mr. Zhenyong Liu to borrow from the Company an amount of $7,059,455 (RMB50,000,000) in total. The loans were unsecured and carried a fixed interest rate of 4.35% per annum. $4,235,673 (RMB30,000,000) was repaid by Mr. Zhengyong Liu in August 2023 and the remaining balance was repaid in December 2023. Interest income of the current liabilities.loan for the three months ended March 31, 2024 an, 2023 were $nil and $131,553.
During the threeAs of March 31, 2024 and nine months ended September 30, 2017 the Company borrowed $nil from shareholders. During the three and nine months ended September 30, 2016, the Company borrowed $nil and $14,000December 31, 2023, amount due to shareholder was $727,433, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount wasis due on demand with interest free. The Company repaid the entire balance by the end of the period.
Lease of Headquarters Compound Real Properties from a Related Party
On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. Sales of the LUR and the Industrial Buildings were completed in year 2013.
In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $147,228 (RMB1,000,000). The lease agreement expired in August 2016. On August 9, 2016, the Company paid off the rental for the first lease agreement and entered into a supplementary agreement with Hebei Fangsheng, who agreed to extend the lease term for another two years, with the same rental payment as original lease agreement.
On October 20, 2017, Hebei Fangsheng agreed to permit the Company to continue to postpone the repayment of the accrued rental charged to Orient Paper HB until the earliest date on which the Company’s quarterly or annual financial statements filed with the SEC show a satisfactory working capital level. The accrued rental owed to Hebei Fangsheng was approximately $21,775 and $56,872, which was recorded as part of the current liabilities as of September 30, 2017 and December 31, 2016, respectively.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9)(10) Notes payable
As of September 30, 2017,March 31, 2024, the Company had bank acceptance notes of $6,026,910$246,501 from the Bank of Cangzhou to one of its major suppliers for settling purchase of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $6,026,910 in the bank as mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at nil% per annum and 0.05% of notes amount as handling charge. The acceptance notes will become due and payable on January 5, 2018.
As of December 31, 2016, the Company had bank acceptance notes of $2,162,318 from the Bank of Hebei to one of its major suppliersthird parties for settling purchases of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $2,162,318 in the bank as mentioned in Note (3).bank. The bank acceptance notes from the bank bore interest rate at nil%nil% per annum and 0.05% of notes amount as handling change. The acceptance note was repaid in February 2017.notes will become due and payable on July 16, 2024.
(10)(11) Other payables and accrued liabilities
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued electricity | $ | 160,199 | $ | 3,054 | ||||
| Value-added tax payable | 77,633 | 696 | ||||||
| Accrued interest to a related party | 597,282 | 598,319 | ||||||
| Payable for purchase of property, plant and equipment | 11,147,449 | 11,175,858 | ||||||
| Accrued commission to salesmen | 9,966 | 47,040 | ||||||
| Accrued bank loan interest | 1,141,860 | 1,070,708 | ||||||
| Others | 734,706 | 16,842 | ||||||
| Totals | $ | 13,869,095 | $ | 12,912,517 | ||||
(12) Derivative Liabilities
Other payablesThe Company analyzed the warrant for derivative accounting consideration under ASC 815, “Derivatives and accrued liabilities consistHedging, and hedging,” and determined that the instrument should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the following:
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Accrued electricity | $ | 2,754 | $ | 335,169 | ||||
| Value-added tax payable | 557,316 | 1,080,055 | ||||||
| Accrued interest to a related party | 884,293 | 516,825 | ||||||
| Payable for purchase of equipment | 48,818 | 223,143 | ||||||
| Accrued commission to salesmen | 10,952 | 160,014 | ||||||
| Others | 57,343 | 109,572 | ||||||
| Totals | $ | 1,561,476 | $ | 2,424,778 | ||||
(11) Common Stockabove conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The Company determined its derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of March 31, 2024. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the March 31, 2024:
| Three months ended | ||||
| March 31, 2024 | ||||
| Expected term | 0.8 - 2.75 | |||
| Expected average volatility | 82% - 102% | |||
| Expected dividend yield | - | |||
| Risk-free interest rate | 0.19% - 4.4% |
The following table summarizes the changes in the derivative liabilities during the three months ended March 31, 2024: Fair
Value Measurements Using Significant Observable Inputs (Level 3)
| Balance at December 31, 2023 | $ | 54 | ||
| Change in fair value of derivative liability | (34 | ) | ||
| Balance at March 31, 2024 | $ | 20 |
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(13) Common Stock
Issuance of common stock to investors
On August 27, 2014,January 20, 2021, the Company issued 1,562,500offered and sold to certain institutional investors an aggregate of 2,618,182 shares of our common stock and 2,618,182 warrants to purchase up to 781,2502,618,182 shares of our common stock (the “Offering”). Eachin a best-efforts public offering for gross proceeds of approximately $14.4 million. The purchase price for each share of common stock and the corresponding warrant was $5.5. The exercise price of the warrant was $5.5 per share.
On March 1, 2021, the Company offered and sold to the public investors an aggregate of 2,927,786 shares of common stock and 1,463,893 warrants to purchase up to 1,463,893 shares of common stock in a firm commitment underwritten public offering for gross proceeds of approximately $21.9 million. The purchase price for each share of common stock and accompanying warrant was sold$7.5. The exercise price of the warrant was $7.5 per share.
Reverse stock split
On June 9, 2022, the Board of Directors of the Company approved the Reverse Stock Split, at a priceratio of $1.60. Please refer1-for-10, pursuant to Note (12),Section 78.207 of the Nevada Revised Statutes (“NRS”). The Reverse Stock Warrants, for details.Split was affected by the Company filing of a Certificate of Change Pursuant to NRS 78.209 with the Secretary of State of the State of Nevada on July 7, 2022. The par value per share of our stock remains unchanged at $0.001 per share after the Reverse Stock Split. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
Issuance of common stock pursuant to the 20122021 Incentive Stock Plan and 2015 Omnibus Equity Incentive
On January 12, 2016,August 15, 2022, the Company granted an aggregate of 1,133,916150,000 shares of common stock under its compensatory incentive plans to nine officers, directors andfifteen employees, of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416 shares of common stock were grantedawards under the 20122021 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus Equity Incentive.Plan. Please see Note (15)(17), Stock Incentive Plans for more details. Total fair value of the stock was calculated at $1,417,395$156,000 as of the date of grant.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) Stock warrants(14) Warrants
On August 27, 2014,April 29, 2020, the Company issued 1,562,500and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020 (the “2020 Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 440,000 shares of our common stock and warrants to purchase up to 781,250440,000 shares of our common stock.stock in a concurrent private placement (the “May 2020 Warrants”). The warrants have an exercise price of $1.70the May 2020 Warrant is $7.425 per share. These warrants arebecome exercisable immediately upon issuance on September 3, 2014July 23, 2020 and have a term of exercise equal to five years and six months from the date of issuance till September 2, 2019. The fair value of these shares amounted to $780,000, is classified as equityJuly 23, 2025. 88,000 May 2020 Warrants were exercised in February 2021 at the dateexercise price of issuance.$7.425 per share and 352,000 May 2020 Warrants were outstanding as of March 31, 2024.
The fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:
In connection with the Offering,On January 20, 2021, the Company issued warrantsoffered and sold to its placement agent of this Offering, which can purchasecertain institutional investors an aggregate of up to 2.50% of the aggregate number of2,618,182 shares of common stock soldand 2,618,182 warrants to purchase up to 2,618,182 shares of common stock (the “January 2021 Warrants”). The January 2021 Warrants became exercisable on January 20, 2021 at an exercise price of $5.5 and will expire on January 20, 2026. 1,410,690 January 2021 Warrants were exercised in the Offering, i.e. 39,062 shares. These warrants have substantially the same terms as the warrants issued to purchaser in the Offering, except thatJanuary and February of 2021 at the exercise price is $2.00of $5.5 per share. 1,207,492 January 2021 Warrants were outstanding as of March 31, 2024.
On March 1, 2021, the Company offered and sold to the public investors an aggregate of 2,927,786 shares of common stock and 1,463,893 warrants to purchase up to 1,463,893 shares of common stock (the “March 2021 Warrants”). The March 2021 Warrants became exercisable on March 1, 2021 at an exercise price of $7.5 and will expire on March 1, 2026. 6,750 March 2021 Warrants were exercised in January and March 2021 at the exercise price of $7.5 per share and the expiration date is from September 3, 2014 to June 26, 2019. 1,457,143 March 2021 Warrants were outstanding as of March 31, 2024.
The fair value of these shares amounted to $35,191, isCompany classified in the equity at the date of issuance to net off the proceeds fromwarrants as liabilities and accounted for the issuance of the shares and warrants. warrants as a derivative.
The fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:
The Company applied judgment in estimating key assumptions in determining the fair value of the warrants on the date of issuance. The Company used historical data to estimate stock volatilities and expected dividend yield. The risk-free rates are consistent with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance. IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of stock warrant activities is as below:
| Three and Nine Months Ended September 30, 2017 | Three months ended March 31, 2024 | |||||||||||||||
| Number | Weight average exercise price | Number | Weight average exercise price | |||||||||||||
| Outstanding and exercisable at beginning of the period | 820,312 | $ | 1.71 | 3,016,635 | $ | 6.6907 | ||||||||||
| Issued during the period | - | - | - | |||||||||||||
| Exercised during the period | - | - | - | |||||||||||||
| Cancelled or expired during the period | - | - | - | |||||||||||||
| Outstanding and exercisable at end of the period | 820,312 | $ | 1.71 | 3,016,635 | $ | 6.6907 | ||||||||||
| Range of exercise price | $1.70 to $2.00 | |||||||||||||||
The following table summarizes information relating to outstanding and exercisable warrants as of March 31, 2024.
| Warrants Outstanding | Warrants Exercisable | ||||||||||||
| Number of Shares | Weighted Average Remaining Contractual life (in years) | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||
| 3,016,635 | 1.84 | $6.6907 | 3,016,635 | $6.6907 | |||||||||
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NoAggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants were issued, exercised, cancelled or expired duringat March 31, 2024 for those warrants for which the nine months ended September 30, 2017. Asquoted market price was in excess of September 30, 2017, the aggregatedexercise price (“in-the-money” warrants). The intrinsic value of the warrants outstandingas of March 31, 2024 and exercisable was $nil.
No warrants were issued, exercised, cancelled or expired during the nine months ended September 30, 2016. As of December 31, 2016, the aggregated intrinsic value of warrants outstanding and exercisable was $nil.2023 are nil.
(13)(15) Earnings Per Share
For the three months ended September 30, 2017March 31, 2024 and 2016, basic and diluted net income per share are calculated as follows:
| Three Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Basic income per share | ||||||||
| Net income for the period - numerator | $ | 1,572,335 | $ | 3,034,542 | ||||
| Weighted average common stock outstanding - denominator | 21,450,316 | 21,450,316 | ||||||
| Net income per share | $ | 0.07 | $ | 0.14 | ||||
| Diluted income per share | ||||||||
| Net income for the period- numerator | $ | 1,572,335 | $ | 3,034,542 | ||||
| Weighted average common stock outstanding - denominator | 21,450,316 | 21,450,316 | ||||||
| Effect of dilution | - | - | ||||||
| Weighted average common stock outstanding - denominator | 21,450,316 | 21,450,316 | ||||||
| Diluted income per share | $ | 0.07 | $ | 0.14 | ||||
For the nine months ended September 30, 2017 and 2016,2023, basic and diluted net income per share are calculated as follows:
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
| 2017 | 2016 | 2024 | 2023 | |||||||||||||
| Basic income per share | ||||||||||||||||
| Net income for the period - numerator | $ | 3,296,121 | $ | 4,242,251 | ||||||||||||
| Basic loss per share | ||||||||||||||||
| Net loss for the period - numerator | $ | (3,746,536 | ) | $ | (2,733,165 | ) | ||||||||||
| Weighted average common stock outstanding - denominator | 21,450,316 | 21,404,627 | 10,065,920 | 10,065,920 | ||||||||||||
| Net income per share | $ | 0.15 | $ | 0.20 | ||||||||||||
| Net loss per share | $ | (0.37 | ) | $ | (0.27 | ) | ||||||||||
| Diluted income per share | ||||||||||||||||
| Net income for the period- numerator | $ | 3,296,121 | $ | 4,242,251 | $ | (3,746,536 | ) | $ | (2,733,165 | ) | ||||||
| Weighted average common stock outstanding - denominator | 21,450,316 | 21,404,627 | 10,065,920 | 10,065,920 | ||||||||||||
| Effect of dilution | - | - | - | - | ||||||||||||
| Weighted average common stock outstanding - denominator | 21,450,316 | 21,404,627 | 10,065,920 | 10,065,920 | ||||||||||||
| Diluted income per share | $ | 0.15 | $ | 0.20 | ||||||||||||
| Diluted loss per share | $ | (0.37 | ) | $ | (0.27 | ) | ||||||||||
For the three and nine months ended September 30, 2017March 31, 2024 and 2016, 820,312 warrants shares are excluded from the calculations of dilutive net income per share as their effects would have been anti-dilutive since the average share price were lower than the warrants exercise price. For the three and nine months ended September 30, 2017,2023 there were no securities with dilutive effect issued and outstanding.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(16) Income Taxes
(14) Income Taxes
United States
Orient Paper and Shengde Holdings are incorporated in the State of Nevada and areThe Company may be subject to the U.S.United States of America Tax laws at a tax rate of 21%. No provision for the US federal taxincome taxes has been made as the Company had no US taxable income for the first quarter ended March 31, 2024 and state statutory tax rates up to 34%2023, and 0%, respectively.management believes that its earnings are permanently invested in the PRC.
