Item
1. Financial Statements
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2020 AND DECEMBER 31, 2019
(Unaudited)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and bank balances
|
|
$
|
12,828,030
|
|
|
$
|
5,837,745
|
|
Restricted
cash
|
|
|
-
|
|
|
|
-
|
|
Accounts
receivable (net of allowance for doubtful accounts of $57,531 and $59,922 as of June 30, 2020 and December 31, 2019, respectively)
|
|
|
3,164,142
|
|
|
|
3,119,311
|
|
Inventories
|
|
|
5,852,472
|
|
|
|
1,607,463
|
|
Prepayments
and other current assets
|
|
|
5,874,642
|
|
|
|
11,613,241
|
|
Due
from related parties
|
|
|
85,526
|
|
|
|
1,863,479
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
27,804,812
|
|
|
|
24,041,239
|
|
|
|
|
|
|
|
|
|
|
Prepayment
on property, plant and equipment
|
|
|
1,412,529
|
|
|
|
1,433,445
|
|
Property,
plant, and equipment, net
|
|
|
142,422,375
|
|
|
|
151,616,852
|
|
Value-added
tax recoverable
|
|
|
2,444,304
|
|
|
|
2,621,841
|
|
Deferred
tax asset non-current
|
|
|
11,348,246
|
|
|
|
10,485,053
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
185,432,266
|
|
|
$
|
190,198,430
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
6,073,875
|
|
|
$
|
6,163,814
|
|
Current
portion of long-term loans from credit union
|
|
|
3,658,450
|
|
|
|
1,605,459
|
|
Accounts
payable
|
|
|
848,390
|
|
|
|
250,486
|
|
Advance
from customers
|
|
|
184,132
|
|
|
|
98,311
|
|
Notes
payable
|
|
|
-
|
|
|
|
-
|
|
Due
to related parties
|
|
|
657,433
|
|
|
|
539,985
|
|
Accrued
payroll and employee benefits
|
|
|
251,868
|
|
|
|
291,924
|
|
Other
payables and accrued liabilities
|
|
|
4,518,691
|
|
|
|
6,503,010
|
|
Income
taxes payable
|
|
|
399,051
|
|
|
|
1,382,471
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
16,591,890
|
|
|
|
16,835,460
|
|
|
|
|
|
|
|
|
|
|
Loans
from credit union
|
|
|
5,183,982
|
|
|
|
7,367,908
|
|
Derivative
liability
|
|
|
717,070
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities (including amounts of the consolidated VIE without recourse to the Company of $16,746,095 and $19,460,257 as of
June 30, 2020 and December 31, 2019, respectively)
|
|
|
22,492,942
|
|
|
|
24,203,368
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, 500,000,000 shares authorized, $0.001 par value per share, 28,514,816 and 22,054,816 shares issued
|
|
|
28,515
|
|
|
|
22,055
|
|
Additional
paid-in capital
|
|
|
53,974,869
|
|
|
|
51,155,174
|
|
Statutory
earnings reserve
|
|
|
6,080,574
|
|
|
|
6,080,574
|
|
Accumulated
other comprehensive loss
|
|
|
(8,523,112
|
)
|
|
|
(6,057,537
|
)
|
Retained
earnings
|
|
|
111,378,478
|
|
|
|
114,794,796
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
162,939,324
|
|
|
|
165,995,062
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
185,432,266
|
|
|
$
|
190,198,430
|
|
See
accompanying notes to condensed consolidated financial statements.
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,362,273
|
|
|
$
|
33,619,948
|
|
|
$
|
35,106,124
|
|
|
$
|
51,070,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(23,803,444
|
)
|
|
|
(30,711,819
|
)
|
|
|
(32,717,014
|
)
|
|
|
(48,354,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
2,558,829
|
|
|
|
2,908,129
|
|
|
|
2,389,110
|
|
|
|
2,715,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(3,357,472
|
)
|
|
|
(2,407,859
|
)
|
|
|
(6,054,435
|
)
|
|
|
(5,389,332
|
)
|
Gain on acquisition of a subsidiary
|
|
|
-
|
|
|
|
31,397
|
|
|
|
-
|
|
|
|
31,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Operations
|
|
|
(798,643
|
)
|
|
|
531,667
|
|
|
|
(3,665,325
|
)
|
|
|
(2,642,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,451
|
|
|
|
1,556
|
|
|
|
15,241
|
|
|
|
60,374
|
|
Subsidy income
|
|
|
(979
|
)
|
|
|
236,288
|
|
|
|
142,019
|
|
|
|
236,288
|
|
Interest expense
|
|
|
(241,436
|
)
|
|
|
(238,771
|
)
|
|
|
(486,154
|
)
|
|
|
(494,040
|
)
|
Loss on derivative liability
|
|
|
(27,865
|
)
|
|
|
-
|
|
|
|
(27,865
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Income Taxes
|
|
|
(1,059,472
|
)
|
|
|
530,740
|
|
|
|
(4,022,084
|
)
|
|
|
(2,839,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
79,441
|
|
|
|
(80,670
|
)
|
|
|
605,766
|
|
|
|
567,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
|
(980,031
|
)
|
|
|
450,070
|
|
|
|
(3,416,318
|
)
|
|
|
(2,272,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
124,179
|
|
|
|
(3,548,683
|
)
|
|
|
(2,465,575
|
)
|
|
|
(255,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
$
|
(855,852
|
)
|
|
$
|
(3,098,613
|
)
|
|
$
|
(5,881,893
|
)
|
|
$
|
(2,527,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted (Losses) Earnings per Share
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – Basic and Diluted
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
See
accompanying notes to condensed consolidated financial statements.
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
(3,416,318
|
)
|
|
$
|
(2,272,525
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,496,314
|
|
|
|
7,789,459
|
|
Loss on derivative liability
|
|
|
27,865
|
|
|
|
-
|
|
(Recovery from) Allowance for bad debts
|
|
|
(1,525
|
)
|
|
|
6,224
|
|
Share-based compensation and expenses
|
|
|
1,242,000
|
|
|
|
-
|
|
Gain on acquisition of a subsidiary
|
|
|
-
|
|
|
|
(31,397
|
)
|
Deferred tax
|
|
|
(1,021,699
|
)
|
|
|
(1,259,134
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(89,311
|
)
|
|
|
(311,265
|
)
|
Prepayments and other current assets
|
|
|
5,739,395
|
|
|
|
60,694
|
|
Inventories
|
|
|
(4,291,622
|
)
|
|
|
(2,920,950
|
)
|
Accounts payable
|
|
|
604,823
|
|
|
|
502,310
|
|
Advance from customers
|
|
|
87,729
|
|
|
|
102,170
|
|
Notes payable
|
|
|
-
|
|
|
|
(3,691,999
|
)
|
Related parties
|
|
|
1,878,231
|
|
|
|
161,857
|
|
Accrued payroll and employee benefits
|
|
|
(35,990
|
)
|
|
|
39,237
|
|
Other payables and accrued liabilities
|
|
|
(1,394,793
|
)
|
|
|
558,026
|
|
Income taxes payable
|
|
|
(968,474
|
)
|
|
|
454,984
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
5,856,625
|
|
|
|
(812,309
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(981,150
|
)
|
|
|
(3,472,355
|
)
|
Acquisition of a subsidiary
|
|
|
-
|
|
|
|
(1,549,384
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(981,150
|
)
|
|
|
(5,021,739
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares and warrants, net
|
|
|
2,273,360
|
|
|
|
-
|
|
Proceeds from short term bank loans
|
|
|
-
|
|
|
|
3,987,359
|
|
Proceeds from credit union loans
|
|
|
-
|
|
|
|
2,362,879
|
|
Repayment of bank loans
|
|
|
-
|
|
|
|
(11,637,180
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
2,273,360
|
|
|
|
(5,286,942
|
)
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
(158,550
|
)
|
|
|
137,936
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
6,990,285
|
|
|
|
(10,983,054
|
)
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash - Beginning of Period
|
|
|
5,837,745
|
|
|
|
12,117,425
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash - End of Period
|
|
$
|
12,828,030
|
|
|
$
|
1,134,371
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest cost
|
|
$
|
288,463
|
|
|
$
|
445,860
|
|
Cash paid for income taxes
|
|
$
|
1,369,690
|
|
|
$
|
222,278
|
|
|
|
|
|
|
|
|
|
|
Cash and bank balances
|
|
|
12,828,030
|
|
|
|
1,134,371
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
|
12,828,030
|
|
|
|
1,134,371
|
|
See
accompanying notes to condensed consolidated financial statements.
