$8,388,501 (or 47% of total revenue) for the three months ended March 31, 2009, representing a $3,068,744 (or 58%) increase over the corrugated paper revenue of $5,319,756 for the comparable period in 2008. Revenue from uncoated writing paper amounted to $3,947,839 (or 22% of total revenue) for the three months ended March 31, 2009, representing a $2,068,270 (or 52% increase) over the uncoated writing paper revenue of $1,879,568 for the comparable period in 2008. On the other hand, revenue from middle grade offset paper for the three months period ended March 31, 2009 dropped $1,296,086, to $2,014,877.
Gross profit for the three months ended March 31, 2009 was $3,336,438, an increase of $852,909 or 34.34% compared to $2,483,529 for the comparable period in 2008. The increase was primarily attributable to increased sales volume in the first quarter of 2009. However, increases in gross profit as a percentage of current quarter sales did not grow in proportion to the growth in total revenue in 2009 as compared to the same period in 2008, because the Company offered more volume discounts to customers who placed larger sales orders. The gross profit margin for the three months ended March 31, 2009 only increased by 0.35%, from 18.36% to 18.70%, in 2009.
Operating income for the three months ended March 31, 2009 was $3,137,684, an increase of $875,112 or 38.7% compared to $2,262,572 for the comparable period in 2008. The increase was primarily attributable to the increase in gross profit in the first quarter of 2009.
Cost of sales for the three months ended March 31, 2009 was $14,501,040, an increase of $3,456,536 or 31.3% from $11,044,504 for the comparable period in 2008. The increase in cost of sales is largely due to increased sales volume.
General and administrative expenses for the three months ended March 31, 2009 were $198,754, a decrease of $22,203 or 10.0% compared to $220,957 for the comparable period in 2008. The decrease was primarily attributable to cost-cutting measures applied to various administrative expenses.
Net income was $2,298,600 for the three months ended March 31, 2009, an increase of $854,340 or 59.2% from $1,444,260 for the same period of 2008. This increase is primarily due to our increased sales volume in terms of quantities sold to existing major customers.
Accounts receivable increased 66.9% to $2,380,017 as of the three months ended March 31, 2009, compared with $1,425,899 as of the three months ended March 31, 2008. This increase in accounts receivable was primarily attributable to increased sales revenue.
Inventory consists of raw materials and finished goods. As of the three months ended March 31, 2009, the recorded value of our inventory has decreased 51.45% to $1,369,524 from $2,821,063 as of the three months ended March 31, 2008. The increase is mainly due to a decrease in raw material costs from $2,378,757 as of December 31, 2008 to $677,159 as of March 31, 2009, a decrease of 71.5%. The Company experienced a market of declining raw material costs in the fourth quarter of 2008 and built up a larger than normal position in used papers by the end of year 2008. The Company predicted that the raw material costs might remain relatively low in the first half of 2009 and accordingly reduced the raw material inventory level in the three months ended March 31, 2009.
Accounts payable amounted to $1,490,894 as of the three months ended March 31, 2009, an increase from $740,846 as of the three months ended March 31, 2008. This increase is mainly due to increased sales/business activities in the first three months of 2009.
Liquidity and Capital Resources
Overview
We had net working capital of $2,013,660 at March 31, 2009, an increase of $3,179,455 over a net working capital deficit of ($15,253,388) at March 31, 2008.
Cash and Cash Equivalents
Our cash and cash equivalents as at the beginning of the three months ended March 31, 2009 was $3,234,419 and increased to $7,815,588 by the end of the period, an increase of $4,581,169 or 141.6% over the base amount at January 1, 2009. The cash and cash equivalents as of March 31, 2009 represented an increase of $6,531,754 or 508.8% from $1,283,834 for the comparable period in 2008. The significant increase over the comparable 2008 period was primarily attributable to the cash outlay for acquiring additional fixed assets in the first quarter of 2008.
Net cash provided by operating activities
Net cash provided by operating activities was $4,585,358 for the three months ended March 31, 2009, a decrease of $5,945,939 or 56.5% from $10,531,297 for the comparable period in 2008. However, net income increased by $854,340 or 59.2% from $1,444,260 for the comparable period in 2008. The decrease in operating cash, compared to the same period in 2008, is mainly attributable to the significant ending balance of accounts payable and accrued expense at March 31, 2008, which included (i) capitalized but unpaid equipment acquisition costs in the amount of $2,926,552 and (ii) $4,486,463 of unpaid accounts payable for purchased inventory. None of the two factors above existed in the three months ended March 31, 2009.
Net cash used in investing activities
The Company did not incur cash expenditure in investing activities during the three-month period ended March 31, 2009.