PRC
OrientDongfang Paper HB and Orient PaperBaoding Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.
The provisions for income taxes for three months ended September 30, 2017March 31, 2024 and 20162023 were as follows:
| Three Months Ended | Three Months Ended | |||||||||||||||
| September 30, | March 31, | |||||||||||||||
| 2017 | 2016 | 2024 | 2023 | |||||||||||||
| Provision for Income Taxes | ||||||||||||||||
| Current Tax Provision U.S. | $ | 36,793 | $ | - | ||||||||||||
| Current Tax Provision PRC | $ | 1,211,668 | $ | 1,521,099 | - | - | ||||||||||
| Deferred Tax Provision PRC | (706,503 | ) | (487,240 | ) | - | - | ||||||||||
| Total Provision for Income Taxes | $ | 505,165 | $ | 1,033,859 | ||||||||||||
| Total Provision for (Deferred tax benefit)/ Income Taxes | $ | 36,793 | $ | - | ||||||||||||
The provisions
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to the reversible future PRC income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset depreciation, the Company was incorporated in the United States and incurred net operating losses of approximately $62,499 and $530,581 for U.S. income taxestax purposes for the nine monthsyears ended September 30, 2017December 31, 2023 and 2016 were2022, respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized, during the period of 2030 through 2035. As of March 31, 2024, management believed that the realization of all the U.S. income tax benefits from these losses, which generally would generate a deferred tax asset if it can be expected to be utilized in the future, appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, As of March 31, 2024 and December 31, 2023, the Company provided a 100% valuation allowance on the U.S. deferred tax asset benefit to reduce the total deferred tax asset to the amount realizable for the PRC income tax purposes. Management reviews this valuation allowance periodically and will make adjustments as warranted. A summary of the otherwise deductible (or taxable) deferred tax items is as follows:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Provision for Income Taxes | ||||||||
| Current Tax Provision PRC | $ | 2,993,819 | $ | 3,534,967 | ||||
| Deferred Tax Provision PRC | (1,887,891 | ) | (1,457,141 | ) | ||||
| Total Provision for Income Taxes | $ | 1,105,928 | $ | 2,077,826 | ||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Deferred tax assets (liabilities) | ||||||||
| Depreciation and amortization of property, plant and equipment | $ | 17,378,268 | $ | 16,922,756 | ||||
| Impairment of property, plant and equipment | 584,365 | 585,380 | ||||||
| Miscellaneous | 642,735 | 135,714 | ||||||
| Net operating loss carryover of PRC company | 151,335 | 274,525 | ||||||
| (Gain) Loss on asset disposal | (63,954 | ) | (64,065 | ) | ||||
| Total deferred tax assets | 18,692,749 | 17,854,310 | ||||||
| Less: Valuation allowance | (18,692,749 | ) | (17,854,310 | ) | ||||
| Total deferred tax assets, net | $ | - | - | |||||
During the three months ended September 30, 2017March 31, 2024 and 2016,2023, the effective income tax rate was estimated by the Company to be 24.3%-1.0% and 25.4%0%, respectively. Duringrespectively
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| PRC Statutory rate | 25.0 | % | 25.0 | % | ||||
| Effect of tax and book difference | (3.4 | )% | (16.7 | )% | ||||
| Change in valuation allowance | (22.6 | )% | (8.3 | )% | ||||
| Effective income tax rate | (1.0 | )% | - | |||||
As of March 31, 2024, except for the nine months ended September 30,one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated foreign E&Ps, the Company does not believe that its future dividend policy and 2016, the effective incomeavailable U.S. tax rate was estimated bydeductions and net operating losses will cause the Company to recognize any other substantial current U.S. federal or state corporate income tax liability in the near future. Nor does it believe that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected to be 25.1% and 32.9%, respectively.indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required.
The following table reconciles the PRC statutory rates to the Company’s effective tax rate for:
Three Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| PRC Statutory rate | 25.0 | % | 25.0 | % | ||||
| Effect of different tax jurisdiction | (0.5 | ) | (0.2 | ) | ||||
| Effect of expenses not deductible for PRC tax purposes | 0.3 | (0.1 | ) | |||||
| Over provision in previous years | (2.4 | ) | - | |||||
| Change in valuation allowance | 1.9 | 0.7 | ||||||
| Effective income tax rate | 24.3 | % | 25.4 | % | ||||
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| PRC Statutory rate | 25.0 | % | 25.0 | % | ||||
| Effect of different tax jurisdiction | (0.3 | ) | (2.8 | ) | ||||
| Effect of expenses not deductible for PRC tax purposes | 0.3 | 0.1 | ||||||
| (Over) Under provision in previous years | (1.1 | ) | 0.1 | |||||
| Change in valuation allowance | 1.2 | 10.5 | ||||||
| Effective income tax rate | 25.1 | % | 32.9 | % | ||||
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2017March 31, 2024 and 2016,December 31, 2023, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority.
(17) Stock Incentive Plans
(15) Stock Incentive Plans
Issuance of common stock pursuant to the 2011 Incentive Stock Plan and 20122021 Incentive Stock Plan
On August 28, 2011,November 12, 2021, the Company’s Annual General Meeting adopted and approved the 2011 Incentive Stock Plan of Orient Paper, Inc. (the “2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance.
On September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of Orient Paper, Inc. (the “2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012 ISP’s administration. On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which 265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $790,020 as of the date of grant.
2015 Incentive Plan
On August 29, 2015, the Company’s Annual General Meeting approved the 20152021 Omnibus Equity Incentive Plan of Orient Paper,IT Tech Packaging, Inc. (the “2015 ISP”(the”2021 Plan”) as previously adopted by the Board of Directors on July 10, 2015.. Under the 20152021 ISP, the Company may grant an aggregatehas reserved a total of 1,500,000150,000 shares of the Company’s common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On January 12, 2016,August 15, 2022, the Compensation CommitteeCompany granted un-restricted commonan aggregate of 150,000 shares of 1,133,916, of which 168,416 shares were grantedcommon stock under the 2012 ISP and 965,500 shares under the 2015 ISP,its compensatory incentive plans to certain officers, directors, employees and a consultant of the Company as compensation for their services in the past years.fifteen employees. Total fair value of the stock was calculated at $1,417,395$156,000 as of the date of issuance at $1.25 per share.grant.
(16)2023 Incentive Stock Plan
On October 31, 2023, the Company’s Annual General Meeting adopted and approved the 2023 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc.(the”2023 Plan”). Under the 2023 ISP, the Company has reserved a total of 1,500,000 shares of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries.
All shares of common stock under the 2023 ISP, including shares originally authorized by equity holders and shares remaining for future issuance as of March 31, 2024, have been reserved.
(18) Commitments and Contingencies
OperatingXushui Land Lease
Orient PaperThe Company leases 32.95 acres of land from a local government in Xushui County,District, Baoding City, Hebei, China through a real estate lease with a 30-year30- year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,667 (RMB 120,000)$16,900 (RMB120,000). This operating lease is renewable at the end of the 30-year term.
| March 31, | Amount | |||
| 2025 | 16,913 | |||
| 2026 | 16,913 | |||
| 2027 | 16,913 | |||
| 2028 | 16,913 | |||
| 2029 | 16,913 | |||
| Thereafter | 46,512 | |||
| Total operating lease payments | 131,077 | |||
Sale of Headquarters Compound Real Properties
On November 27, 2012, Orient Paper entered into a 49.4 acresAugust 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land lease with an investment companyuse right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Economic Development Zone in Wei County,Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Province, China. The lease termFangsheng for cash prices of approximately
$2.77 million, $1.15 million, and $4.31 million respectively. Sales of the Wei County land lease commences onLUR and the date of the lease and lasts for 15 years. The lease requires an annual rental payment of $530,020 (RMB 3,600,000). The Company is currently building two new tissue paper production lines and future production facilitiesIndustrial Buildings were completed in the leased Wei County land.year 2013.
As mentioned in Note (9) Related Party Transactions, inIn connection with the sale of the Industrial Buildings, to Hebei Fangsheng Hebei Fangsheng agreesagreed to lease the Industrial Buildings back to Orient Paper atthe Company for its original use with an annual rental payment of $147,228 (RMB 1,000,000), for a total termapproximately $140,829 (RMB1,000,000). The lease was recorded in lease assets and liabilities in the consolidated balance sheet as of up to five years.March 31, 2024.
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future minimum lease payments of all operating leases are as follows:
| September 30, | Amount | |||
| 2018 | 686,063 | |||
| 2019 | 560,503 | |||
| 2020 | 560,503 | |||
| 2021 | 560,503 | |||
| 2022 | 560,503 | |||
| Thereafter | 2,924,558 | |||
| Total operating lease payments | $ | 5,852,633 | ||
Capital commitment
As of September 30, 2017,March 31, 2024, the Company has signedentered into several contracts for constructionthe purchase of equipment and facilities, includingpaper machine of a new tissue paper production line PM8.PM10 and the improvement of Industrial Buildings. Total outstanding commitments under these contracts were $11,002,635$3,481,325 and $13,921,168$3,499,936 as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively. The Company expected to pay off all the balances within 1 year.1-3 years.
Guarantees and Indemnities
The Company agreed with Baoding Huanrun Trading Co., a third partymajor supplier of raw materials, to guarantee certain obligations of thethis third party, and as of September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company guaranteed the third party’sits long-term loan from financial institutions amounting to $8,437,674 (RMB56,000,000) and $8,072,654 (RMB56,000,000)$4,369,274 (RMB31,000,000) that maturedwill mature at various times in 2018. In most cases,2028. If Huanrun Trading Co., were to become insolvent, the Company cannot estimate the potential amount of future payments under these guarantees until events arise that would result in a liability under the guarantees. The Company believes that payment under this guarantee is not probable.could be materially adversely affected.
(17)(19) Segment Reporting
Since March 10, 2010, Orient PaperBaoding Shengde started its operations and thereafter the Company manages its operations through twothree business operating segments: OrientDongfang Paper HB,and Tengsheng Paper, which produces offset printing paper, and corrugating medium paper and Orient Papertissue paper, and Baoding Shengde, which produces face masks and digital photo paper. They are managed separately because each business requires different technology and marketing strategies.