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Statutory
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserve
|
|
|
Income (loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
22,054,816
|
|
|
$
|
22,685
|
|
|
$
|
51,154,544
|
|
|
$
|
6,080,574
|
|
|
$
|
(6,057,537
|
)
|
|
$
|
114,794,796
|
|
|
$
|
165,995,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to officer and directors
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
1,198,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,000
|
|
Issuance of shares
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
1,579,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584,155
|
|
Issuance of shares to a consultant
|
|
|
60,000
|
|
|
|
60
|
|
|
|
41,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,465,575
|
)
|
|
|
|
|
|
|
(2,465,575
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,416,318
|
)
|
|
|
(3,416,318
|
)
|
Balance at June 30, 2020
|
|
|
28,514,816
|
|
|
$
|
28,515
|
|
|
$
|
53,974,869
|
|
|
$
|
6,080,574
|
|
|
$
|
(8,523,112
|
)
|
|
$
|
111,378,478
|
|
|
$
|
162,939,324
|
|
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Organization and Business Background
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 Dongfang Paper Milling
Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and
effective December 21, 2007, we changed our name to “Orient Paper, Inc.”.
Effective
on August 1, 2018, we changed our corporate name to 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
October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang
Zhiye 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 Dongfang Paper and such shares of Dongfang Paper
were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders
of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s
behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant
PRC Administration of Industry and Commerce as the 100% owner of Dongfang 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, Dongfang
Paper, became an indirectly owned subsidiary of the Company.
Dongfang
Holding, as the 100% owner of Dongfang Paper, was unable to complete the registration of Dongfang 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 Dongfang Paper to their original shareholders,
and the original Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding
Shengde”) to transfer the control of Dongfang Paper over to Baoding 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, a Nevada corporation. Shengde Holdings Inc was incorporated in the State of Nevada
on February 25, 2009. On June 1, 2009, Shengde Holdings Inc incorporated Baoding Shengde, a limited liability company organized
under the laws of the PRC. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as a wholly
foreign-owned entity under PRC law.
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 Dongfang Paper with certain PRC regulations,
on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”) with
Dongfang Paper and Dongfang Paper Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde
Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Baoding 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).
Baoding 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 Baoding Shengde shall provide exclusive technical, business and management
consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80% of Dongfang Paper’s
total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal
amount of $10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its
proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among
other things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each
owner’s equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should
pay to each of Dongfang Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which
provides that Dongfang Paper Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security
for their obligations under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose
of the pledged equity interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement
or Dongfang Paper fails to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting
Agreement; and (v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding
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 Dongfang Paper or with respect to any equity owner action to be taken in accordance
with the laws and Dongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as
long as Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. An Dongfang Paper Equity Owner will
cease to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the
Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009, and continued
to control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements
is considered as a business combination under common control.
On
February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate
the above-mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through
Baoding Shengde instead of Dongfang Paper, 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
Dongfang Paper and its businesses in the PRC.
An
agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010,
reiterating that Baoding Shengde is entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the above mentioned
Contractual Agreements. In addition, Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s
unappropriated earnings as dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and
thereafter.
On
June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei
Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire
Hebei Tengsheng. Upon full payment of the consideration in the amount of RMB 320 million (approximately $45 million), Hebei Tengsheng
will become a wholly owned subsidiary of Dongfang Paper that manufactures and sells tissue paper products.
The
Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company
is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective
control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang
Paper being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the
Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”).
The revenue generated from Dongfang Paper for the three months ended June 30, 2020 and 2019 was accounted for 96.79% and 100%
of the Company’s total revenue, repectively. The revenue generated from Dongfang Paper for the six months ended June 30,
2020 and 2019 was accounted for 97.59% and 100% of the Company’s total revenue, respectively. Dongfang Paper also accounted
for 90.15% and 91.01% of the total assets of the Company as of June 30, 2020 and December 31, 2019, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of June 30, 2020 and December 31, 2019, details of the Company’s subsidiaries and variable interest entities are as follows:
|
|
Date
of
|
|
Place
of
|
|
|
|
|
|
|
|
Incorporation
|
|
Incorporation
or
|
|
Percentage
of
|
|
|
|
Name
|
|
or
Establishment
|
|
Establishment
|
|
Ownership
|
|
|
Principal
Activity
|
Subsidiary:
|
|
|
|
|
|
|
|
|
|
Dongfang
Holding
|
|
November
13, 2006
|
|
BVI
|
|
|
100
|
%
|
|
Inactive
investment holding
|
Shengde
Holdings
|
|
February
25, 2009
|
|
State
of Nevada
|
|
|
100
|
%
|
|
Investment
holding
|
Baoding
Shengde
|
|
June
1, 2009
|
|
PRC
|
|
|
100
|
%
|
|
Paper
production and distribution
|
|
|
|
|
|
|
|
|
|
|
|
Variable
interest entity (“VIE”):
|
|
|
|
|
|
|
|
|
|
|
Dongfang
Paper
|
|
March
10, 1996
|
|
PRC
|
|
|
Control*
|
|
|
Paper
production and distribution
|
|
*
|
Dongfang
Paper is treated as a 100% controlled variable interest entity of the Company.
|
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.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company has aggregated the financial information of Dongfang Paper in the table below. The aggregate carrying value of Dongfang
Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed
consolidated balance sheets as of June 30, 2020 and December 31, 2019 are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and bank balances
|
|
$
|
10,497,051
|
|
|
$
|
5,675,374
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable
|
|
|
3,077,201
|
|
|
|
3,119,312
|
|
Inventories
|
|
|
5,820,389
|
|
|
|
1,603,038
|
|
Prepayments and other current assets
|
|
|
5,872,022
|
|
|
|
11,610,576
|
|
Due from related parties
|
|
|
85,525
|
|
|
|
1,863,479
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,352,188
|
|
|
|
23,871,779
|
|
|
|
|
|
|
|
|
|
|
Prepayment on property, plant and equipment
|
|
|
1,412,529
|
|
|
|
1,433,445
|
|
Property, plant, and equipment, net
|
|
|
130,563,350
|
|
|
|
138,920,440
|
|
Deferred tax asset non-current
|
|
|
9,834,828
|
|
|
|
8,869,385
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
167,162,895
|
|
|
$
|
173,095,049
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
6,073,875
|
|
|
$
|
6,163,814
|
|
Current portion of long-term loans from credit union
|
|
|
409,633
|
|
|
|
315,358
|
|
Accounts payable
|
|
|
821,310
|
|
|
|
250,486
|
|
Advance from customers
|
|
|
184,132
|
|
|
|
98,311
|
|
Due to related parties
|
|
|
-
|
|
|
|
56,552
|
|
Accrued payroll and employee benefits
|
|
|
233,844
|
|
|
|
287,584
|
|
Other payables and accrued liabilities
|
|
|
4,471,918
|
|
|
|
6,502,974
|
|
Income taxes payable
|
|
|
399,051
|
|
|
|
1,382,471
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,593,763
|
|
|
|
15,057,550
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
4,336,464
|
|
|
|
4,501,018
|
|
Loans from a related party
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
16,930,227
|
|
|
$
|
19,558,568
|
|
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.
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, 2019 of the Company, and its subsidiaries
and variable interest entity (which we sometimes refer to collectively as “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 June 30, 2020 and the results of operations for the six months ended June 30,
2020 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.
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 June 30, 2020 and December 31, 2019, 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.
Management determined that liabilities created
by beneficial conversion features associated with the issuance of certain warrants (see “Derivative liabilities”
under Note (10)), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these
derivative liabilities was determined based on management’s estimate of the expected future cash flows required to settle
the liabilities. This valuation technique involves management’s estimates and 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-Employees to 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.