Net cash used in financing activities
Net cash provided by financing activities was $537 for the three months ended March 31, 2009. The Company did not incur new borrowings or pay off any loans carried from December 31, 2008.
Short term loans
On January 31, 2008, HBOP entered into a loan agreement with the Industrial and Commercial Bank of China, Xushui Branch, for a loan in the amount of RMB 13,000,000 yuan ($1,904,500 at March 31, 2008). The loan is renewable at maturity and is subject to a 6.372% interest rate. The loan is secured by certain manufacturing equipments of the Company and payable on the maturity date of January 29, 2009. On January 21, 2009 the Company and the Bank renewed the loan agreement for another 12 months and extended the maturity date to January 20, 2010.
On March 10, 2008, HBOP entered into a loan agreement with Huaxia Bank, Shijiazhuang Branch, for a loan in the amount of RMB 8,500,000 yuan ($1,245,250 at March 31, 2008). The loan is renewable and subject to a 9.828% per annum interest rate. The loan is guaranteed by a third party guarantor, Hebei Small-Medium Enterprise Credit Guarantee Service Center, a quasi-governmental agency, and is due and payable on the maturity date of March 5, 2009. On and after March 5, 2009, the Bank granted a grace period to the HBOP for purpose of negotiating for loan renewal. The Company then arranged to receive a one-month bridge loan from Heibei Small-Medium Enterprise Credit Gurantee Service Center to pay off the Huanxia Bank loan. The bridge loan carried a monthly interest of 0.933%. We paid off the bridge loan and accrued interest in the amount of $1,266,557 on April 30, 2009.
On September 5, 2008, HBOP entered into a loan agreement with the Industrial & Commercial Bank of China, Xushui Branch, for a credit facility in the amount of RMB 6,000,000 yuan ($879,000 as of March 31, 2009).
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The loan is renewable at maturity and subject to a 8.217% interest rate. The loan is due and payable on the maturity date of June 4, 2009.
On January 23, 2009, HBOP entered into a short term credit facility extension agreement with United Commercial Bank (China) Limited, for the extension of a revolving credit facility in the amount of $2,000,000 and a non-revolving import loan of $816,977. The original credit facility agreement was entered into on April 14, 2006 and extended on May 8, 2007. Under the terms of the extension agreement, the loan is collateralized by the Company’s building and land use rights and personally guaranteed by Zhenyong Liu, our Chief Executive Officer. Interest payment is made quarterly and is indexed to a floating interest rate, based upon 5% plus the three-month LIBOR, adjustable every three months. The entire principal of $2,816,977 is due and payable on June 30, 2009. The credit facility agreement includes certain covenants that require the Company to maintain (1) the equity to debt (including contingent liabilities) ratio at no less than 50%, and (2) its current ratio at no less than 100%. The Company is in compliance with these covenants as of March 31, 2009.
Long term loan
On August 12, 2008, HBOP entered into a loan agreement with the Rural Credit Cooperative of Xushui, Dayin Branch, for a loan in the amount of RMB 13,280,000 yuan ($1,945,520 as of March 31, 2009). The loan is guaranteed by an unrelated third party, Hebei Chenyang Industry and Trade Group Co., Ltd., and carries a 0.774% interest rate per month. The loan runs for three years, starting September 16, 2008, and is payable on the maturity date of September 16, 2011.
Related party loans
On December 31, 2006, Zhenyong Liu, our Chief Executive Officer and a member of our Board of Directors, loaned money to HBOP for working capital purposes, which amounted to RMB 41,970,716 yuan ($6,157,104 as of December 31, 2008). The loan is non-interest bearing and is to be paid in installments of RMB20,000,000 per year, or as otherwise to be negotiated, depending on the liquidity condition of HBOP. On July 24, 2008, Mr. Liu agreed to change the loan term to three years. As such, the loan, as amended, is non-interest bearing and is due on July 23, 2011.
On August 1, 2008, Shuangxi Zhao, a director of HBOP, loaned money to HBOP for working capital purposes, which amounted to $880,200 as of December 31, 2008. The amount owed bears interest at 7.56% per annum (equivalent to the interest rate determined by the People’s Bank of China), and is due on July 31, 2011.
On August 5, 2008, Xiaodong Liu, a member of our Board of Directors, loaned money to HBOP for working capital purposes, which amounted to $1,100,250 as of December 31, 2008. The amount owed bears interest at 7.56% per annum (equivalent to the interest rate determined by the People’s Bank of China), and is due on August 4, 2011.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our financial position, results of operations, and cash flows.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
| | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | | |
Contractual Obligations | | Total | | Less than
1 year | | 1 – 3 years | | 3 – 5 years | | More than
5 years | |
| | | | | | | | | | | | |
Long-Term Debt Obligations | | $ | 8,795,358 | | $ | 6,849,838 | | $ | — | | $ | 1945,520 | | $ | — | |
R&D Project Obligation Operating Lease Obligations | | | 386,760 | | | 17,580 | | | 35,160 | | | 35,160 | | | 298,860 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 9,182,118 | | $ | 6,867,418 | | $ | 35,160 | | $ | 1,980,680 | | $ | 298,860 | |
| | | | | | | | | | | | | | | | |
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Off Balance Sheet Arrangements
None.