The Company evaluates performance of its operating segments based on net income. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated betweenamong the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui County, Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for the twothree reportable segments is as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2017 | Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||
| Orient Paper | Orient Paper | Not Attributable | Elimination of | Enterprise-wide, | Dongfang | Tengsheng | Baoding | Not Attributable | Elimination | Enterprise-wide, | ||||||||||||||||||||||||||||||||||
| HB | Shengde | to Segments | Inter-segment | consolidated | Paper | Paper | Shengde | to Segments | of Inter-segment | consolidated | ||||||||||||||||||||||||||||||||||
| Revenues | $ | 33,507,053 | $ | - | $ | - | $ | - | $ | 33,507,053 | $ | 6,826,799 | $ | 37,042 | $ | - | $ | - | $ | - | $ | 6,863,841 | ||||||||||||||||||||||
| Gross profit | 7,221,288 | - | - | - | 7,221,288 | 362,335 | 36,778 | - | - | - | 399,113 | |||||||||||||||||||||||||||||||||
| Depreciation and amortization | 3,497,635 | 231,367 | - | - | 3,729,002 | 989,272 | 2,100,541 | 391,975 | - | - | 3,481,788 | |||||||||||||||||||||||||||||||||
| Loss from disposal of property, plant and equipment | (1,653,039 | ) | - | - | - | (1,653,039 | ) | |||||||||||||||||||||||||||||||||||||
| Interest income | 3,548 | 1,955 | - | - | 5,503 | 1,462 | 536 | 173 | 12 | - | 2,183 | |||||||||||||||||||||||||||||||||
| Interest expense | 604,351 | 43,612 | - | - | 647,963 | 89,507 | 44,854 | 72,245 | 3,684 | - | 210,290 | |||||||||||||||||||||||||||||||||
| Income tax expense(benefit) | 579,232 | (74,067 | ) | - | - | 505,165 | - | - | - | 36,793 | - | 36,793 | ||||||||||||||||||||||||||||||||
| Net income (loss) | 1,916,821 | (225,778 | ) | (118,708 | ) | - | 1,572,335 | |||||||||||||||||||||||||||||||||||||
| Net loss | (1,134,241 | ) | (2,122,757 | ) | (54,512 | ) | (435,026 | ) | - | (3,746,536 | ) | |||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||
| Dongfang | Tengsheng | Baoding | Not Attributable | Elimination | Enterprise-wide, | |||||||||||||||||||
| Paper | Paper | Shengde | to Segments | of Inter-segment | consolidated | |||||||||||||||||||
| Revenues | $ | 19,528,196 | $ | 227,044 | $ | 35,637 | $ | - | $ | - | $ | 19,790,877 | ||||||||||||
| Gross profit (loss) | 439,080 | (713,240 | ) | (2,839 | ) | - | - | (276,999 | ) | |||||||||||||||
| Depreciation and amortization | 1,140,466 | 2,137,928 | 407,849 | - | - | 3,686,243 | ||||||||||||||||||
| Interest income | 133,183 | 693 | 1,235 | 1,157 | - | 136,268 | ||||||||||||||||||
| Interest expense | 146,702 | 28,574 | 73,893 | - | - | 249,169 | ||||||||||||||||||
| Income tax expense(benefit) | - | - | - | - | - | - | ||||||||||||||||||
| Net loss | (569,464 | ) | (1,920,120 | ) | (99,285 | ) | (144,296 | ) | - | (2,733,165 | ) | |||||||||||||
| As of March 31, 2024 | ||||||||||||||||||||||||
| Dongfang | Tengsheng | Baoding | Not Attributable | Elimination | Enterprise-wide, | |||||||||||||||||||
| Paper | Paper | Shengde | to Segments | of Inter-segment | consolidated | |||||||||||||||||||
| Total assets | $ | 57,882,403 | 125,436,285 | 7,761,164 | 1,516,252 | - | 192,596,104 | |||||||||||||||||
| As of December 31, 2023 | ||||||||||||||||||||||||
| Dongfang | Tengsheng | Baoding | Not Attributable | Elimination | Enterprise-wide, | |||||||||||||||||||
| Paper | Paper | Shengde | to Segments | of Inter-segment | consolidated | |||||||||||||||||||
| Total assets | $ | 57,139,592 | 127,734,031 | 8,184,902 | 1,651,124 | - | 194,709,649 | |||||||||||||||||
ORIENT PAPER,IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three Months Ended | ||||||||||||||||||||
| September 30, 2016 | ||||||||||||||||||||
| Orient Paper | Orient Paper | Not Attributable | Elimination of | Enterprise-wide, | ||||||||||||||||
| HB | Shengde | to Segments | Inter-segment | consolidated | ||||||||||||||||
| Revenues | $ | 37,397,395 | $ | 64,671 | $ | - | $ | - | $ | 37,462,066 | ||||||||||
| Gross profit (loss) | 7,347,908 | (17,065 | ) | - | - | 7,330,843 | ||||||||||||||
| Depreciation and amortization | 3,485,154 | 230,868 | - | - | 3,716,022 | |||||||||||||||
| Loss from disposal of property, plant and equipment | - | - | - | - | - | |||||||||||||||
| Interest income | 14,568 | 264 | - | - | 14,832 | |||||||||||||||
| Interest expense | 677,576 | - | - | - | 677,576 | |||||||||||||||
| Income tax expense(benefit) | 1,098,270 | (64,411 | ) | - | - | 1,033,859 | ||||||||||||||
| Net income (loss) | 3,313,671 | (196,558 | ) | (82,571 | ) | - | 3,034,542 | |||||||||||||
| Nine Months Ended | ||||||||||||||||||||
| September 30, 2017 | ||||||||||||||||||||
| Orient Paper | Orient Paper | Not Attributable | Elimination of | Enterprise-wide, | ||||||||||||||||
| HB | Shengde | to Segments | Inter-segment | consolidated | ||||||||||||||||
| Revenues | $ | 81,584,395 | $ | - | $ | - | $ | - | $ | 81,584,395 | ||||||||||
| Gross profit | 16,339,874 | - | - | - | 16,339,874 | |||||||||||||||
| Depreciation and amortization | 10,247,936 | 680,566 | - | - | 10,928,502 | |||||||||||||||
| Loss from disposal of property, plant and equipment | (1,665,140 | ) | - | - | - | (1,665,140 | ) | |||||||||||||
| Interest income | 25,767 | 3,492 | - | - | 29,259 | |||||||||||||||
| Interest expense | 1,953,379 | 70,198 | - | - | 2,023,577 | |||||||||||||||
| Income tax expense(benefit) | 1,402,558 | (296,630 | ) | - | - | 1,105,928 | ||||||||||||||
| Net income (loss) | 4,350,831 | (516,705 | ) | (538,005 | ) | - | 3,296,121 | |||||||||||||
| As of September 30, 2017 | ||||||||||||||||||||
| Orient | Orient | Not | Elimination | Enterprise- | ||||||||||||||||
| Paper | Paper | Attributable | of | wide, | ||||||||||||||||
| HB | Shengde | to Segments | Inter-segment | consolidated | ||||||||||||||||
| Total assets | $ | 191,096,727 | $ | 30,480,117 | $ | 276 | $ | - | $ | 221,577,120 | ||||||||||
| Nine Months Ended | ||||||||||||||||||||
| September 30, 2016 | ||||||||||||||||||||
| Orient Paper | Orient Paper | Not Attributable | Elimination of | Enterprise-wide, | ||||||||||||||||
| HB | Shengde | to Segments | Inter-segment | consolidated | ||||||||||||||||
| Revenues | $ | 102,703,977 | $ | 664,314 | $ | - | $ | - | $ | 103,368,291 | ||||||||||
| Gross profit (loss) | 18,376,724 | (390,243 | ) | - | - | 17,986,481 | ||||||||||||||
| Depreciation and amortization | 10,966,088 | 702,888 | - | - | 11,668,976 | |||||||||||||||
| Loss from disposal of property, plant and equipment | (25,774 | ) | - | - | (25,774 | ) | ||||||||||||||
| Interest income | 94,430 | 796 | - | - | 95,226 | |||||||||||||||
| Interest expense | 2,094,448 | - | - | - | 2,094,448 | |||||||||||||||
| Income tax expense(benefit) | 2,248,946 | (171,120 | ) | - | - | 2,077,826 | ||||||||||||||
| Net income (loss) | 6,747,378 | (559,747 | ) | (1,945,380 | ) | - | 4,242,251 | |||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||
| Orient | Orient | Not | Elimination | Enterprise- | ||||||||||||||||
| Paper | Paper | Attributable | of | wide, | ||||||||||||||||
| HB | Shengde | to Segments | Inter-segment | consolidated | ||||||||||||||||
| Total assets | $ | 179,689,131 | $ | 28,687,027 | $ | 1,460 | $ | - | $ | 208,377,618 | ||||||||||
(Unaudited)
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(18)(20) Concentration and Major Customers and Suppliers
For the three months ended September 30, 2017March 31, 2024 and 2016,2023, the Company had no single customer contributed over 10% of total sales.
For the ninethree months ended September 30, 2017 and 2016,March 31, 2024, the Company had no single customer contributing over 10% of total sales.
For the three months ended September 30, 2017, the Company had threetwo major suppliers accounted for 83%, 7%75% and 4%15% of total purchases. For the three months ended September 30, 2016,March 31, 2023, the Company had threetwo major suppliers which primarily accounted for 63%,76% and 14% and 8% of the total purchases.
For the nine months ended September 30, 2017, the Company had three major suppliers which primarily accounted for 66%, 11% and 6% of the total purchases. For the nine months ended September 30, 2016, the Company had three major suppliers which primarily accounted for 63%, 10% and 7% of the total purchases.
(19)(21) Concentration of Credit Risk
Financial instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of September 30, 2017as of March 31, 2024 and December 31, 2016.2023. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB500,000 (US$75,336)($70,472) per depositor per insured financial intuition, including both principal and interest. For the cash placed in financial institutions in the United States, the Company’s U.S. bank accounts are all fully covered by the FDIC insurance as of September 30, 2017March 31, 2024 and December 31, 2016, respectively,2023, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB81,101,668 (US$12,219,812)RMB33,408,380 ($4,708,722) as of September 30, 2017.March 31, 2024.
(22) Risks and Uncertainties
(20) Risks and Uncertainties
Orient PaperThe Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various laws and restrictions.
(21) Recent Accounting Pronouncements(23) Subsequent Event
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Gross versus Net), which is effective upon adoption of ASU 2014-09. This ASU clarifies the implementation guidance in ASU 2014-09 on principal versus agent considerations. These ASUs are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company will adopt ASU 2014-09, and its related clarifying ASUs, as of January 1, 2018. The Company is continuing to assess the potential effects of these ASUs on its consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company anticipates adopting the standard using the modified retrospective transition approach. Under this approach, the new standard would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. We do not expect the adoption of these ASUs to have a material impact on our condensed consolidated financial statements.None.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that are required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our condensed consolidated financial statements.
ORIENT PAPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our condensed consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-09 on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed 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” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; 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; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU 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. We are currently evaluating the impact of the adoption of ASU 2016-15 on our condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU 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. We are currently evaluating the impact of the adoption of ASU 2016-18 on our condensed consolidated financial statements. The Company had $6,026,910 and $2,162,318 of restricted cash as of September 30, 2017 and December 31, 2016, respectively.
In January 2017, the FASB issued ASU No. 2017-01, “‘Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), which clarify the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments in this ASU 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 so long as the transaction has not been reported in financial statements that have been issued or made available for issuance. We are currently evaluating the impact of the adoption of ASU 2017-01 on our condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “‘Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU 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. We are currently evaluating the impact of the adoption of ASU 2017-09 on our condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Notice Regarding Forward-Looking Statements
The following discussion of the financial condition and results of operations of the Company for the periods ended September 30, 2017March 31, 2024 and 20162023 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly report.
In this quarterly report, references to “Orient Paper,” “ONP,” “the Company,” “we,” “our” and “us” refer to Orient Paper,IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise.
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services,products, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”, “may”, “should”, “will”, “would”, and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking statements. In evaluating the forward-looking statements contained in this report, you should consider various factors, including, without limitation, the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitably, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities laws.
Results of Operations
Comparison of the Three Months Ended September 30, 2017months ended March 31, 2024 and 20162023
Revenue for the three months ended September 30, 2017March 31, 2024 was $33,507,053,$6,863,841, representing a decrease of $3,955,013,$12,927,036, or 10.56%65.32%, from $37,462,066$19,790,877 for the same period in the previous year. This was mainly due to the production suspension of corrugating medium paper (“CMP”) in January and February of 2024, and production suspension of tissue paper products in the first quarter of 2024.
Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products
Revenue from sales of offset printing paper, corrugating medium paper (“CMP”)CMP and tissue paper products for the three months ended September 30, 2017March 31, 2024 was $33,507,053,$6,826,800, representing a decrease of $3,890,342,$12,924,348, or 10.40%65.44%, from $37,397,395$19,751,148 for the thirdfirst quarter of 2016.2023. Total offset printing paper, CMP and tissue paper products sold during the three months ended September 30, 2017March 31, 2024 amounted to 61,90318,670 tonnes, representing a decrease of 35,03031,203 tonnes, or 36.14%62.56%, compared to 96,93349,873 tonnes sold in the comparable period in the previous year. We removed all coal burning boilers and startedProduction orders of CMP were arranged ahead of schedule (in December 2023), in order to replace them with gas boilersmitigate the impact of energy price rise in September 2017 in compliance with the latest government regulation.2024. Production of CMP was suspended duringin January and February 2024 due to the removalchange of boilers. In addition, the temporary restrictions on our production volume instatedschedule and Chinese New Year holiday. Production of CMP was resumed in November 2016 by the government remain in place. As a result, the production volumemid of regular CMP, light-Weight CMP andMarch 2024. Production of offset printing paper and salestissue paper products were suspended due to the higher natural gas price and Chinese New Year in the first quarter of these products decreased2024 and expected to resume in the third quarter of 2017.2024. The changes in revenue dollar amount and in quantity sold for the three months ended September 30, 2017March 31, 2024 and 20162023 are summarized as follows:
| Three Months Ended | Three Months Ended | Percentage | ||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change in | Change | |||||||||||||||||||||||||||||
| Sales Revenue | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity | Amount | ||||||||||||||||||||||||
| Regular CMP | 43,202 | $ | 22,397,413 | 68,422 | $ | 22,248,535 | (25,220 | ) | $ | 148,878 | -36.86 | % | 0.67 | % | ||||||||||||||||||
| Light-Weight CMP | 10,173 | $ | 4,995,701 | 12,613 | $ | 4,181,371 | (2,440 | ) | $ | 814,330 | -19.35 | % | 19.48 | % | ||||||||||||||||||
| Total CMP | 53,375 | $ | 27,393,114 | 81,035 | $ | 26,429,906 | (27,660 | ) | $ | 963,208 | -34.13 | % | 3.64 | % | ||||||||||||||||||
| Offset Printing Paper | 8,035 | $ | 5,453,889 | 14,571 | $ | 9,338,690 | (6,536 | ) | $ | (3,884,801 | ) | -44.86 | % | -41.60 | % | |||||||||||||||||
| Tissue Paper Products | 493 | $ | 660,050 | 1,327 | 1,628,799 | (834 | ) | $ | (968,749 | ) | -62.85 | % | -59.48 | % | ||||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper Revenue | 61,903 | $ | 33,507,053 | 96,933 | $ | 37,397,395 | (35,030 | ) | $ | (3,890,342 | ) | -36.14 | % | -10.40 | % | |||||||||||||||||
| Three Months Ended | Three Months Ended | Percentage | ||||||||||||||||||||||||||||||
| March 31, 2024 | March 31, 2023 | Change in | Change | |||||||||||||||||||||||||||||
| Sales Revenue | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity | Amount | ||||||||||||||||||||||||
| Regular CMP | 15,640 | $ | 5,750,601 | 41,663 | $ | 16,467,969 | (26,023 | ) | $ | (10,717,368 | ) | -62.46 | % | -65.08 | % | |||||||||||||||||
| Light-Weight CMP | 3,030 | $ | 1,076,199 | 8,019 | $ | 3,060,226 | (4,989 | ) | $ | (1,984,027 | ) | -62.21 | % | -64.83 | % | |||||||||||||||||
| Total CMP | 18,670 | $ | 6,826,800 | 49,682 | $ | 19,528,195 | (31,012 | ) | $ | (12,701,395 | ) | -62.42 | % | -65.04 | % | |||||||||||||||||
| Offset Printing Paper | - | $ | - | - | $ | - | - | $ | - | % | % | |||||||||||||||||||||
| Tissue Paper Products | - | $ | - | 191 | $ | 222,953 | (191 | ) | $ | (222,953 | ) | -100.00 | % | -100.00 | % | |||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper Revenue | 18,670 | $ | 6,826,800 | 49,873 | $ | 19,751,148 | (31,203 | ) | $ | (12,924,348 | ) | -62.56 | % | -65.44 | % | |||||||||||||||||
Monthly sales revenue (excluding revenue from digital photo paper and tissue paper products) for the 24 months ended September 30, 2017,March 31, 2024, are summarized below:
The Average Selling Prices (ASPs) for our main products in the three months ended September 30, 2016March 31, 2024 and 20172023 are summarized as follows:
| Offset Printing Paper ASP | Regular CMP ASP | Light-Weight CMP ASP | Tissue Paper Products ASP | |||||||||||||
| Three Months ended September 30, 2016 | $ | 641 | $ | 325 | $ | 332 | $ | 1227 | ||||||||
| Three Months ended September 30, 2017 | $ | 679 | $ | 518 | $ | 491 | $ | 1339 | ||||||||
| Increase from comparable period in the previous year | $ | 38 | $ | 193 | $ | 159 | $ | 112 | ||||||||
| Increase by percentage | 5.93 | % | 59.38 | % | 47.89 | % | 9.13 | % | ||||||||
| Offset Printing Paper ASP | Regular CMP ASP | Light- Weight CMP ASP | Tissue Paper Products ASP | |||||||||||||
| Three Months ended March 31, 2024 | $ | - | $ | 368 | $ | 355 | $ | - | ||||||||
| Three Months ended March 31, 2023 | $ | - | $ | 395 | $ | 382 | $ | 1,167 | ||||||||
| Decrease from comparable period in the previous year | $ | - | $ | (27 | ) | $ | (27 | ) | $ | (1,167 | ) | |||||
| Decrease by percentage | - | % | -6.84 | % | -7.07 | % | - | % | ||||||||
The following chart shows the month-by-month ASPs (excluding the ASPs of the digital photo paper and tissue paper products) for the 24 month24-month period ended September 30, 2017:
March 31, 2024:
Corrugating Medium Paper
Revenue from CMP amounted to $27,393,114 (81.75%$6,826,800 (100.00% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September 30, 2017,March 31, 2024, representing an increasea decrease of $963,208,$12,701,395, or 3.64%65.04%, from $26,429,906$19,528,195 for the comparable period in 2016.2023. Production of CMP was suspended in January and February of 2024 and production of offset printing paper was suspended in the first quarter of 2024.
We sold 53,37518,670 tonnes of CMP in the three months ended September 30, 2017March 31, 2024 as compared to 81,03549,682 tonnes for the same period in 2016,2023, representing a 34.13%62.42% decrease in quantity sold.
ASP for regular CMP increaseddecreased from $325/$395/tonne for the three months ended September 30, 2016March 31, 2023 to $518/$368/tonne for the three months ended September 30, 2017,March 31, 2024, representing a 59.38% increase.6.84% decrease. ASP in RMB for regular CMP for the thirdfirst quarter of 20162023 and 20172024 was RMB2,165RMB2,712 and RMB3,468,RMB2,611, respectively, representing a 60.18% increase.3.73% decrease. The quantity of regular CMP sold decreased by 25,22026,023 tonnes, from 68,42241,663 tonnes in the thirdfirst quarter of 20162023 to 43,20215,640 tonnes in the thirdfirst quarter of 2017.2024.
ASP for light-weight CMP increaseddecreased from $332/$382/tonne for the three months ended September 30, 2016March 31, 2023 to $491/$355/tonne for the three months ended September 30, 2017,March 31, 2024, representing a 47.89% increase.7.07% decrease. ASP in RMB for light-weight CMP for the thirdfirst quarter of 20162023 and 20172024 was RMB2,208RMB2,618 and RMB3,299,RMB2,522, respectively, representing a 49.41% increase.3.68% decrease. The quantity of light-weight CMP sold decreased by 2,4404,989 tonnes, from 12,6138,019 tonnes in the thirdfirst quarter of 2016,2023, to 10,1733,030 tonnes in the thirdfirst quarter of 2017.2024.
Our production was suspended in September 2017 due to boiler replacement mandated by regulation. Our production volume was also restricted pursuant to restrictions put into place in November 2016. The government has been requiring outdated paper facilities to close since 2010 and is expected to continue to force the closure of outdated facilities in the next few years. With the restriction of production volume and the decrease in supply due to government restrictions on production, we expect that the market demand and ASPs for CMP and other packaging paper will be on an upward trend in the next 12 months.
Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the thirdfirst quarter of 20172024 and 20162023 were 47.41%15.11% and 74.59%44.49%, respectively, representing a decrease of 27.18%29.38%.
Quantities sold for regular CMP that was produced by the PM6 production line from October 2015April 2022 to September 2017March 2024 are as follows:
Offset Printing Paperprinting paper
Revenue from offset printing paper was $5,453,889 (16.28% of the total offset printing paper, CMP and tissue paper products revenues)$nil for the three months ended September 30, 2017, representing a decreaseMarch 31, 2024 and 2023. Production of $3,884,801, or 41.60%, from $9,338,690 foroffset printing paper was suspended in the three months ended September 30, 2016. We sold 8,035 tonnes of offset printing paper in the third quarter of 2017, as compared to 14,571 tonnes in the comparable period of 2016, a decrease of 6,536 tonnes, or 44.86%., as a result of the production suspensionMarch 31, 2024 and restriction on production volume described above. ASPs for offset printing paper for the third quarter of 2016 and 2017 were $641 and $679, respectively, representing a 5.93% increase. ASP in RMB for offset printing paper for the third quarter of 2016 and 2017 was RMB4,274 and RMB4,543, respectively, representing a 6.29% increase. With the restriction on production volume and decrease in supply due to government restrictions on production, we expect that the ASP for offset printing paper will show an upward trend in the next 12 months.
2023.
Tissue Paper Products
We began the commercial production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper purchased from a long-term supplier and produce finished tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels, that are marketed and sold under the Orient Paper brand.
Revenue from tissue paper products was $660,050 (1.97% of the total offset printing paper, CMP$nil and tissue paper products revenues)$222,953 for the three months ended September 30, 2017, representing a decreaseMarch 31, 2024 and 2023, respectively. Production of $968,749, or 59.48%,tissue paper products was suspended during the first quarter of 2024.
Revenue of Face Mask
Revenue generated from $1,628,799selling face mask were $nil and $35,637 for the three months ended September 30, 2016. We sold 493 tonnes of tissue paper in the third quarter of 2017, as compared to 1,327 tonnes in the comparable period of 2016, a decrease of 834 tonnes, or 62.85%, as a result of the restriction in production volume described above.
Revenue of Digital Photo Paper
Revenue generated from selling digital photo paper were $nil for the three months ended September 30, 2017. In June 2016, we suspended the production of digital photo paper due to low market demand for our productsMarch 31, 2024 and now are upgrading the production line to produce more competitive photo paper products. We expect to resume our digital photo paper production in the near future.
Changes in revenue and quantities sold of our digital photo paper for the three months ended September 30, 2017 and 2016 are summarized as follows:
| Three Months Ended | Three Months Ended | Percentage | ||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change in | Change | |||||||||||||||||||||||||||||
| Sales Revenue | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity | Amount | ||||||||||||||||||||||||
| Digital Photo Paper | - | $ | - | 38 | $ | 64,671 | (38 | ) | (64,671 | ) | -100.00 | % | -100.00 | % | ||||||||||||||||||
2023, respectively.
Cost of Sales
Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended September 30, 2017March 31, 2024 was $26,285,765,$6,464,464, a decrease of $3,763,722,$13,553,915, or 12.53%67.71%, from $30,049,487$20,018,379 for the comparable period in 2016.2023. This was mainly a result of (i) adue to the decrease in cost of sales of $2,164,910 for offset printing paper,quantity and (ii) athe decrease in costthe unit material costs of sales of $1,328,931 for regular CMP.
Cost of sales for CMP was $21,066,773$6,464,464 for the quarter ended September 30, 2017,March 31, 2024, as compared to $21,854,757$19,089,115 for the comparable period in 2016.2023. The decrease in the cost of sales of $787,984$12,624,651 for CMP was mainly due to the decreasedecreases in sales volume partially offset by increase inand average unit cost of recycled paper board.sales of CMP. Average cost of sales per tonne for CMP increaseddecreased by 46.30%9.90%, from $270$384 in the thirdfirst quarter of 20162023 to $395$346 in the thirdfirst quarter of 2017.2024. The increasedecrease in average cost of sales was mainly attributable to the higherlower average unit purchase costs (net of applicable value added tax) of recycled paper board in the thirdfirst quarter of 20172024 compared to the thirdfirst quarter of 2016. Cost of sales for offset printing paper was $4,603,292 for the quarter ended September 30, 2017, as compared to $6,768,202 for the comparable period in 2016. Average cost of sales per tonne of offset printing paper increased by 23.49%, from $464 in the three months ended September 30, 2016, to $573 during the comparable period in 2017. The increase in average cost of sales of offset printing paper was mainly due to the increase in cost of recycled white scrap paper. 2023.
Cost of sales for tissue paper products was $615,700$nil for the quarter ended September 30, 2017,March 31, 2024, as compared to $1,426,528$929,264 for the comparable period in 2016. Average cost of sales per tonne2023. The production of tissue paper products increased by 16.19%, from $1,075was suspended in the three months ended September 30, 2016, to $1,249 for the comparable period in 2017 due to subsidies to the labors during the production restriction.first quarter of 2024.