(3)
Restricted Cash
Restricted
cash was nil as of June 30, 2020 and December 31, 2019.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4)
Inventories
Raw
materials inventory includes mainly recycled paper board and 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 June
30, 2020 and December 31, 2019:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw Materials
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
4,116,442
|
|
|
$
|
40,032
|
|
Recycled white scrap paper
|
|
|
130,972
|
|
|
|
10,541
|
|
Gas
|
|
|
111,573
|
|
|
|
41,675
|
|
Base paper, mask fabric and other raw materials
|
|
|
309,692
|
|
|
|
293,935
|
|
|
|
|
4,668,680
|
|
|
|
386,183
|
|
Semi-finished Goods
|
|
|
122,010
|
|
|
|
83,266
|
|
Finished Goods
|
|
|
1,061,782
|
|
|
|
1,212,849
|
|
Total inventory, gross
|
|
|
5,852,472
|
|
|
|
1,682,298
|
|
Inventory reserve
|
|
|
-
|
|
|
|
(74,835
|
)
|
Total inventory, net
|
|
$
|
5,852,472
|
|
|
$
|
1,607,463
|
|
(5)
Prepayments and other current assets
Prepayments
and other current assets consisted of the following as of June 30, 2020 and December 31, 2019:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid land lease
|
|
$
|
169,504
|
|
|
$
|
301,023
|
|
Prepayment for purchase of materials
|
|
|
60,510
|
|
|
|
5,394,297
|
|
Value-added tax recoverable
|
|
|
5,408,783
|
|
|
|
5,666,975
|
|
Others
|
|
|
235,845
|
|
|
|
250,946
|
|
|
|
$
|
5,874,642
|
|
|
$
|
11,613,241
|
|
(6)
Property, plant and equipment, net
As
of June 30, 2020 and December 31, 2019, property, plant and equipment consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Property, Plant, and Equipment:
|
|
|
|
|
|
|
Land use rights
|
|
$
|
11,518,553
|
|
|
$
|
11,689,114
|
|
Building and improvements
|
|
|
69,778,558
|
|
|
|
70,811,803
|
|
Machinery and equipment
|
|
|
150,856,392
|
|
|
|
152,954,020
|
|
Vehicles
|
|
|
579,229
|
|
|
|
587,806
|
|
Construction in progress
|
|
|
6,646,105
|
|
|
|
6,399,986
|
|
Totals
|
|
|
239,378,837
|
|
|
|
242,442,729
|
|
Less: accumulated depreciation and amortization
|
|
|
(96,956,462
|
)
|
|
|
(90,825,877
|
)
|
Property, Plant and Equipment, net
|
|
$
|
142,422,375
|
|
|
$
|
151,616,852
|
|
As
of June 30, 2020 and December 31, 2019, land use rights represented two parcel of state-owned lands located in Xushui District
and Wei County of Hebei Province in China, with lease terms of 50 years expiring in 2061 and 2066, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Construction
in progress mainly represents payments for paper machine of a new tissue paper production line PM10 and improvement of the office
building and essentially all industrial-use buildings in the Headquarters Compound.
As
of June 30, 2020 and December 31, 2019, certain property, plant and equipment of Dongfang Paper with net values of $3,013,792
and $3,935,270, respectively, have been pledged pursuant to a long-term loan from credit union for Dongfang Paper. Land use right
of Dongfang Paper with net values of $5,606,524 and $5,757,546 as of June 30, 2020 and December 31, 2019, respectively, was pledged
for the bank loan from Industrial & Commercial Bank of China. Land use right of Hebei Tengsheng with net value of $5,124,570
and $5,200,452 as of June 30, 2020 and December 31, 2019, respectively, was pledged for a long-term loan from credit union of
Baoding Shengde. In addition, land use right of Hebei Tengsheng with net value of $7,939,368 and $8,056,930 as of June 30, 2020
and December 31, 2019, respectively, was pledged for another long-term loan from credit union of Baoding Shengde. See “Short-term
bank loans” and “Long-term loans from credit union” under Note (7), Loans Payable, for details of the transaction
and asset collaterals.
Depreciation
and amortization of property, plant and equipment was $3,721,640 and $3,859,399 for the three months ended June 30, 2020 and 2019,
respectively. Depreciation and amortization of property, plant and equipment was $7,496,314 and $7,789,459 for the six months
ended June 30, 2020 and 2019, respectively.
(7)
Loans Payable
Short-term
bank loans
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
$
|
6,073,875
|
|
|
$
|
6,163,814
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
$
|
6,073,875
|
|
|
$
|
6,163,814
|
|
On
December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,073,875 and $6,163,814
as of June 30, 2020 and December 31, 2019, respectively. The working capital loan was secured by land use right of Hebei Tengsheng
as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and
repaid by December 23, 2020.
As
of June 30, 2020, there were guaranteed short-term borrowings of $6,073,875 and unsecured bank loans of $nil. As of December 31,
2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil.
The
average short-term borrowing rates for the three months ended June 30, 2020 and 2019 were approximately 4.79% and 4.77%, respectively.
The average short-term borrowing rates for the six months ended June 30, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-term
loans from credit union
As
of June 30, 2020 and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443 and $8,973,367,
respectively.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Rural Credit Union of Xushui District Loan 1
|
|
$
|
1,214,775
|
|
|
$
|
1,232,763
|
|
Rural Credit Union of Xushui District Loan 2
|
|
|
3,531,322
|
|
|
|
3,583,613
|
|
Rural Credit Union of Xushui District Loan 3
|
|
|
2,260,047
|
|
|
|
2,293,512
|
|
Rural Credit Union of Xushui District Loan 4
|
|
|
1,836,288
|
|
|
|
1,863,479
|
|
Total
|
|
|
8,842,432
|
|
|
|
8,973,367
|
|
Less: Current portion of long-term loans from credit union
|
|
|
(3,658,450
|
)
|
|
|
(1,605,459
|
)
|
Long-term loans from credit union
|
|
$
|
5,183,982
|
|
|
$
|
7,367,908
|
|
As
of June 30, 2020, the Company’s long-term debt repayments for the next five years were as follows:
|
|
Amount
|
|
Fiscal year
|
|
|
|
Remainder of 2020
|
|
$
|
1,582,033
|
|
2021
|
|
|
3,022,812
|
|
2022
|
|
|
1,553,782
|
|
2023
|
|
|
2,683,805
|
|
Total
|
|
|
8,842,432
|
|
On
April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due 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 0.64% per month. On November 6, 2018, the loan was renewed
for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of June
30, 2020 and December 31, 2019, total outstanding loan balance was $1,214,775 and $1,232,763, respectively. Out of the total outstanding
loan balance, current portion amounted were $169,503 and $143,345 as of June 30, 2020 and December 31, 2019, respectively, which
are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,045,272 and $1,089,418
are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020 and December 31, 2019, respectively.
On
July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was 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 will be due and payable in various installments from December 21, 2018 to June 20, 2023.
The loan is secured by certain of the Company’s manufacturing equipment with net book value of $3,013,792 and $3,935,270
as of June 30, 2020 and December 31, 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per
month. As of June 30, 2020 and December 31, 2019, the total outstanding loan balance was $3,531,322 and $3,583,613, respectively.
Out of the total outstanding loan balance, current portion amounted were $240,130 and $172,013 as of June 30, 2020 and December
31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $3,291,192 and $3,411,600 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020 and
December 31, 2019, respectively.
On
April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng
with its land use right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of
0.6% per month. As of June 30, 2020 and December 31, 2019, the total outstanding loan balance was $2,260,047 and $2,293,512, respectively.
Out of the total outstanding loan balance, current portion amounted were $2,260,047 and $1,146,756 as of June 30, 2020 and December
31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $nil and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020 and December
31, 2019, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 is secured by Hebei Tengsheng
with its land use right as collateral for the benefit of the bank. Interest payment is due monthly and bears a fixed rate of 7.56%
per annum. As of June 30, 2020 and December 31, 2019, the total outstanding loan balance was $1,836,288 and $1,863,479, respectively.
Out of the total outstanding loan balance, current portion amounted were $988,770 and $143,345 as of June 30, 2020 and December
31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $847,518 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020 and
December 31, 2019, respectively.
Total
interest expenses for the short-term bank loans and long-term loans for the three months ended June 30, 2020 and 2019 were $241,436
and $214,907, respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months ended
June 30, 2020 and 2019 were $486,154 and $445,860, respectively.
(8)
Related Party Transactions
Mr.
Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On
January 1, 2013, Dongfang Paper 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 $362,079 and $367,441 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 June 30, 2020 and December 31, 2019, respectively.
On
December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083 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 June 30, 2020 and December 31, 2019, approximately $42,376 and
$43,003 of interest 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.
On
March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount
up to $ 16,950,350 (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 $4,324,636
was drawn from the facility. On October 14, 2016, an unsecured amount of $2,883,091 was drawn from the 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 June 30, 2020 and December 31, 2019, the outstanding loan balance were $nil and
the accrued interest was $194,134 and $197,009, respectively, which was recorded in other payables and accrued liabilities as
part of the current liabilities in the consolidated balance sheet.
As
of June 30, 2020 and December 31, 2019, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred
for such related party loans are $nil and $23,865 for the three months ended June 30, 2020 and 2019, respectively. The interest
expenses incurred for such related party loans are $nil and $48,180 for the six months ended June 30, 2020 and 2019, respectively.
The accrued interest owed to Mr. Zhenyong Liu was approximately $598,589 and $607,453, as of June 30, 2020 and December 31, 2019,
respectively, which was recorded in other payables and accrued liabilities.
As
of June 30, 2020 and December 31, 2019, amount due to shareholder are $657,433 and $483,433, respectively, which represents funds
from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.
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 $142,019 (RMB1,000,000).