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 (See Note 2 in the Notes to Financial Statements).
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations – Revised 2007” (“SFAS No. 141R”), which replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141Restablishes principles and requirements intending to improve the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports about a business combination and its effects. This is accomplished through requiring the acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. This includes contractual contingencies only if it is more likely than not that they meet the definition of an asset of a liability in FASB Concepts Statement No. 6, “Elements of Financial Statements –a replacement of FASB Concepts Statement No. 3.”This statement also requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual. However, this statement improves the way in which an acquirer’s obligations to make payments conditioned on the outcome of future events are recognized and measured, which in turn improves the measure of goodwill. This statement also defines a bargain purchase as a business combination in which the total acquisition-date fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer. This, therefore, improves the representational faithfulness and completeness of the information provided about both the acquirer’s earnings during the period in which it makes a bargain purchase and the measures of the assets acquired in the bargain purchase. The management of Orient Paper does not expect the adoption of this pronouncement to have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The management of Orient Paper does not expect the adoption of this pronouncement to have a material impact on its financial statements.
In March 2008, the FASB issued FASB Statement No. 161,“Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement 133” (“SFAS No. 161”). SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB No. 133,“Accounting for Derivative Instruments and Hedging Activities”; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, FASB No. 161 requires:
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• | Disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation; |
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• | Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format; |
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• | Disclosure of information about credit-risk-related contingent features; and |
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• | Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed. |
FASB No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Earlier application is encouraged. The management of Orient Paper does not expect the adoption of this pronouncement to have a material impact on its financial statements.
In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. The sources of accounting principles that are generally accepted are categorized in descending order as follows:
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e) | FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB. |
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f) | FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position. |
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g) | AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts (EITF D-Topics). |
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h) | Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry. |
SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to its authoritative literature. It is only effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. The management of Orient Paper does not expect the adoption of this pronouncement to have a material impact on its financial statements.
On May 26, 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“SFAS No. 163”). SFAS No. 163 clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS No. 60”), applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts.
The accounting and disclosure requirements of SFAS No. 163 are intended to improve the comparability and quality of information provided to users of financial statements by creating consistency. Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” That diversity results in inconsistencies in the recognition and measurement of claim liabilities because of differing views about when a loss has been incurred under FASB Statement No. 5, “Accounting for Contingencies” (“SFAS No. 5”). SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (b) the insurance enterprise’s surveillance or watch list.
SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management
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activities. Disclosures about the insurance enterprise’s risk-management activities are effective the first period beginning after issuance of SFAS No. 163. Except for those disclosures, earlier application is not permitted.
The management of the Company does not anticipate that the adoption of these three standards will have a material impact on these financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
N/A.
Item 4. Controls and Procedures.
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Zhenyong Liu, the Company’s Chief Executive Officer (“CEO”), and Winston C. Yen, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the three months ended March 31, 2009. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal controls
Our management, with the participation of our CEO and CFO, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended March 31, 2009. Based on that evaluation, our CEO and CFO concluded that no change occurred in the Company’s internal controls over financial reporting during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
To our knowledge, there is no material litigation pending or threatened against us.
Item 1A. Risk Factors.
N/A.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
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To our knowledge, there are no material defaults upon senior securities.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) Exhibits
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10.1 | Loan Agreement, dated December 31, 2006, by and between Hebei Baoding Orient Paper Milling Company Limited and Zhenyong Liu. |
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10.2 | Loan Agreement, dated August 1, 2008, by and between Hebei Baoding Orient Paper Milling Company Limited and Shuangxi Zhao. |
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10.3 | Loan Agreement, dated August 5, 2008, by and between Hebei Baoding Orient Paper Milling Company Limited and Xiaodong Liu. |
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31.1 | Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002. |
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31.2 | Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002. |
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32.1 | Certification Required Under Section 906 of Sarbanes-Oxley Act of 2002. |
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32.2 | Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002. |
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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.
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| ORIENT PAPER, INC. |
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Dated: May 15, 2009 | By: | /s/ Zhenyong Liu |
| | |
| | Name: Zhenyong Liu |
| | Title: Chief Executive Officer |
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Dated: May 15, 2009 | By: | /s/ Winston C. Yen |
| | |
| | Name: Winston C. Yen |
| | Title: Chief Financial Officer |
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