Changes in cost of sales and cost per tonne by product for the quarters ended September 30, 2017March 31, 2024 and 20162023 are summarized below:
| Three Months Ended | Three Months Ended | Change in | ||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change in | percentage | |||||||||||||||||||||||||||||
| Cost of Sales | Cost per Tonne | Cost of Sales | Cost per tonne | Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tone | |||||||||||||||||||||||||
| Regular CMP | $ | 17,361,505 | $ | 402 | $ | 18,690,436 | $ | 273 | $ | (1,328,931 | ) | $ | 129 | -7.11 | % | 47.25 | % | |||||||||||||||
| Light-Weight CMP | $ | 3,705,268 | $ | 364 | $ | 3,164,321 | $ | 251 | $ | 540,947 | $ | 113 | 17.10 | % | 45.02 | % | ||||||||||||||||
| Total CMP | $ | 21,066,773 | $ | 395 | $ | 21,854,757 | $ | 270 | $ | (787,984 | ) | $ | 125 | -3.61 | % | 46.30 | % | |||||||||||||||
| Offset Printing Paper | $ | 4,603,292 | $ | 573 | $ | 6,768,202 | $ | 464 | $ | (2,164,910 | ) | $ | 109 | -31.99 | % | 23.49 | % | |||||||||||||||
| Tissue Paper Products | $ | 615,700 | $ | 1,249 | 1,426,528 | $ | 1,075 | $ | (810,828 | ) | $ | 174 | -56.84 | % | 16.19 | % | ||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper | $ | 26,285,765 | $ | n/a | $ | 30,049,487 | $ | n/a | $ | (3,763,722 | ) | $ | n/a | -12.53 | % | n/a | ||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
| March 31, 2024 | March 31, 2023 | Change in | Change in percentage | |||||||||||||||||||||||||||||
| Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tone | |||||||||||||||||||||||||
| Regular CMP | $ | 5,424,012 | $ | 347 | $ | 16,149,948 | $ | 388 | $ | (10,725,936 | ) | $ | (41 | ) | -66.41 | % | -10.57 | |||||||||||||||
| Light-Weight CMP | $ | 1,040,452 | $ | 343 | $ | 2,939,167 | $ | 367 | $ | (1,898,715 | ) | $ | (24 | ) | -64.60 | % | -6.54 | |||||||||||||||
| Total CMP | $ | 6,464,464 | $ | 346 | $ | 19,089,115 | $ | 384 | $ | (12,624,651 | ) | $ | (38 | ) | -66.14 | % | -9.90 | |||||||||||||||
| Offset Printing Paper | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | % | |||||||||||||||||||
| Tissue Paper Products | $ | - | $ | - | 929,264 | $ | 4,865 | $ | (929,264 | ) | $ | (4,865 | ) | -100.00 | % | -100.00 | ||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper | $ | 6,464,464 | $ | n/a | $ | 20,018,379 | $ | n/a | $ | (13,553,915 | ) | $ | n/a | -67.71 | % | n/a | ||||||||||||||||
Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper in the three months ended September 30, 2017 wereMarch 31, 2024 was RMB 1,978/1,276/tonne (approximately $291/tonne) and RMB 2,728/tonne (approximately $402/$180/tonne), as compared to RMB 1,084/1,502/tonne (approximately $165/tonne) and RMB 2,222/tonne (approximately $338/$219/tonne) for the three months ended September 30, 2016, respectively.March 31, 2023. These changes (in US dollars) represent a year-over-year increasedecrease of 76.36%17.81% for the recycled paper board. We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled paper.
The pricing trends of our major raw materials for the 24-month period from October 2015April 2022 to September 2017March 2024 are shown below:
Electricity and coalgas are our two main energy sources. The price of coal has been subject to seasonal fluctuations in China, with the peaks often occurring in the winter months. In 2016, electricityElectricity and coalgas accounted for approximately 8%4% and 4% of total sales, respectively. The average cost per tonne of coal went up from $68.2 (RMB449) in the third quarter of 2016 to $92.3 (RMB627) in third quarter of 2017, accounting for approximately 5%12.4% of total sales in the thirdfirst quarter of 2017. In order2024, respectively, compared to reduce carbon emissions, we have been required to reduce coal consumption by the local government. After replacing some of the coal burning boilers with gas boilers, we started using natural gas in December 20164% and liquefied gas in February 2017, which accounted for approximately 0.7%14% of total sales in thirdthe first quarter of 2017.2023. The monthly energy cost (electricity, coal and gas) as a percentage of total monthly sales of our main paper products for the 24 months ended September 30, 2017March 31, 2024 are summarized as follows:
Gross Profit (Loss)
Gross profit for the three months of September 30, 2017ended March 31, 2024 was $7,221,288 (21.55%$399,113 (representing 5.81% of the total revenue), representing a decreasean increase of $109,555,$676,112, or 1.49%244.08%, from the gross profitloss of $7,330,843 (19.57%$276,999 (representing 1.40% of the total revenue) for the three months ended September 30, 2016. The decrease was mainly due to the decrease in sales volume and increase in unit cost of recycled paper board, partially offset by the increase in average selling prices as further described above.March 31, 2023.
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset printing paper, CMP and tissue paper products for the three months ended September 30, 2017March 31, 2024 was $7,221,288, a decrease$362,336, representing an increase of $126,620,$629,567, or 1.72%235.59%, from the gross profitloss of $7,347,908$267,231 for the three months ended September 30, 2016. The decreaseMarch 31, 2023. This was mainly due to the resultgross loss incurred for tissue paper products in the first quarter of the factors discussed above.2023.
The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 1.906.66 percentage points, from 19.65%-1.35% for the three months ended September 30, 2016,March 31, 2023, to 21.55%5.31% for the three months ended September 30, 2017.
March 31, 2024.
Gross profit margin for regular CMP for the three months ended September 30, 2017March 31, 2024 was 22.48%5.68%, or 6.493.75 percentage points higher, as compared to gross profit margin of 15.99%1.93% for the three months ended September 30, 2016.March 31, 2023. Such increase was primarilymainly due to the result of the increase in average selling price of regular CMP, partially offset by increasedecrease in cost of recycled paper board, partially offset by the decrease in ASP of regular CMP in the thirdfirst quarter of 2017.2024.
Gross profit margin for light-weight CMP for the three months ended September 30, 2017March 31, 2024 was 25.83%3.32%, or 1.51 percentage points higher, as compared to gross profit margin of 24.32% for the three months ended September 30, 2016. The increase was primarily the result of increase in average selling price of light-weight CMP, partially offset by increase in cost of recycled paper board in the third quarter of 2017.
Gross profit margin for offset printing paper was 15.60% for the three months ended September 30, 2017, a decrease of 11.93 percentage points, as compared to 27.53% for the three months ended September 30, 2016.The decrease was primarily the result of an increase in the cost of recycled white scrap paper in the third quarter of 2017.
Gross profit margin for tissue paper products for the three months ended September 30, 2017 was 6.72%, or 5.700.64 percentage points lower, as compared to gross profit margin of 12.42%3.96% for the three months ended September 30, 2016.March 31, 2023.
Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended September 30, 2017March 31, 2024 are as follows:
Digital Photo Paper
Profit
Face Masks
Gross loss for digital photo paperface masks for the three months ended September 30, 2017 was $nil. In June 2016, we suspended the productionMarch 31, 2024 and 2023 were gross loss of digital photo paper due to low market demand for our products$nil and now are upgrading the production line to produce more competitive photo paper products. We expect to resume our digital photo paper production in the near future.$2,839, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2017March 31, 2024 were $2,848,699,$3,900,783, an increase of $249,001,$1,405,421, or 9.58%56.32% from $2,599,698$2,495,362 for the three months ended September 30, 2016.March 31, 2023. The decrease was mainly due to the increase in depreciation of idle fixed assets during production suspension.
IncomeLoss from Operations
Operating incomeloss for the quarter ended September 30, 2017March 31, 2024 was $2,719,550,$3,501,670, a decrease of $2,011,595,$729,309, or 42.52%26.31%, from $4,731,145$2,772,361 for the quarter ended September 30, 2016.March 31, 2023. The decrease in operating incomeloss from operations was primarily due to the decreaseincrease in selling, general and administrative expenses, partially offset by the increase in gross profit as discussed above. profit.
Other Income and Expenses
Interest expense for the three months ended September 30, 2017March 31, 2024 decreased by $29,613,$38,879, from $677,576$249,169 in the three months September 30, 2016,ended March 31, 2023, to $647,963.$210,290. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $28,266,208$12,204,370 as of September 30, 2017,March 31, 2024, as compared to $35,711,062$18,212,347 as of September 30, 2016. March 31, 2023.
Gain on derivative liability
The interest incurred duringCompany analyzed the warrant for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The change in fair value of derivative liability for the three months ended September 30 2017March 31, 2024 and 2016, were $nil2023 was a gain of $34 and $10,839, respectively, and were capitalized as soft-cost of construction-in-progress. The interest expense capitalized in both periods was solely related to the sale-leaseback obligation with China National Foreign Trade Financial & Leasing Co., Ltd (“CNFTFL”).
$152,097, respectively.
Net IncomeLoss
As a result ofand the factors discussed above, net incomeloss was $1,572,335$3,746,536 for the quarter ended September 30, 2017,March 31, 2024, representing a decrease of $1,462,207,$1,013,371, or 48.19%37.08%, from $3,034,542$2,733,165 in net loss for the quarter ended September 30, 2016.March 31, 2023.
Comparison of the nine months ended September 30, 2017 and 2016
Revenue for the nine months ended September 30, 2017 was $81,584,395, a decrease of $21,783,896, or 21.07%, from $103,368,291 for the same period in the previous year.
Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products
Revenue from sales of offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2017 was $81,584,395, a decrease of $21,119,582, or 20.56%, from $102,703,977 for the nine months ended September 30, 2016. Total quantities of offset printing paper, CMP and tissue paper products sold during the nine months ended September 30, 2017 amounted to 175,101 tonnes, a decrease of 87,649 tonnes, or 33.36%, compared to 262,750 tonnes sold during the nine months ended September 30, 2016. Total quantities of CMP and offset printing paper sold decrease by 85,480 tonnes in the nine months of 2017 as compared to the same period of 2016. We sold 1,619 tonnes of tissue paper products in the nine months of 2017 as opposed to 3,788 tonnes in the same period of 2016. We removed all coal burning boilers and started to replace them with gas boilers in September 2017 in compliance with the latest government regulation. Production was suspended during the removal of boilers. In addition, the temporary restrictions on our production volume instated in November 2016 by the government remain in place. As a result, the production volume of regular CMP, light-Weight CMP and offset printing paper and sales of these products decreased for the nine months ended September 30, 2017.
A summary of the above changes and further analyses of the changes in our sales revenue are as follows:
| Nine Months Ended | Nine Months Ended | Percentage | ||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change in | Change | |||||||||||||||||||||||||||||
| Sales Revenue | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity | Amount | ||||||||||||||||||||||||
| Regular CMP | 128,988 | $ | 55,741,068 | 183,044 | $ | 59,615,744 | (54,056 | ) | $ | (3,874,676 | ) | -29.53 | % | -6.50 | % | |||||||||||||||||
| Light-Weight CMP | 24,396 | $ | 10,449,339 | 34,478 | $ | 11,452,823 | (10,082 | ) | $ | (1,003,484 | ) | -29.24 | % | -8.76 | % | |||||||||||||||||
| Total CMP | 153,384 | $ | 66,190,407 | 217,522 | $ | 71,068,567 | (64,138 | ) | $ | (4,878,160 | ) | -29.49 | % | -6.86 | % | |||||||||||||||||
| Offset Printing Paper | 20,098 | $ | 13,306,551 | 41,440 | $ | 26,919,794 | (21,342 | ) | $ | (13,613,243 | ) | -51.50 | % | -50.57 | % | |||||||||||||||||
| Tissue Paper Products | 1,619 | $ | 2,087,437 | 3,788 | 4,715,616 | (2,169 | ) | $ | (2,628,179 | ) | -57.26 | % | -55.73 | % | ||||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper Revenue | 175,101 | $ | 81,584,395 | 262,750 | $ | 102,703,977 | (87,649 | ) | $ | (21,119,582 | ) | -33.36 | % | -20.56 | % | |||||||||||||||||
ASPs for our main products in the nine-month period ended September 30, 2017 and 2016 are summarized as follows:
| Offset Printing Paper ASP | Regular CMP ASP | Light-Weight CMP ASP | Tissue Paper Products ASP | |||||||||||||
| Nine Months Ended September 30, 2016 | $ | 650 | $ | 326 | $ | 332 | $ | 1245 | ||||||||
| Nine Months Ended September 30, 2017 | $ | 662 | $ | 432 | $ | 428 | $ | 1289 | ||||||||
| Increase from comparable period in the previous year | $ | 12 | $ | 106 | $ | 96 | $ | 44 | ||||||||
| Increase by percentage | 1.85 | % | 32.52 | % | 28.92 | % | 3.53 | % | ||||||||
Revenue of Digital Photo Paper
Revenue generated from selling digital photo paper were $nil for the nine months ended September 30, 2017. In June 2016, we suspended the production of digital photo paper due to low market demand for our products and now are upgrading the production line to produce more competitive photo paper products. We expect to resume our digital photo paper production in the near future.