The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements
with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same rental payment as original
lease agreement.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9)
Other payables and accrued liabilities
Other
payables and accrued liabilities consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued electricity
|
|
$
|
118,688
|
|
|
$
|
129,466
|
|
Value-added tax payable
|
|
|
99,729
|
|
|
|
854,728
|
|
Accrued interest to a related party
|
|
|
598,589
|
|
|
|
607,453
|
|
Payable for purchase of equipment
|
|
|
3,376,452
|
|
|
|
3,936,047
|
|
Accrued commission to salesmen
|
|
|
13,660
|
|
|
|
17,162
|
|
Accrued bank loan interest
|
|
|
196,624
|
|
|
|
-
|
|
Others
|
|
|
114,949
|
|
|
|
958,154
|
|
Totals
|
|
$
|
4,518,691
|
|
|
$
|
6,503,010
|
|
(10)
Derivative Liabilities
The
Company 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 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 above 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 our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model
to calculate the fair value as of June 30, 2020. 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 June 30, 2020:
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
Expected term
|
|
|
2.68- 2.75
|
|
Expected average volatility
|
|
|
85 - 88%
|
|
Expected dividend yield
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.18 - 0.24%
|
|
The
following table summarizes the changes in the derivative liabilities during the six months ended June 30, 2020:
Fair Value Measurements Using Significant Observable Inputs (Level 3)
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
-
|
|
Addition of new derivatives recognized as warrant
|
|
|
689,205
|
|
Addition of new derivatives recognized as loss on derivatives
|
|
|
306,215
|
|
Change in fair value of derivative liability
|
|
|
(278,350
|
)
|
Balance at June 30, 2020
|
|
$
|
717,070
|
|
The
following table summarizes the loss on derivative liability included in the income statement for the six months ended June 30,
2020 and 2019, respectively.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Day one loss due to derivative liabilities as warrant
|
|
$
|
306,215
|
|
|
$
|
-
|
|
Loss on change in fair value of derivative liability
|
|
|
(278,350
|
)
|
|
|
-
|
|
|
|
|
27,865
|
|
|
|
-
|
|
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11)
Common Stock
Issuance
of common stock to investors
On
August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our
common stock. Each share of common stock and accompanying warrant was sold at a price of $1.60.
On
April 29, 2020, the Company and 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 4,400,000 shares of common stock in a registered direct offering and warrants to purchase up to 4,400,000 shares of the Company’s
common stock in a concurrent private placement, for gross proceeds of approximately $2.55 million (net proceeds of approximately
2.27 million). The purchase price for each share of Common Stock and the corresponding warrant was $0.58.
Issuance
of common stock pursuant to the 2012 Incentive Stock Plan, 2015 Omnibus Equity Incentive and 2019 Omnibus Equity Incentive
On
January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans
to nine officers, directors and 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 granted under the 2012 Incentive Stock Plan and 965,500
shares were granted under the 2015 Omnibus Equity Incentive. Please see Note (14), Stock Incentive Plans for more details. Total
fair value of the stock was calculated at $1,417,395 as of the date of grant.
On
September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen
officers, directors and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair
value of the shares of common stock granted was calculated at $470,360 as of the date of issuance.
On
April 2, 2020, the compensation committee granted an aggregate of 2,000,000 shares of restricted common stock to fifteen officers,
directors and employees of the Company, which were granted under the 2019 Omnibus Equity Incentive Plan. Total fair value of the
shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share.
Issuance
of common stock to Weitian
On
October 15, 2018, the Company entered into an agreement with Weitian Group LCC (“Weitian”) and agreed as compensation
to issue to Weitian in the aggregate of 70,000 shares of common stock for investor relation consulting service rendered from October
15, 2018 to October 15, 2019. 37,500 shares of common stock were issued to Weitian on November 12, 2018. Total fair value of the
shares of common stock granted was calculated at $32,625 at $0.87 per share. 32,500 shares of common stock were issued to Weitian
on August 13, 2019. Total fair value of the shares of common stock granted was calculated at $17,550 at $0.54 per share.
Issuance
of common stock to a consultant
On
January 2, 2020, the Company entered into an agreement with a consultant and agreed as compensation to issue to the consultant
in the aggregate of 60,000 shares of common stock for merge and acquisition consulting service rendered from January 2, 2020 to
January 2, 2021. 60,000 shares of common stock were issued to this consultant on April 28, 2020. Total fair value of the shares
of common stock issued was calculated at $42,000 at $0.70 per share.
(12) Warrants
Pursuant to the 2020 Purchase Agreement,
the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock and warrants to purchase up to
4,400,000 shares of the Common Stock in a concurrent private placement. The exercise price of the warrant is $0.7425 per
share. These warrants are exercisable on November 4, 2020 and have a term of exercise equal to five years and six months from
the date of issuance till November 4, 2025. The Company classified warrant as liabilities and accounted for the issuance of
the Warrants as a derivative.
A
summary of stock warrant activities is as below:
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
Weight
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
|
Number
|
|
|
price
|
|
Outstanding and exercisable at beginning of the period
|
|
|
|
|
|
$
|
|
|
Issued during the period
|
|
|
4,400,000
|
|
|
|
0.7425
|
|
Exercised during the period
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired during the period
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at end of the period
|
|
|
4,400,000
|
|
|
$
|
0.7425
|
|
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes information
relating to outstanding and exercisable warrants as of June 30, 2020.
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Number of
|
|
|
Weighted Average Remaining
Contractual life
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
Shares
|
|
|
(in years)
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
4,400,000
|
|
|
|
5.34
|
|
|
$
|
0.7425
|
|
|
|
4,400,000
|
|
|
$
|
0.7425
|
|
Aggregate 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 at June 30, 2020
for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants).
There is no intrinsic value of the warrants as of June 30, 2020.
(13)
Earnings Per Share
For
the three months ended June 30, 2020 and 2019, basic and diluted net income per share are calculated as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Basic (loss) income per share
|
|
|
|
|
|
|
Net (loss) income for the period - numerator
|
|
$
|
(980,031
|
)
|
|
$
|
450,070
|
|
Weighted average common stock outstanding - denominator
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
Net income for the period- numerator
|
|
$
|
(980,031
|
)
|
|
$
|
450,070
|
|
Weighted average common stock outstanding - denominator
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
For
the six months ended June 30, 2020 and 2019, basic and diluted net income per share are calculated as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Basic loss per share
|
|
|
|
|
|
|
Net loss for the period - numerator
|
|
$
|
(3,416,318
|
)
|
|
$
|
(2,272,525
|
)
|
Weighted average common stock outstanding - denominator
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
Net loss for the period - numerator
|
|
$
|
(3,416,318
|
)
|
|
$
|
(2,272,525
|
)
|
Weighted average common stock outstanding - denominator
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
24,444,761
|
|
|
|
22,022,316
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.10
|
)
|
For
the three and six months ended June 30, 2020 and 2019 there were no securities with dilutive effect issued and outstanding.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(14)
Income Taxes
United
States
The
Company and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory
tax rates up to 34% and 0%, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJAAct”),
which significantly changed U.S. tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate
from the highest rate of 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign
income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that
were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting
Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement
period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In
accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete
but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company
cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the
basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA.
In
connection with the Company’s initial analysis of the impact of the enactment of the 2017 TCJA, the Company recorded a net
tax expense of approximately $80,000 in the fourth quarter of 2017. For various reasons that are discussed more fully below, including
the issuance of additional technical and interpretive guidance, the Company has not completed its accounting for the income tax
effects of certain elements of the 2017 TCJA. However, with respect to the following, the Company was able to make reasonable
estimates of the 2017 TCJA’s effects and, as such, recorded provisional amounts:
Transition
tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the
Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition
to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes
paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified
assets. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional
income tax expense of approximately $80,000 in the fourth quarter of 2017. However, the Company is continuing to gather additional
information and will consider additional technical guidance to more precisely compute and account for the amount of the transition
tax. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S.
federal taxation and finalizes the amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable
over eight years beginning in 2018. Hence, the Company only provided $6,528 for the year ended 31 December 2017.