Changes in revenue and quantities sold of our digital photo paper for the nine months ended September 30, 2017 and 2016 are summarized as follows:
| Nine Months Ended | Nine Months Ended | Percentage | ||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change in | Change | |||||||||||||||||||||||||||||
| Sales Revenue | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity | Amount | ||||||||||||||||||||||||
| Digital Photo Paper | - | $ | - | 372 | $ | 664,314 | (372 | ) | (664,314 | ) | -100.00 | % | -100.00 | % | ||||||||||||||||||
Cost of Sales
Total cost of sales for CMP, offset printing paper and tissue paper products in the nine months ended September 30, 2017 was $65,244,521, a decrease of $19,082,732, or 22.63%, from $84,327,253 for the nine months ended September 30, 2016. This was mainly a result of the decrease in volume sold, partially offset by increase in cost of recycled paper board. Cost of sales for CMP was $52,337,031 for the nine months ended September 30, 2017, as compared to $59,227,017 in the same period of 2016. The decrease in the cost of sales of $6,889,986 for CMP was mainly due to the decrease in the quantities of regular CMP and light-weight CMP sold in the nine months of 2017, partially offset by the increase in cost of recycled paper board. Average cost of sales per tonne for CMP increased by 25.37%, from $272 for the nine months ended September 30, 2016, to $341 in the same period of 2017. The increase was mainly attributable to the higher average unit purchase costs (net of applicable value added tax) of recycled paper board in the nine months ended September 30, 2017 compared to the same period of 2016. Cost of sales for offset printing paper was $10,956,465 for the nine months ended September 30, 2017, as compared to $20,951,362 in the same period of 2016. Average cost of sales per tonne of offset printing paper increased by 7.71%, from $506 in the nine months ended September 30, 2016, to $545 in the same period of 2017. Cost of sales for tissue paper products was $1,951,025 for the nine months ended September 30, 2017. Average cost of sales per tonne of tissue paper products was $1,205 for the nine months ended September 30, 2017.
Changes in cost of sales and cost per tonne by product for the nine months ended September 30, 2017 and 2016 are summarized below:
| Nine Months Ended | Nine Months Ended | Change in | ||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change in | percentage | |||||||||||||||||||||||||||||
| Cost of Sales | Cost per Tonne | Cost of Sales | Cost per tonne | Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tone | |||||||||||||||||||||||||
| Regular CMP | $ | 44,325,899 | $ | 344 | $ | 50,513,721 | $ | 276 | $ | (6,187,822 | ) | $ | 68 | -12.25 | % | 24.64 | % | |||||||||||||||
| Light-Weight CMP | $ | 8,011,132 | $ | 328 | $ | 8,713,296 | $ | 253 | $ | (702,164 | ) | $ | 75 | -8.06 | % | 29.64 | % | |||||||||||||||
| Total CMP | $ | 52,337,031 | $ | 341 | $ | 59,227,017 | $ | 272 | $ | (6,889,986 | ) | $ | 69 | -11.63 | % | 25.37 | % | |||||||||||||||
| Offset Printing Paper | $ | 10,956,465 | $ | 545 | $ | 20,951,362 | $ | 506 | $ | (9,994,897 | ) | $ | 39 | -47.71 | % | 7.71 | % | |||||||||||||||
| Tissue Paper Products | $ | 1,951,025 | $ | 1,205 | $ | 4,148,874 | $ | 1,095 | (2,197,849 | ) | $ | 110 | -52.97 | % | 10.05 | % | ||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper Revenue | $ | 65,244,521 | $ | n/a | $ | 84,327,253 | $ | n/a | $ | (19,082,732 | ) | $ | n/a | -22.63 | % | n/a | % | |||||||||||||||
For the nine months ended September 30, 2017, cost of sales for digital photo paper was $nil, as compared to $1,054,557 for the same period in year 2016.
Gross Profit
Gross profit for the nine months ended September 30, 2017 was $16,339,874 (20.03% of the total revenue), representing a decrease of $1,646,607, or 9.15%, from the gross profit of $17,986,481 (17.40% of the total revenue) for the nine months ended September 30, 2016. The decrease was mainly due to (i) the decrease in quantities sold and (ii) the increase of material purchase price of CMP, partially offset by the increase of ASP of regular CMP.
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2017 was $16,339,874, a decrease of $2,036,850, or 11.08%, from the gross profit of $18,376,724 for the nine months ended September 30, 2016. The decrease was mainly the result of the factors discussed above.
The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 2.14 percentage points, from 17.89% for the nine months ended September 30, 2016, to 20.03% for the nine months ended September 30, 2017.
Gross profit margin for regular CMP for the nine months ended September 30, 2017 was 20.48%, or 5.21 percentage points higher, as compared to gross profit margin of 15.27% for the nine months ended September 30, 2016. Such increase was primarily due to the increase in ASP of regular CMP.
Gross profit margin for light-weight CMP for the nine months ended September 30, 2017 was 23.33%, or 0.59 percentage points lower, as compared to gross profit margin of 23.92% for the nine months ended September 30, 2016.
Gross profit margin for offset printing paper was 17.66% for the nine months ended September 30, 2017, a decrease of 4.51 percentage points, as compared to 22.17% for the nine months ended September 30, 2016.
Gross profit margin for tissue paper products was 6.53% for the nine months ended September 30, 2017, a decrease of 5.49 percentage points, as compared to 12.02% for the nine months ended September 30, 2016.
Digital Photo Paper
Profit for digital photo paper for the nine months ended September 30, 2017 was $nil, compared with a loss of $390,243, for the nine months ended September 30, 2016. In June 2016, we suspended the production of digital photo paper due to low market demand for our products and now are upgrading the production line to produce more competitive photo paper products. We expect to resume our digital photo paper production in the near future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2017 were $8,319,590, a decrease of $1,321,818, or 13.71% from $9,641,408 for the nine months ended September 30, 2016. The expenses were higher in 2016 because the Company issued 1,133,916 shares of common stock, valued at $1,417,395, pursuant to the Company’s compensatory incentive plans in January 2016.
Accounts Receivable
Income from Operations
Operating income for the nine months ended September 30, 2017 was $6,355,144, a decrease of $1,964,155, or 23.61%, from $8,319,299 for the nine months ended September 30, 2016. The decrease in operating income was primarily due to the decrease in gross profit, partially offset by the decrease in selling, general and administrative expenses as discussed above.
Other Income and Expenses
Interest expense for the nine months ended September 30, 2017 decreased by $70,871, from $2,094,448 in the nine months ended September 30, 2016, to $2,023,577. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $28,266,208 as of September 30, 2017, as compared to $35,711,062 as of September 30, 2016. The interest incurred during the nine months ended September 30, 2017 and 2016, were $9,761 and $43,786 (a portion of interest related to the sale-leaseback arrangement with CNFTFL), respectively, and were capitalized as soft-cost of construction-in-progress.
Net Income
As a result of the above, net income was $3,296,121 for the nine months ended September 30, 2017, representing a decrease of $946,130, or 22.30%, from $4,242,251 for nine months ended September 30, 2016.
Accounts Receivable
Net accounts receivable decreasedincreased by $3,763,508,$1,810,651, or 96.64%314.61%, to $130,928$2,386,177 as of September 30, 2017,March 31, 2024, as compared with $3,894,436$575,526 as of December 31, 2016.2023. We usually collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories
Inventories consist of raw materials (accounting for 90.49%36.15% of total value of inventory as of September 30, 2017)March 31, 2024), semi-finished goods and finished goods. As of September 30, 2017,March 31, 2024, the recorded value of inventory increaseddecreased by 70.51%1.77% to $9,603,313$3,492,364 from $5,632,030$3,555,235 as of December 31, 2016.2023. As of September 30, 2017,March 31, 2024, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $6,711,977,$1,031,201, approximately $3,374,328,$832,457, or 101.10%418.86%, higher than the balance as of December 31, 2016.2023. As a result of the restrictions in our production volume (described above)better control over stock turnover and the rising pricevolatility of recycled paper board we reduced the Company’sprice, inventory was kept in a minimum level as of recycled paper board at the end of 2016. We brought our inventory back to normal levels in anticipation of the prices of raw materials increasing and anticipated growth in demand in 2017.December 2023.
A summary of changes in major inventory items is as follows:
September 30, 2017 | December 31, 2016 | $ Change | % Change | |||||||||||||
| Raw Materials | ||||||||||||||||
| Recycled paper board | $ | 6,711,977 | $ | 3,337,649 | 3,374,328 | 101.10 | % | |||||||||
| Recycled white scrap paper | 838,086 | - | 838,086 | |||||||||||||
| Recycled scrap binding margin | 831,968 | 547,803 | 284,165 | 51.87 | % | |||||||||||
| Tissue base paper | 41,299 | 87,641 | -46,342 | -52.88 | % | |||||||||||
| Coal & gas | 85,950 | 242,307 | -156,357 | -64.53 | % | |||||||||||
| Digital photo base paper and other raw materials | 180,763 | 177,823 | 2,940 | 1.65 | % | |||||||||||
| Total Raw Materials | 8,690,043 | 4,393,223 | 4,296,820 | 97.81 | % | |||||||||||
| Finished Goods | 913,270 | 1,238,807 | -325,537 | -26.28 | % | |||||||||||
| Totals | $ | 9,603,313 | $ | 5,632,030 | 3,971,283 | 70.51 | % | |||||||||
Accounts Payable and Notes Payable
Accounts payable and notes payable was $6,037,930 as of September 30, 2017, an increase of 3,315,660, or 121.80%, from $2,722,270 as of December 31, 2016. Accounts payable was $11,020 and $559,952 as of September 30, 2017 and December 31, 2016, respectively. We have been relying on the bank acceptance notes issued under our credit facilities with Bank of Hebei and Bank of Cangzhou to make the majority of our raw materials payments to our vendors. Our notes payable to Bank of Cangzhou and Bank of Hebei were $6,026,910 and $2,162,318 as of September 30, 2017 and December 31, 2016, respectively. We have paid off bank acceptance notes of $2,260,091 in February 2017. We also acquired additional bank acceptance notes of $6,026,910 from Bank of Cangzhou in January 2017, which we expect to pay off upon maturity on January 5, 2018.
Liquidity and Capital Resources
Overview
As of September 30, 2017, we had net working capital deficit of $1,004,941, an improvement of $5,103,328, from the net working capital deficit of $6,108,269 at December 31, 2016. Total current assets as of September 30, 2017 amounted to $22,322,334. Substantially all cash and cash equivalents are cash deposits in bank accounts. Restricted cash of $6,026,910 was included in our current assets as of September 30, 2017. Restricted cash is deposited at the Bank of Cangzhou for the purpose of securing the bank acceptance notes from the bank. The acceptance notes are due and payable on January 5, 2018, and the Company anticipates renewing such notes upon maturity on substantially similar terms.
Current liabilities as of September 30, 2017 totaled $23,327,275, an increase of $2,741,684, from the December 31, 2016 balance of $20,585,591. We use bank acceptance notes, which are typically 6-to-12 month notes, to guarantee the payments to our vendors. Notes payable was $6,026,910 as of September 30, 2017, representing an increase of $3,864,592, or 178.72%, from $2,162,318 as of December 31, 2016. Most of our current short-term bank loans are either revolving or term loans. We expect to renew these loans with the banks on similar terms at or before maturity. All of our short-term loans (with the exception of the notes payable, which carry no interest but require a deposit equal to a portion of the credit facilities at the issuing banks) have interest-only monthly payments, with a balloon payment for the entire principal amount upon maturity of the loan. The long term loans from the credit union require monthly and quarterly interest payments, with one large balloon payment upon maturity.