PRC
Dongfang
Paper and Baoding 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 June 30, 2020 and 2019 were as follows:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
Current Tax Provision U.S.
|
|
$
|
14,717
|
|
|
$
|
14,747
|
|
Current Tax Provision PRC
|
|
|
386,499
|
|
|
|
677,262
|
|
Deferred Tax Provision PRC
|
|
|
(480,657
|
)
|
|
|
(611,339
|
)
|
Total Provision for (Deferred tax benefit)/ Income Taxes
|
|
$
|
(79,441
|
)
|
|
$
|
80,670
|
|
The
provisions for income taxes for the six months ended June 30, 2020 and 2019 were as follows:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
Current Tax Provision U.S.
|
|
$
|
14,747
|
|
|
$
|
14,747
|
|
Current Tax Provision PRC
|
|
|
401,186
|
|
|
|
677,262
|
|
Deferred Tax Provision PRC
|
|
|
(1,021,699
|
)
|
|
|
(1,259,134
|
)
|
Total Provision for (Deferred tax benefit)/ Income Taxes
|
|
$
|
(605,766
|
)
|
|
$
|
(567,125
|
)
|
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 aggregate net
operating losses of approximately $nil and $6,710,939 for U.S. income tax purposes for the years ended December 31, 2018 and 2017,
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 December 31, 2019, 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 December 31, 2019, 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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
|
|
$
|
10,271,940
|
|
|
$
|
9,277,009
|
|
Impairment of property, plant and equipment
|
|
|
506,368
|
|
|
|
521,803
|
|
Miscellaneous
|
|
|
244,644
|
|
|
|
277,511
|
|
Net operating loss carryover of PRC company
|
|
|
325,294
|
|
|
|
408,730
|
|
Total deferred tax assets
|
|
|
11,348,246
|
|
|
|
10,485,053
|
|
Less: Valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax assets, net
|
|
$
|
11,348,246
|
|
|
$
|
10,485,053
|
|
The
following table reconciles the statutory rates to the Company’s effective tax rate for:
|
|
Three Months Ended
|
|
|
|
June 30
|
|
|
|
2020
|
|
|
2019
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of different tax jurisdiction
|
|
|
-
|
|
|
|
-
|
|
Effect of reconciling items in the PRC for tax purposes
|
|
|
(17.5
|
)
|
|
|
(9.8
|
)
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Effective income tax rate
|
|
|
7.5
|
%
|
|
|
15.2
|
%
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2020
|
|
|
2019
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of different tax jurisdiction
|
|
|
-
|
|
|
|
-
|
|
Effect of reconciling items in the PRC for tax purposes
|
|
|
(9.9
|
)
|
|
|
(5
|
)
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Effective income tax rate
|
|
|
15.1
|
%
|
|
|
20
|
%
|
During
the three months ended June 30, 2020 and 2019, the effective income tax rate was estimated by the Company to be 7.5% and 15.2%,
respectively.
During
the six months ended June 30, 2020 and 2019, the effective income tax rate was estimated by the Company to be 15.1% and 20%, respectively.
As
of December 31, 2017, except for the 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 the available U.S. tax deductions 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 believes 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 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.
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 December 31, 2019 and 2018, 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 consolidated financial
statements for the years ended December 31, 2019 and 2018, 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.
(15)
Stock Incentive Plans
Issuance
of common stock pursuant to the 2011 Incentive Stock Plan and 2012 Incentive Stock Plan
On
August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan of IT Tech Packaging, 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 IT Tech Packaging, 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 Stock Plan
On
August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging,
Inc. (the “2015 ISP”) as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company
may grant an aggregate of 1,500,000 shares of the Company’s common stock to the directors, officers, employees and/or consultants
of the Company and its subsidiaries. On January 12, 2016, the Compensation Committee granted restricted common shares of 1,133,916,
of which 168,416 shares were granted under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors,
employees and a consultant of the Company as compensation for their services in the past years. Total fair value of the stock
was calculated at $1,417,395 as of the date of issuance at $1.25 per share.
On
September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors
and employees of the Company, which were granted under the 2015 ISP. Total fair value of the shares of common stock granted was
calculated at $470,360 as of the date of issuance at $0.88 per share.
2019
Incentive Stock Plan
On
October 31, 2019, the shareholders of the Company at the Company’s Annual Shareholders General Meeting adopted and approved
the 2019 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2019 ISP”). Under the 2019 ISP, the Company
has reserved a total of 2,000,000 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. On April 2, 2020, 2,000,000 shares of common stock were granted
under the 2019 ISP. Total fair value of the shares of common stock granted was calculated at $1,200,000 as of the date of issuance
at $0.60 per share.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(16)
Commitments and Contingencies
Operating
Lease
The
Company leases 32.95 acres of land from a local government in Xushui District, Baoding City, Hebei, China through a real estate
lease with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,042
(RMB120,000). This operating lease is renewable at the end of the 30-year term.
As
mentioned in Note (8) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei
Fangsheng agrees to lease the Industrial Buildings back to the Company at an annual rental of $142,019 (RMB1,000,000), for a total
term of up to five years.
Future
minimum lease payments of all operating leases are as follows:
June 30,
|
|
Amount
|
|
2021
|
|
|
158,203
|
|
2022
|
|
|
158,203
|
|
2023
|
|
|
13,822
|
|
2024
|
|
|
16,950
|
|
2025
|
|
|
16,950
|
|
Thereafter
|
|
|
110,177
|
|
Total operating lease payments
|
|
$
|
474,307
|
|
Capital
commitment
As
of June 30, 2020, the Company has signed several contracts for purchase of paper machine of a new tissue paper production line
PM10 and improvement of Industrial Buildings. Total outstanding commitments under these contracts were $5,205,861 and $1,101,989
as of June 30, 2020 and December 31, 2019, respectively. The Company expected to pay off all the balances within 1-3 years.
On
June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei
Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire
Hebei Tengsheng. The consideration for the acquisition is RMB320 million (approximately $45 million), of which $1.4 million was
paid by the Company, and the balance consideration of $43.6 million is payable by December 31, 2021.
Guarantees
and Indemnities
The
Company agreed with Baoding Huanrun Trading Co., Ltd.(“Baoding Huanrun”), a major supplier of raw materials, to guarantee
certain obligations of this third party, and as of June 30, 2020 and December 31, 2019, the Company guaranteed its long-term loan
from financial institutions amounting to $4,378,840 (RMB31,000,000) that matured at various times in 2020-2023. If Baoding Huanrun
were to become insolvent, the Company could be materially adversely affected.
(17)
Segment Reporting
Since
March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business
operating segments: Dongfang Paper, which produces offset printing paper and corrugating medium paper and Baoding Shengde, which
produces digital photo paper and single-use face masks. 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
between the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui District,
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 three reportable segments
is as follows:
|
|
Three Months Ended
|
|
|
|
June 30, 2020
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,136,915
|
|
|
$
|
2,379,806
|
|
|
$
|
845,552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,362,273
|
|
Gross profit
|
|
|
2,429,407
|
|
|
|
(373,977
|
)
|
|
|
503,399
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,558,829
|
|
Depreciation and amortization
|
|
|
1,617,412
|
|
|
|
2,105,130
|
|
|
|
(902
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,721,640
|
|
Interest income
|
|
|
7,577
|
|
|
|
464
|
|
|
|
1,410
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,451
|
|
Interest expense
|
|
|
165,416
|
|
|
|
-
|
|
|
|
76,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241,436
|
|
Income tax expense(benefit)
|
|
|
357,463
|
|
|
|
(525,769
|
)
|
|
|
88,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(79,441
|
)
|
Net income (loss)
|
|
|
1,441,234
|
|
|
|
(1,349,174
|
)
|
|
|
324,495
|
|
|
|
(1,396,586
|
)
|
|
|
-
|
|
|
|
(980,031
|
)
|
|
|
Three Months Ended
|
|
|
|
June 30, 2019
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,413,830
|
|
|
$
|
1,206,118
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,619,948
|
|
Gross profit
|
|
|
3,581,797
|
|
|
|
(673,668
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,908,129
|
|
Depreciation and amortization
|
|
|
1,656,695
|
|
|
|
2,202,698
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,859,399
|
|
Interest income
|
|
|
1,468
|
|
|
|
26
|
|
|
|
62
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,556
|
|
Interest expense
|
|
|
199,615
|
|
|
|
-
|
|
|
|
39,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
238,771
|
|
Income tax expense(benefit)
|
|
|
631,292
|
|
|
|
(550,448
|
)
|
|
|
(14,921
|
)
|
|
|
14,747
|
|
|
|
-
|
|
|
|
80,670
|
|
Net income (loss)
|
|
|
2,480,493
|
|
|
|
(1,980,144
|
)
|
|
|
(33,415
|
)
|
|
|
(48,261
|
)
|
|
|
31,397
|
|
|
|
450,070
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
30,874,417
|
|
|
$
|
3,386,155
|
|
|
$
|
845,552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,106,124
|
|
Gross profit
|
|
|
2,971,562
|
|
|
|
(1,085,851
|
)
|
|
|
503,399
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,389,110
|
|
Depreciation and amortization
|
|
|
3,124,039
|
|
|
|
4,240,501
|
|
|
|
131,774
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,496,314
|
|
Interest income
|
|
|
13,094
|
|
|
|
547
|
|
|
|
1,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,241
|
|
Interest expense
|
|
|
332,997
|
|
|
|
-
|
|
|
|
153,157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
486,154
|
|
Income tax expense(benefit)
|
|
|
349,100
|
|
|
|
(1,048,685
|
)
|
|
|
79,102
|
|
|
|
14,717
|
|
|
|
-
|
|
|
|
(605,766
|
)
|
Net income (loss)
|
|
|
945,149
|
|
|
|
(2,944,112
|
)
|
|
|
124,098
|
|
|
|
(1,541,453
|
)
|
|
|
-
|
|
|
|
(3,416,318
|
)
|
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30, 2019
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
49,864,122
|
|
|
$
|
1,206,118
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51,070,240
|
|
Gross profit
|
|
|
3,389,331
|
|
|
|
(673,668
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,715,663
|
|
Depreciation and amortization
|
|
|
5,586,749
|
|
|
|
2,202,698
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,789,459
|
|
Loss from impairment and disposal of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
60,195
|
|
|
|
26
|
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,374
|
|
Interest expense
|
|
|
412,491
|
|
|
|
-
|
|
|
|
81,549
|
|
|
|
-
|
|
|
|
-
|
|
|
|
494,040
|
|
Income tax expense(benefit)
|
|
|
8,988
|
|
|
|
(550,448
|
)
|
|
|
(40,412
|
)
|
|
|
14,747
|
|
|
|
-
|
|
|
|
(567,125
|
)
|
Net income (loss)
|
|
|
39,665
|
|
|
|
(1,980,144
|
)
|
|
|
(72,222
|
)
|
|
|
(291,221
|
)
|
|
|
31,397
|
|
|
|
(2,272,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
70,525,495
|
|
|
|
96,637,401
|
|
|
|
18,062,459
|
|
|
|
206,911
|
|
|
|
-
|
|
|
|
185,432,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
73,347,811
|
|
|
|
99,747,236
|
|
|
|
17,031,392
|
|
|
|
71,991
|
|
|
|
-
|
|
|
|
190,198,430
|
|
(18) Concentration and Major Customers and Suppliers
For the three months ended June 30, 2020, the Company had no
single customer contributed over 10% of total sales.