Financing with Sale-Leaseback
The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013, for a total financing proceeds in the amount of RMB 150 million (approximately US$23 million). Pursuant to the Lease Financing Agreement, Orient Paper HB sold some equipment to CNFTFL for RMB 150 million (approximately US$23 million). Concurrent with the sale of equipment, Orient Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,260) to CNFTFL to buy back all of the Leased Equipment.
| March 31, | December 31, | |||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| Raw Materials | ||||||||||||||||
| Recycled paper board | $ | 1,031,201 | $ | 198,744 | 832,457 | 418.86 | % | |||||||||
| Recycled white scrap paper | 10,629 | 10,647 | -18 | -0.17 | % | |||||||||||
| Tissue base paper | 21,101 | 21,138 | -37 | -0.18 | % | |||||||||||
| Gas | 33,083 | 21,428 | 11,655 | 54.39 | % | |||||||||||
| Other raw materials | 166,410 | 121,011 | 45,399 | 37.52 | % | |||||||||||
| Total Raw Materials | 1,262,424 | 372,968 | 889,456 | 238.48 | % | |||||||||||
| Semi-finished Goods | 299,686 | 300,207 | -521 | -0.17 | % | |||||||||||
| Finished Goods | 1,930,254 | 2,885,019 | -954,765 | -33.09 | % | |||||||||||
| Total inventory, gross | 3,492,364 | 3,558,194 | -65,830 | -1.85 | % | |||||||||||
| Inventory reserve | - | (2,959 | ) | 5 | 100 | % | ||||||||||
| Total inventory, net | $ | 3,492,364 | $ | 3,555,235 | (65,825 | ) | -1.77 | % | ||||||||
On July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into an agreement (the “2015 Agreement”), to amend and restate the Lease Financing Agreement entered into in 2013 (the “2015 Agreement”). The 2015 Agreement sets forth a modified and extended payment schedule with respect to the remaining payment obligation, with the final repayment date extended to June 21, 2017. Orient Paper HB made all payments due according to the modified schedule prior to June 20, 2016. Orient Paper HB made partial payments in the following payment obligations as well as interests on overdue balance until August 24, 2017, when the remaining overdue amount was fully paid off. All the Lease Equipment was bought back at the nominal price according to the agreement. The balance of the long-term obligations under capital lease were $nil as of September 30, 2017 and December 31, 2016, and its current portion in the amount of nil and $8,786,528, respectively.
Total interest expenses for the sale-leaseback arrangement for the three months ended September 30, 2017 and 2016 were $213,571 and $237,053, respectively. Total interest expenses for the sale-leaseback arrangement for the nine months ended September 30, 2017 and 2016 were $789,322 and $526,912, respectively.
As a result of the sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The deferred gain was amortized over the lease term and as an offset to depreciation of the Leased Equipment. In term of the extension of the new payment schedule, the deferred gain was amortized over the remaining lease term through June 21, 2017.
Renewal of operating lease
On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $147,228$140,829 (RMB1,000,000). The lease agreement expiredwas renewed in August 2016. On August 9, 2016, the Company paid off the rental for the first lease agreement and entered into2022 with a supplementary agreement with Hebei Fangsheng, who agreed to extend the lease term for another twoof six years with the same rental paymentpayments as provided for in the original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $21,775 and $56,872, which was recorded as part of the current liabilities as of September 30, 2017 and December 31, 2016, respectively.
Capital Expenditure Commitment as of September 30, 2017March 31, 2024
We finance our daily operations mainly by cash flows generated from our business operationsOn May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production line PM10 and loans from banking institutions (including leasing companies) and our major shareholders. Major capital expenditures in the nine months ended September 30, 2017 were primarily financed by cash generated from business operations. Company signed an agreement to purchase paper machine with paper machine supplier. The Company expected the new tissue paper production line to be launched after the completion of trial run.
As of September 30, 2017,March 31, 2024, we had approximately $11$3.5 million in capital expenditure commitments that were mainly related to the construction costspurchase of building equipmentpaper machine of PM10. The infrastructure work of PM10 has been completed and otherthe associated ancillary facilities are working in a new industrial park in Wei County of Hebei, China, where we expect to build two tissue paper production lines (PM8 and PM9), and install other paper production machinery.progress. These commitments are expected to be financed by bank loans and cash flows generated from our business operations and loans.
operations.
Capital ExpendituresFinancing with Sale-Leaseback
Our committed capital expenditures for the next 12 months are approximately $11 million, which mainly includes budgeted costs for the projects described below.
New Production Lines at the Wei County Industrial Park
In November 2012, weThe Company entered into a 15-year landsale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.3 million). Under the sale-leaseback arrangement, Tengsheng Paper sold the Leased Equipment to TLCL for 16 million (approximately US$2.3 million). Concurrent with the sale of equipment, Tengsheng Paper leases back the equipment sold to TLCL for a lease with a land investment company in Wei County forterm of three years. At the purpose of developing the 49.4 acres of land into the base of our next capacity expansion. In December 2012, we signed a contract with an equipment contractor in Shanghai to build the first of our two tissue paper production lines in Wei County. The two production lines, each having production capacity of 15,000 tonnes/year, will be designated as PM8 and PM9 upon completion. Total estimated costend of the Wei County tissue paper project is uplease term, Tengsheng Paper may pay a nominal purchase price of RMB 100 (approximately $14) to approximately $123 million (of which $115 million has been incurred thus far), includingTLCL and buy back the estimated costsLeased Equipment. The Leased Equipment in amount of general infrastructure and administrative facilities such$2,349,452 was recorded as warehouses, offices, dorms and landscaping,right of up to $102 million (of which $93 million has been incurred thus far)use assets and the estimated costs for the two paper machines and related packaging equipment of up to $22 million (of which $22 million has been incurred thus far). We had previously estimated that the installation and test operationsnet present value of the PM8 production line would be completed inminimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the second half of 2014. Our current estimated completion timeinception of the PM8 production line is the first half of 2018. We have experienced delays resulting from our inability to obtain approval for a coal burning boiler in the PM8 production line from the Heibei Provincial Government. Accordinglease on August 17, 2020.
Tengsheng Paper made payments due according to the latest regulation announced byschedule. On July 17, 2023, the Heibei Provincial Government, coal burning boilers are no longer allowed for new plants. We are considering alternative solutions suchCompany made a final payment on outstanding obligations and bought back the Lease Equipment at nominal price according to the agreement. The lease assets were reclassified as gas boilersown assets and going through necessary procedures for a re-application. The delaybalance of completionLeased Equipment net of the PM8 production line did not have any major financial impact on our current period earnings,amortization were $nil as we did not previously budget significant revenue or net earnings from the PM8 production line tissue paper for 2017.of March 31, 2024 and December 31, 2023.
We plan to build a second 15,000 tonnes/year tissue paper production line (designated as PM9) at an estimated cost of $7.8 million after the PM8 production line is put into production.
Relocation of Digital Photo Paper PM4 and PM5 Production Lines
In August 2015, we completed the relocation of our digital photo paper production lines (PM4 and PM5), as well as related chemical and packaging equipment, from the workshops located in our Headquarters Compound to a new location that is across the street from our Xushui Paper Mill, the Xushui Mill Annex. Total cost of the relocation of the PM4 and PM5 production lines and building construction costs incurred was approximately $4.5 million.
We purchased the land use rights of the 58,566 square meters at Xushui Mill Annex for approximately $7.7 million in April 2012 and constructed three industrial buildings for the digital photo paper operations, a dormitory for factory workers and offices to hold our consolidated Xushui County operations. We completed the relocation and resumed commercial production of digital photo paper in August 2015. In June 2016, we suspended the production of digital photo paper due to low market demand for our products. We are upgrading the facilities to produce more competitive photo paper products. We expect to resume the digital photo paper production in the near future.
Cash and Cash Equivalents
Our cash, and cash equivalents and restricted cash as of September 30, 2017March 31, 2024 was $6,505,284,$5,417,560, an increase of $4,172,638,$1,025,639, from $2,332,646$4,391,921 as of December 31, 2016.2023. The increase of cash and cash equivalents for the ninethree months ended September 30, 2017March 31, 2024 was attributable to a number of factors:factors including:
i. Net cash provided by (used in) operating activities
Net cash provided by operating activities was $16,841,558$624,420 for the ninethree months ended September 30, 2017.March 31, 2024. The balance represented an increasea decrease of cash of $8,211,524,$4,185,507, or 95.15%87.02%, from $8,630,034$4,809,928 provided for the ninethree months ended September 30, 2016.March 31, 2023. Net incomeloss for the ninethree months ended September 30, 2017March 31, 2024 was $3,296,121,$3,746,536, representing a decrease of $946,130,$1,013,371, or 22.30%37.08%, from a net incomeloss of $4,242,251$2,733,165 for the ninethree months ended September 30, 2016.March 31, 2023. Changes in various asset and liability account balances throughout the ninethree months ended September 30, 2017March 31, 2024 also contributed to the net change in cash from operating activities in ninethree months ended September 30, 2017.March 31, 2024. Chief among such changes is the decreaseincrease of accounts receivable in the amount of $3,928,087$1,847,112 during the ninethree months of 2017 and the increase of notes payable in the amount of $3,680,693.2024. There was also an increasea decrease of $3,631,641$59,612 in the ending inventory balance as of September 30, 2017 (a decreaseMarch 31, 2024 (an increase to net cash for the ninethree months ended September 30, 2017March 31, 2024 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $10,928,502.$3,481,788. The Company also had a net decrease of $472,847$1,276,805 in prepayment and other current assets (an increase to net cash) and a net decreaseincrease of $687,584$908,127 in other payables and accrued liabilities and due to a related party (a decrease to net cash), as well as a decrease in income tax payable of $107,105 (a decreaseparties (an increase to net cash) during the ninethree months ended September 30, 2017.March 31, 2024.
ii. Net cash used in investing activities
We incurred $7,570,166$9,027 in net cash expenditures for investing activities during the ninethree months of 2017,ended March 31, 2024, as compared to $7,674,649$295,018 for the same period of 2016. Expenditures in the nine months ended September 30, 2017 were mainly for the progress payments for the construction of our first tissue paper production line (PM8) and related facilities, including three paper mill workshops and maintenance workshops and four warehouses at the Wei County industrial park in Wei County, Hebei province.
2023.
iii. Net cash provided by (used in) financing activities
Net cash used inprovided by financing activities was $5,440,381$422,488 for the ninethree months ended September 30, 2017,March 31, 2024, as compared to net cash provided by financing activities in the amount of $2,191,637$2,564,646 for the ninethree months ended September 30, 2016. The decrease was mainly attributable to (i) repayment ofMarch 31, 2023.
Short-term bank loans
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Bank of Cangzhou 1 | $ | 140,944 | $ | - | ||||
| Bank of Cangzhou 2 | 281,889 | - | ||||||
| Industrial and Commercial Bank of China (“ICBC”) Loan 1 | 2,819 | 2,824 | ||||||
| ICBC Loan 2 | 70,472 | 70,594 | ||||||
| ICBC Loan 3 | 349,542 | 350,149 | ||||||
| Total short-term bank loans | $ | 845,666 | $ | 423,567 | ||||
On December 31, 2023, the Company entered into a working capital lease obligation and (ii) cash outflow fromloan agreement with the increase of restricted deposits upon additions of notes payables to Bank of Cangzhou.Cangzhou, to borrow $140,944 at a fixed interest rate of 5.5% per annum. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $306,528 as of March 31, 2024. The loan will be due by December 30, 2024.
Short-term bank loansOn December 31, 2023, the Company entered into a working capital loan agreement with the Bank of Cangzhou, to borrow $281,889 at a fixed interest rate of 5.5% per annum. The loan will be due by December 30, 2024.
| September 30, | December 31, | |||||||||
| 2017 | 2016 | |||||||||
| Bank of Hebei | (a) | $ | - | $ | 2,162,318 | |||||
| Industrial and Commercial Bank of China (“ICBC”) Loan 1 | (b) | - | 2,883,091 | |||||||
| Bank of Cangzhou | (c) | 6,026,910 | - | |||||||
| ICBC Loan 2 | (d) | 4,218,837 | - | |||||||
| Total short-term bank loans | $ | 10,245,747 | $ | 5,045,409 | ||||||
On September 15, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,819 and $2,824 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 14, 2024.
On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $70,472 and $70,594 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024.
On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $349,542 and $350,149 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024.
As of September 30, 2017,March 31, 2024, there were guaranteed short-term borrowings of $10,245,747$nil and unsecured bank loans of $nil.$704,722. As of December 31, 2016,2023, there were guaranteed short-term borrowings of $5,045,409$nil and unsecured bank loans of $nil.$423,567.
The average short-term borrowing rates for the three months ended September 30, 2017March 31, 2024 and 20162023 were approximately 5.30%4.48% and 8.19%, respectively. The average short-term borrowing rates for the nine months ended September 30, 2017 and 2016 were approximately 5.28% and 8.53%, respectively.4.72%.
Long-term loans from credit union
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, long-term loans payable to Rural Credit Union of Xushui County, amounted to $7,473,368were $11,358,704 and $4,843,592,$11,378,429, respectively.