For the three months ended June 30, 2019, the Company had no
single customer contributed over 10% of total sales.
For the three months ended June 30, 2020,
the Company had four major suppliers accounted for 74%, 11%, 4% and 3% of total purchases.
For the three months ended June 30, 2019,
the Company had three major suppliers accounted for 80%, 9% and 4% of total purchases.
For the six months ended June 30, 2020,
the Company had four major suppliers accounted for 73%, 11%, 4% and 4% of total purchases. For the six months ended June 30, 2019,
the Company had three major suppliers accounted for 80%, 9% and 4% of total purchases.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(19) 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 June 30, 2020 and December
31, 2019. 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$70,626) 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 June 30, 2020 and December 31, 2019, respectively, while for the cash placed in financial institutions
in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB87,769,319 (US$12,397,672) as of June 30,
2020.
(20) Risks and Uncertainties
The 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.
Our business, financial condition and
results of operations may be materially adversely affected by global health epidemics, including the recent COVID-19 outbreak.
Outbreaks of epidemic, pandemic, or contagious
diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread
of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. While the COVID-19
pandemic is still growing worldwide, international stock markets have reflected the uncertainty associated with the slow-down in
the global economy and the reduced levels of international travel experienced since the beginning of January, large declines in
oil prices and the significant decline in the Dow Industrial Average at the end of February and beginning of March 2020 was largely
attributed to the effects of COVID-19. Any resulting financial impact cannot be reasonably estimated at this time. The extent to
which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain
the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may
arise from all such possible events. During the quarter ended June 30, 2020, our revenue was affected by the temporary suspension
in production as a result of the pandemic outbreak. We are still assessing our business operations and the total impact COVID-19
may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part
or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.
(21) Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove,
modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness.
ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020, with early adoption permitted. The transition
requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively.
The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial
statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented.
The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on
a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year
of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective
basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as
of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We do not expect
the adoption of ASU 2019-12 to have a material impact on our condensed consolidated financial statements.
(22) Subsequent Event
None.
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 June 30, 2020 and 2019 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 “the Company,” “we,” “our” and “us” refer to 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 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 June 30, 2020 and
2019
Revenue for the three
months ended June 30, 2020 was $26,362,273, a decrease of $7,257,675, or 21.59%, from $33,619,948 for the same period in the previous
year. This was mainly due to the decrease in sales volume of regular CMP and offset printing paper and Average Selling Prices (ASPs)
of CMP, offset printing paper and tissue paper products.
Revenue of Offset Printing Paper, Corrugating Medium Paper
and Tissue Paper Products
Revenue from sales
of offset printing paper, corrugating medium paper (“CMP”) and tissue paper products for the three months ended June
30, 2020 was $25,516,720, a decrease of $8,103,228, or 24.10%, from $33,619,948 for the second quarter of 2019. Total offset printing
paper, CMP and tissue paper products sold during the three months ended June 30, 2020 amounted to 64,658 tonnes, a decrease of
5,731 tonnes, or 8.14%, compared to 70,389 tonnes sold in the comparable period in the previous year. CMP production was suspended
in mid-January to early March 2020 due to Chines New Year and COVID-19 outbreak. We resumed full capacity of CMP production in
May 2020. The production of offset printing paper was suspended during January to May 2020 and resumed in June 2020. The changes
in revenue dollar amount and in quantity sold for the three months ended June 30, 2020 and 2019 are summarized as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity
(Tonne)
|
|
|
Amount
|
|
|
Quantity
(Tonne)
|
|
|
Amount
|
|
|
Quantity
(Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
46,979
|
|
|
$
|
17,372,097
|
|
|
|
47,994
|
|
|
$
|
20,883,320
|
|
|
|
(1,014
|
)
|
|
$
|
(3,511,223
|
)
|
|
|
-2.11
|
%
|
|
|
-16.81
|
%
|
Light-Weight CMP
|
|
|
12,611
|
|
|
$
|
4,502,628
|
|
|
|
12,582
|
|
|
$
|
5,310,771
|
|
|
|
29
|
|
|
$
|
(808,143
|
)
|
|
|
0.23
|
%
|
|
|
-15.22
|
%
|
Total CMP
|
|
|
59,590
|
|
|
$
|
21,874,725
|
|
|
|
60,576
|
|
|
$
|
26,194,091
|
|
|
|
(986
|
)
|
|
$
|
(4,319,366
|
)
|
|
|
-1.63
|
%
|
|
|
-16.49
|
%
|
Offset Printing Paper
|
|
|
2,183
|
|
|
$
|
1,262,188
|
|
|
|
8,559
|
|
|
$
|
6,236,965
|
|
|
|
(6,376
|
)
|
|
$
|
(4,974,777
|
)
|
|
|
(74.49
|
)%
|
|
|
(79.76
|
)%
|
Tissue Paper Products
|
|
|
2,884
|
|
|
$
|
2,379,807
|
|
|
|
1,254
|
|
|
$
|
1,188,892
|
|
|
|
1,630
|
|
|
$
|
1,190,915
|
|
|
|
129.98
|
%
|
|
|
100.17
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
64,658
|
|
|
$
|
25,516,720
|
|
|
|
70,389
|
|
|
$
|
33,619,948
|
|
|
|
(5,731
|
)
|
|
$
|
(8,103,228
|
)
|
|
|
-8.14
|
%
|
|
|
-24.10
|
%
|
Monthly sales revenue
for the 24 months ended June 30, 2020, are summarized below:
The Average Selling
Prices (ASPs) for our main products in the three months ended June 30, 2020 and 2019 are summarized as follows:
|
|
Offset Printing
Paper ASP
|
|
|
Regular
CMP ASP
|
|
|
Light-Weight
CMP ASP
|
|
|
Tissue Paper
Products ASP
|
|
Three Months ended June 30, 2019
|
|
$
|
729
|
|
|
$
|
435
|
|
|
$
|
422
|
|
|
$
|
948
|
|
Three Months ended June 30, 2020
|
|
$
|
578
|
|
|
$
|
370
|
|
|
$
|
357
|
|
|
$
|
825
|
|
Decrease from comparable period in the previous year
|
|
$
|
(151
|
)
|
|
$
|
(65
|
)
|
|
$
|
(65
|
)
|
|
$
|
(123
|
)
|
Decrease by percentage
|
|
|
-20.71
|
%
|
|
|
-14.94
|
%
|
|
|
-15.40
|
%
|
|
|
-12.97
|
%
|
The following chart
shows the month-by-month ASPs for the 24-month period ended June 30, 2020:
Corrugating Medium Paper
Revenue from CMP amounted
to $21,874,725 (85.73% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended June
30, 2020, representing a decrease of $4,319,366, or 16.49%, from $26,194,091 for the comparable period in 2019.