On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is payable in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.72% per month. In August 2015, after giving the required notice to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the loan in an amount of $188,341, of which $82,870 was paid ahead of its original repayment schedule as of September 30, 2017. As of September 30, 2017 and December 31, 2016, total outstanding loan balance was $1,295,786 and $1,239,729 respectively, which is presented as non-current liabilities in the condensed consolidated balance sheet.
On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui CountyDistrict for a term of 5 years, which iswas originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and was due and payable in various installments from December 21, 2018 to June 20, 2023. On August 24, 2023, the loan was extended for another 3 years and will be due and payable on August 24, 2026. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $8,579,118 and $9,813,294$nil as of September 30, 2017March 31, 2024 and December 31, 2016, respectively.2023. Interest payment is due quarterlymonthly and bearsbore a fixed rate of 0.72%7.68% per month. In August 2015, after givingannum. Effective from November 15, 2022, the required noticeinterest rate was reduced to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the loan in an amount of $195,875, of which $75,336 was paid ahead of its original repayment schedule as of September 30, 2017.7% per annum. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the total outstanding loan balance was $3,766,818$3,522,200 and $3,603,863 respectively.$3,528,315. Out of the total outstanding loan balance, current portion amounted were $3,766,818was $1,267,090 and $nil as of September 30, 2017 and December 31, 2016, respectively,$1,269,290, which areis presented as current liabilities in the condensed consolidated balance sheet and the remaining balance of $nil$2,255,110 and $3,603,863 are$2,259,025 is presented as non-current liabilities in the condensed consolidated balance sheet as of September 30, 2017March 31, 2024 and December 31, 20162023, respectively.
On April 20, 2017,17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui CountyDistrict for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on April 16, 2024 according to the new schedule. The loan is secured by Tengsheng Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bore a rate of 7.68% per annum. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of March 31, 2024 and December 31, 2023, the total outstanding loan balance was $2,255,109 and $2,259,026, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023.
On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on December 11, 2024 according to the new schedule. The loan is secured by Tengsheng Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bore a rate of 7.56% per annum. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of March 31, 2024 and December 31, 2023, the total outstanding loan balance was $1,832,276 and $1,835,458, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023.
On February 26, 2023, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from August 26, 201721, 2023 to April 19, 2019.February 24, 2025. The loan is guaranteedsecured by Hebei TengshengDongfang Paper with its land use right pledged as collateral for the benefit of the bank.credit union. Interest payment is due quarterlymonthly and bearsbore a fixed rate of 0.6%7% per month.annum. As of September 30, 2017March 31, 2024 and December 31, 2023, the total outstanding loan balance was $2,410,764, out$2,536,998 and $2,541,404. Out of the total outstanding loan balance, current portion amounted was $2,536,998 and $1,284,820, which $90,404 and $2,320,360 areis presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,256,584 is presented as non-current liabilities in the condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.
On December 5, 2023, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 3 years, which was due in various installments from June 21, 2024 to December 5, 2026. The loan was guaranteed by an independent third party. Interest payment was due monthly and bore a rate of 7% per annum. As of March 31, 2024 and December 31, 2023, total outstanding loan balance was $1,212,121 and $1,214,226, respectively. Out of the total outstanding loan balance, current portion amounted $225,511 and $225,903, which is presented as current liabilities and the remaining balance of $986,610 and $988,323 is presented as non-current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.
Total interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2017March 31, 2024 and 20162023 were $320,077$209,586 and $354,011,$244,679, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2017 and 2016 were $907,785 and $1,172,692, respectively.
Shareholder Loans
TheMr. Zhenyong Liu, the Company’s CEO has loaned money to OrientDongfang Paper HB for working capital purposes over a period of time. On January 1, 2013, OrientDongfang Paper HB and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $386,225$361,289 and $361,915 of interest is stillwere outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of March 31, 2024 and December 31, 2023, approximately $42,283 and $42,357 of interest, respectively were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of September 30, 2017.sheet.
On December 10, 2014, the CEO provided an unsecured loan to the Company of $9,040,365 (RMB 60,000,000), for working capital purpose with an interest rate of 5.25% per annum, which was based on the primary lending rate of People’s Bank of China. The loan would be originally due on December 10, 2017. During the year ended December 31, 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with the interest of $288,596. Mr. Zhenyong Liu agreed to extend the loan for further 3 years and the remaining balance will be due on December 2, 2020. As of September 30, 2017, the outstanding loan balance was $3,013,455 and the accrued interest was $143,516, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows OrientDongfang Paper HB to borrow from the CEO an amount up to $18,080,730$17,201,342 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,348,267$4,324,636 was drawn from the facility, which carried an interest rate of 5.25%.facility. On October 14, 2016 an unsecured amount of $2,898,845$2,883,091 was drawn from the facility, which carried an interest rate of 4.35%.facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the company paid off the remaining balance, together with interest of 94,636. As of September 30, 2017March 31, 2024 and December 31, 2023, the outstanding loan balance was $7,533,638 and the accrued interest was $354,552,$193,710 and $194,047, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, total amount of loans due to Mr. Zhenyong Liu were $10,547,093 and $10,090,817, respectively.$nil. The interest expensesexpense incurred for such related party loans are $114,315 and $97,351were $nil for the three months ended September 30, 2017March 31, 2024 and 2016, respectively. On October 20, 2017, the Company’s CEO agreed to permit the Company to postpone the repayment of the loan and accrued interest on his loan to Orient Paper HB until the earliest date on which the Company’s quarterly or annual financial statements filed with the SEC show a satisfactory working capital level.2023. The accrued interest oweowing to Mr. Zhenyong Liu was approximately $884,293$597,282 and $598,319, as of September 30, 2017,March 31, 2024 and December 31, 2023, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities.
During the three and nine months ended September 30, 2017, the Company borrowed $nil from shareholders. During the three and nine months ended September 30, 2016, the Company borrowed $nil and $14,000 from shareholders to pay for various expenses incurred in the U.S. The amount was due on demand with interest free. The Company repaid the entire balance by the end of the period.
Critical Accounting Policies and Estimates
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates. The most critical accounting policies are listed below:
Revenue Recognition Policy
The Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered when the customer’s truck picks up goods at our finished goods inventory warehouse.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry. For the three months ended September 30, 2017March 31, 2024 and 2016,2023, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record such impairment in the future.
Foreign Currency Translation
The functional currency of OrientDongfang Paper HB and Orient PaperBaoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of September 30, 2017March 31, 2024 and December 31, 20162023 to translate the Chinese RMB to the U.S. Dollars are 6.6369:7.0950:1 and 6.9370:7.0827:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.7922:7.1008:1 and 6.6529:6.8613:1 for the three months ended September 30, 2017March 31, 2024 and 2016,2023, respectively. Translation adjustments are included in other comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor for a third partyBaoding Huanrun Trading Co., for its long-term bank loans in an amount of $8,437,674 (RMB56,000,000)$4,369,274 (RMB31,000,000), which matures at various times in 2018. The third party2028. Baoding Huanrun Trading Co. is one of our major suppliers.suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Gross versus Net), which is effective upon adoption of ASU 2014-09. This ASU clarifies the implementation guidance in ASU 2014-09 on principal versus agent considerations. These ASUs are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company will adopt ASU 2014-09, and its related clarifying ASUs, as of January 1, 2018. The Company is continuing to assess the potential effects of these ASUs on its consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company anticipates adopting the standard using the modified retrospective transition approach. Under this approach, the new standard would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. We do not expect the adoption of these ASUs to have a material impact on our condensed consolidated financial statements.
In January 2016,October 2021, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10)2021-08, Business Combinations (Topic 805): Recognition and Measurement of FinancialAccounting for Contract Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to be measured at fair valueContract Liabilities from Contracts with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or thoseCustomers (ASU 2021-08), which clarifies that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair valueacquirer of a liability resulting frombusiness should recognize and measure contract assets and contract liabilities in a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair valuebusiness combination in accordance with the fair value option for financial instruments. In addition, theTopic 606, Revenue from Contracts with Customers. The new amendments in this update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that are required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017,2023, including interim periods within those fiscal years. Except forThe amendments should be applied prospectively to business combinations occurring on or after the early application guidance discussed in ASU 2016-01, early adoptioneffective date of the amendments, in this update is notwith early adoption permitted. We doThe Company does not expect the adoption of ASU 2016-01this standard to have a material impact on our condensedits consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our condensed consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-09 on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed 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” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; 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; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU 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. We are currently evaluating the impact of the adoption of ASU 2016-15 on our condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU 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. We are currently evaluating the impact of the adoption of ASU 2016-18 on our condensed consolidated financial statements. The Company had $6,026,910 and $2,162,318 of restricted cash as of September 30, 2017 and December 31, 2016, respectively.
In January 2017, the FASB issued ASU No. 2017-01, “‘Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), which clarify the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments in this ASU 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 so long as the transaction has not been reported in financial statements that have been issued or made available for issuance. We are currently evaluating the impact of the adoption of ASU 2017-01 on our condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “‘Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU 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. We are currently evaluating the impact of the adoption of ASU 2017-09 on our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Exchange Risk
While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risks as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Inflation
Inflation
Although we are generally able to pass along minor incremental cost inflation to our customers, inflation such as increases in the costs of our products and overhead costs may adversely affect our operating results. We do not believe that inflation in China has had a material impact on our financial position or results of operations to date, however, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase in line with the increased costs.
Item 4. Controls and Procedures.
As required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Securities“Exchange Act”), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, which were designed to provide reasonable assurance of achieving their objectives. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2017,March 31, 2024, our disclosure controls and procedures were effective at the reasonable assurance level to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes with respect to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the quarterly period ended September 30, 2017.March 31, 2024.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business. We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects other than the following:
In February 17, 2022, FT Global Capital, Inc. (“FTG”), filed a lawsuit against the Company in the Commercial Division of New York Supreme Court (the “Court”). FTG has brought a breach of contract action against the Company to recover fees in connection with an agreement that the parties entered into in April 2019 (the “Agreement”). The Company has answered FTG’s complaint and has denied the allegations because it is the Company’s position that FTG did not fulfill its obligations under the terms of the Agreement. Discovery is continuing. The Court issued a Status Conference Order (the “Order”) dated April 15, 2024. According to the Order, the Court ordered that the Company has failed to appear and is in default, and that pursuant to the warning given in the Court’s order dated March 22, 2024, the Company’s default renders its answer subject to being stricken, and accordingly the answer of the Company is hereby stricken. On April 18, 2024, FT Global filed a notice of motion for default judgment against the Company.
In November 2023, an individual plaintiff involved in a civil loan dispute filed a lawsuit against the defendants including Tengsheng Paper and Jie Ping, who served as the executive director and the legal representative of Tengsheng Paper, at the Lianchi District People's Court of Baoding City, China (the “PRC Court”). On December 1, 2023, the plaintiff sought property preservation measures, requesting the PRC Court to freeze RMB3.35 million worth of bank deposits held by Jie Ping and Tengsheng Paper. Following this request, on the same day, the PRC Court issued a ruling to immediately freeze the RMB3.35 million worth of bank deposits of Jie Ping and Tengsheng Paper.
The ultimate resolution of the proceedings may have a material adverse impact on our business, financial condition, results of operations or cash flows. Failure to settle the proceedings or other unfavorable outcomes in this proceedings could result in significant damages, additional penalties or other remedies imposed against the Company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources. It could also result in our reputation being harmed and our stock price could decline as a result of allegations made in the course ofthe proceedings, regardless of the truthfulness of the allegations.
Item 1A. Risk Factors.
Information about risk factors for the three months ended September 30, 2017, does not differ materially from that set forth in Part I, Item 1AWe are a smaller reporting company as defined by Rule 12b-2 of the Company’s 2016 Annual Report on Form 10-K.Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) Exhibits
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | ||
| Inline XBRL Instance Document | ||
| 101.SCH | Inline XBRL Schema Document | |
| 101.CAL | Inline XBRL Calculation Linkbase Document | |
| Inline XBRL Definition Linkbase Document | ||
| 101.LAB | Inline XBRL Label Linkbase Document | |
| 101.PRE | Inline XBRL Presentation Linkbase Document | |
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.
| Date: | /s/ Zhenyong Liu | ||
| Name: | Zhenyong Liu | ||
| Title: | Chief Executive Officer | ||
| (Principal Executive Officer) | |||
| Date: | /s/ Jing Hao | ||
| Name: | Jing Hao | ||
| Title: | Chief Financial Officer | ||
(Principal Financial Officer) | |||