We sold 59,590 tonnes
of CMP in the three months ended June 30, 2020 as compared to 60,576 tonnes for the same period in 2019, representing a 1.63% decrease
in quantity sold.
ASP for regular CMP
dropped from $435/tonne for the three months ended June 30, 2019 to $370/tonne for the three months ended June 30, 2020, representing
a 14.94% decrease. ASP in RMB for regular CMP for the second quarter of 2019 and 2020 was RMB2,962 and RMB2,610, respectively,
representing an 11.88% decrease. The quantity of regular CMP sold decreased by 1,014 tonnes, from 47,994 tonnes in the second quarter
of 2019 to 46,979 tonnes in the second quarter of 2020.
ASP for light-weight
CMP decreased from $422/tonne for the three months ended June 30, 2019 to $357/tonne for the three months ended June 30, 2020,
representing a 15.40% decrease. ASP in RMB for light-weight CMP for the second quarter of 2019 and 2020 was RMB2,875 and RMB2,522,
respectively, representing a 12.28% decrease. The quantity of light-weight CMP sold increased by 29 tonnes, from 12,582 tonnes
in the second quarter of 2019, to 12,611 tonnes in the second quarter of 2020.
Our PM6 production
line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the second quarter
of 2020 and 2019 were 52.47% and 52.78%, respectively, representing a decrease of 0.31%.
Quantities sold for
regular CMP that was produced by the PM6 production line from July 2018 to June 2020 are as follows:
Tissue Paper Products
We produce 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 brand “Qingmu”. In December 2018 and November 2019, we
completed the construction, installation and test of operation of our PM8 and PM9 production lines. We launched the complete line
of processing base tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue paper products with
designated capacity of 15,000 tonnes/year.
Revenue from tissue
paper products was $2,379,807 (9.33% of the total offset printing paper, CMP and tissue paper products revenues) for the three
months ended June 30, 2020, representing an increase of $1,190,915, or 100.17%, from $1,188,892 for the three months ended June
30, 2019. We sold 2,884 tonnes of tissue paper in the second quarter of 2020, as compared to 1,254 tonnes in the comparable period
of 2019, representing an increase of 1,630 tonnes, or 129.98%.
ASP for tissue paper
products decreased from $948/tonne for the three months ended June 30, 2019 to $825/tonne for the three months ended June 30, 2020,
representing a 12.97% decrease. ASP in RMB for tissue paper products for the second quarter of 2019 and 2020 was RMB6,512 and RMB5,827,
respectively, representing a 10.52% decrease.
Offset printing paper
Revenue from offset
printing paper was $1,262,188 (4.95% of the total offset printing paper, CMP and tissue paper products revenues) for the three
months ended June 30, 2020, representing a decrease of $4,974,777, or 79.76%, from $6,236,965 for the three months ended June 30,
2019. We sold 2,183 tonnes of offset printing paper in the second quarter of 2020, as compared to 8,559 tonnes in the comparable
period of 2019, a decrease of 6,376 tonnes, or 74.49%. ASPs for offset printing paper for the second quarter of 2019 and 2020 were
$729 and $578, respectively, representing a 20.71% decrease. ASP in RMB for offset printing paper for the second quarter of 2019
and 2020 was RMB4,934 and RMB4,071, respectively, representing a 17.49% decrease.
Revenue of Face Mask
On April 29, 2020, we launched a production
line of non-medical single-use face masks, following the completion of raw materials preparation, trial run of the equipment and
the sample products inspection. Revenue generated from selling face masks were $845,553 for the three months ended June 30, 2020.
We sold 6,280 thousand pieces of face masks in the second quarter of 2020.
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products for the quarter ended June 30, 2020 was $23,461,291, a decrease of $7,250,528,
or 23.61%, from $30,711,819 for the comparable period in 2019. This was mainly due to the decrease in sales quantity of CMP and
offset printing paper and the decrease in material costs.
Cost of sales for
CMP was $19,743,977 for the quarter ended June 30, 2020, as compared to $24,231,791 for the comparable period in 2019. The decrease
in the cost of sales of $4,487,814 for CMP was mainly due to the decrease in sales volume of regular CMP and the decrease in average
cost of sales. Average cost of sales per tonne for CMP decreased by 17.25%, from $400 in the second quarter of 2019 to $331 in
the second quarter of 2020. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs
(net of applicable value added tax) of recycled paper board in second quarter of 2020 compared to the second quarter of 2019.
Cost of sales for
offset printing paper was $963,531 for the quarter ended June 30, 2020, as compared to $4,617,156 for the comparable period in
2019. Average cost of sales per tonne of offset printing paper decreased by 18.18%, from $539 in the three months ended June 30,
2019, to $441 during the comparable period in 2020. The decrease in average cost of sales of offset printing paper was mainly due
to the decrease in manufacturing overhead costs (i.e. utilities, repair and maintenance etc.).
Cost of sales for
tissue paper products was $2,753,783 for the quarter ended June 30, 2020, as compared to $1,862,872 for the comparable period in
2019. The increase in the cost of sales of $890,911 for tissue paper products was mainly due to the increase in sales volume of
tissue paper products, partially offset by the decrease in average cost of sales. Average cost of sales per tonne of tissue paper
products decreased by 35.73%, from $1,486 in the three months ended June 30, 2019, to $955 for the comparable period in 2020. This
is mainly due to the decrease in cost of tissue base paper.
Changes in cost of
sales and cost per tonne by product for the quarters ended June 30, 2020 and 2019 are summarized below:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
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
|
|
$
|
15,804,679
|
|
|
$
|
336
|
|
|
$
|
19,274,205
|
|
|
$
|
402
|
|
|
$
|
(3,469,526
|
)
|
|
$
|
(66
|
)
|
|
|
-18.00
|
%
|
|
|
-16.42
|
%
|
Light-Weight CMP
|
|
$
|
3,939,298
|
|
|
$
|
312
|
|
|
$
|
4,957,586
|
|
|
$
|
394
|
|
|
$
|
(1,018,288
|
)
|
|
$
|
(82
|
)
|
|
|
-20.54
|
%
|
|
|
-20.81
|
%
|
Total CMP
|
|
$
|
19,743,977
|
|
|
$
|
331
|
|
|
$
|
24,231,791
|
|
|
$
|
400
|
|
|
$
|
(4,487,814
|
)
|
|
$
|
(69
|
)
|
|
|
-18.52
|
%
|
|
|
-17.25
|
%
|
Offset Printing Paper
|
|
$
|
963,531
|
|
|
$
|
441
|
|
|
$
|
4,617,156
|
|
|
$
|
539
|
|
|
$
|
(3,653,625
|
)
|
|
$
|
(98
|
)
|
|
|
-79.13
|
%
|
|
|
-18.18
|
%
|
Tissue Paper Products
|
|
$
|
2,753,783
|
|
|
$
|
955
|
|
|
|
1,862,872
|
|
|
$
|
1,486
|
|
|
$
|
890,911
|
|
|
$
|
(531
|
)
|
|
|
47.82
|
%
|
|
|
-35.73
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper
|
|
$
|
23,461,291
|
|
|
$
|
n/a
|
|
|
$
|
30,711,819
|
|
|
$
|
n/a
|
|
|
$
|
(7,250,528
|
)
|
|
$
|
n/a
|
|
|
|
-23.61
|
%
|
|
|
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 June
30, 2020 were RMB1,371/tonne (approximately $195/tonne), as compared to RMB1,559/tonne (approximately $230/tonne) for the three
months ended June 30, 2019. These changes (in US dollars) represent a year-over-year decrease of 15.22% 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 July 2018 to June 2020 are shown below:
Electricity and gas
are our two main energy sources. Electricity and gas accounted for approximately 4% and 10.3% of total sales in the second quarter
of 2020, respectively, compared to 7% and 10.3% of total sales in the second quarter of 2019. The monthly energy cost as a percentage
of total monthly sales of our main paper products for the 24 months ended June 30, 2020 are summarized as follows:
Gross Profit
Gross profit for the
three months ended June 30, 2020 was $2,558,829 (9.71% of the total revenue), representing a decrease of $349,300, or 12.01%, from
the gross profit of $2,908,129 (8.65% of the total revenue) for the three months ended June 30, 2019, as a result of factors described
above.
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the three months ended June 30, 2020 was $2,055,429, a decrease of $852,700,
or 29.32%, from the gross profit of $2,908,129 for the three months ended June 30, 2019. 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 decreased by 0.59 percentage points, from 8.65% for the
three months ended June 30, 2019, to 8.06% for the three months ended June 30, 2020.
Gross profit margin
for regular CMP for the three months ended June 30, 2020 was 9.02%, or 1.31 percentage points higher, as compared to gross profit
margin of 7.71% for the three months ended June 30, 2019. Such increase was mainly due to the decrease in cost of recycled paper
board, partially offset by the decrease in ASP of regular CMP in the second quarter of 2020.
Gross profit margin
for light-weight CMP for the three months ended June 30, 2020 was 12.51%, or 5.86 percentage points higher, as compared to gross
profit margin of 6.65% for the three months ended June 30, 2019. The increase was mainly due to decrease in cost of recycled paper
board, partially offset by the decrease in ASP of light-weight CMP in the second quarter of 2020.
Gross profit margin
for offset printing paper was 23.66% for the three months ended June 30, 2020, a decrease of 2.31 percentage points, as compared
to 25.97% for the three months ended June 30, 2019. The decrease was mainly due to the decrease in ASP of offset printing paper
in the second quarter of 2020.
Gross profit margin
for tissue paper products for the three months ended June 30, 2020 was -15.71%, or 40.98 percentage points higher, as compared
to gross profit margin of -56.69% for the three months ended June 30, 2019.
Monthly gross profit
margins on the sales of our CMP and offset printing paper for the 24-month period ended June 30, 2020 are as follows:
Face Mask
Gross profit for face
masks for the three months ended June 30, 2020 was $503,400, representing a gross margin of 59.53%.
Selling, General and Administrative Expenses
Selling, general and
administrative expenses for the three months ended June 30, 2020 were $3,357,472, an increase of $949,613, or 39.44% from $2,407,859
for the three months ended June 30, 2019. The increase was mainly due to the issuance of 2,000,000 shares of common stock to officers,
directors and employees of the Company, as compensatory incentive, valued at $1,200,000 and the issuance of 60,000 shares of common
stock to a consultant as compensation of service, valued at $42,000 in April 2020.
Income (Loss) from Operations
Operating loss for
the quarter ended June 30, 2020 was $798,643, a decrease of $1,330,310, or 250.21%, from income from operations of $531,667 for
the quarter ended June 30, 2019. The decrease in income from operations was primarily due to the decrease in gross profit and increase
in selling, general and administrative expenses.
Other Income and Expenses
Interest expense for
the three months ended June 30, 2020 increased by $2,665, from $238,771 in the three months ended June 30, 2019, to $241,436. The
Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,916,307
as of June 30, 2020, as compared to $15,942,513 as of June 30, 2019.
Net Income (Loss)
As a result and the factors discussed above, net loss was
$980,031 for the quarter ended June 30, 2020, representing a decrease of $1,430,101, or 317.75%, from net income of $450,070 for
the quarter ended June 30, 2019.
Comparison of the six months ended
June 30, 2020 and 2019
Revenue for the six
months ended June 30, 2020 was $35,106,124, a decrease of $15,964,116, or 31.26%, from $51,070,240 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 six months ended June 30, 2020 was $34,260,571, a decrease of $16,809,669,
or 32.91%, from $51,070,240 for the six months ended June 30, 2019. This was mainly due to the decrease in sales volume of Regular
CMP and offset printing paper and the decrease in ASP of CMP, offset printing paper and tissue paper products. Total quantities
of offset printing paper, CMP and tissue paper products sold during the six months ended June 30, 2020 amounted to 84,519 tonnes,
a decrease of 21,190 tonnes, or 20.05%, compared to 105,709 tonnes sold during the six months ended June 30, 2019. Total quantities
of CMP and offset printing paper sold decreased by 22,402 tonnes in the six months of 2020 as compared to the same period of 2019.
We sold 4,069 tonnes of tissue paper products in the six months of 2020 as opposed to 2,857 tonnes in the same period of 2019.
The changes in revenue and quantity sold for the six months ended June 30, 2020 and 2019 are summarized as follows:
A summary of the above
changes and further analyses of the changes in our sales revenue are as follows:
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
Percentage
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
60,767
|
|
|
$
|
23,094,037
|
|
|
|
74,286
|
|
|
$
|
33,108,199
|
|
|
|
(13,519
|
)
|
|
$
|
(10,014,162
|
)
|
|
|
-18.20
|
%
|
|
|
-30.25
|
%
|
Light-Weight CMP
|
|
|
17,500
|
|
|
$
|
6,518,191
|
|
|
|
20,006
|
|
|
$
|
8,675,903
|
|
|
|
(2,506
|
)
|
|
$
|
(2,157,712
|
)
|
|
|
-12.53
|
%
|
|
|
-24.87
|
%
|
Total CMP
|
|
|
78,267
|
|
|
$
|
29,612,228
|
|
|
|
94,292
|
|
|
$
|
41,784,102
|
|
|
|
(16,025
|
)
|
|
$
|
(12,171,874
|
)
|
|
|
-17.00
|
%
|
|
|
-29.13
|
%
|
Offset Printing Paper
|
|
|
2,183
|
|
|
$
|
1,262,188
|
|
|
|
8,560
|
|
|
$
|
6,236,965
|
|
|
|
(6,377
|
)
|
|
$
|
(4,974,777
|
)
|
|
|
-74.50
|
%
|
|
|
-79.76
|
%
|
Tissue Paper Products
|
|
|
4,069
|
|
|
$
|
3,386,155
|
|
|
|
2,857
|
|
|
|
3,049,173
|
|
|
|
1,212
|
|
|
$
|
336,982
|
|
|
|
42.42
|
%
|
|
|
11.05
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
84,519
|
|
|
$
|
34,260,571
|
|
|
|
105,709
|
|
|
$
|
51,070,240
|
|
|
|
(21,190
|
)
|
|
$
|
(16,809,669
|
)
|
|
|
-20.05
|
%
|
|
|
-32.91
|
%
|
ASPs for our main
products in the six-month period ended June 30, 2020 and 2019 are summarized as follows:
|
|
Offset Printing
Paper ASP
|
|
|
Regular
CMP ASP
|
|
|
Light-Weight
CMP ASP
|
|
|
Tissue Paper
Products ASP
|
|
Six Months Ended June 30, 2019
|
|
$
|
729
|
|
|
$
|
446
|
|
|
$
|
434
|
|
|
$
|
1,067.00
|
|
Six Months Ended June 30, 2020
|
|
$
|
578
|
|
|
$
|
380
|
|
|
$
|
372
|
|
|
$
|
832
|
|
Decrease from comparable period in the previous year
|
|
$
|
-151
|
|
|
$
|
-66
|
|
|
$
|
-62
|
|
|
$
|
-235
|
|
Decrease by percentage
|
|
|
-20.71
|
%
|
|
|
-14.80
|
%
|
|
|
-14.29
|
%
|
|
|
-22.02
|
%
|
Revenue of Face Mask
Revenue
generated from selling face masks were $845,553 for the six months ended June 30, 2020. We sold 6,280 thousand pieces of face masks
for the six months ended June 30, 2020.
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products in the six months ended June 30, 2020 was $32,374,861, a decrease of $15,979,716,
or 33.05%, from $48,354,577 for the six months ended June 30, 2019. This was mainly a result of the decrease in volume sold, partially
offset by decrease in cost of recycled paper board. Cost of sales for CMP was $26,939,324 for the six months ended June 30, 2020,
as compared to $40,047,877 in the same period of 2019. The decrease in the cost of sales of $13,108,553 for CMP was mainly due
to the decrease in the quantities of regular CMP sold, partially offset by the decrease in cost of recycled paper board in the
six months of 2020. Average cost of sales per tonne for CMP decreased by 19.06%, from $425 for the six months ended June 30, 2019,
to $344 in the same period of 2020. The decrease was mainly attributable to the lower average unit purchase costs (net of applicable
value added tax) of recycled paper board. Cost of sales for offset printing paper was $963,531 for the six months ended June 30,
2020, as compared to $4,617,156 in the same period of 2019. Average cost of sales per tonne of offset printing paper decreased
by 18.18%, from $539 for the six months ended June 30, 2019, to $441 in the same period of 2020. Cost of sales for tissue paper
products was $4,472,006 for the six months ended June 30, 2020, as compared to $3,689,544 in the same period of 2019. Average cost
of sales per tonne of tissue paper products decreased by 14.87%, from $1,291 for the six months ended June 30, 2019, to $1,099
in the same period of 2020.
Changes in cost of
sales and cost per tonne by product for the six months ended June 30, 2020 and 2019 are summarized below:
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
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
|
|
$
|
21,244,189
|
|
|
$
|
350
|
|
|
$
|
31,545,280
|
|
|
$
|
425
|
|
|
$
|
(10,301,091
|
)
|
|
$
|
(75
|
)
|
|
|
-32.65
|
%
|
|
|
-17.65
|
%
|
Light-Weight CMP
|
|
$
|
5,695,135
|
|
|
$
|
325
|
|
|
$
|
8,502,597
|
|
|
$
|
425
|
|
|
$
|
(2,807,462
|
)
|
|
$
|
(100
|
)
|
|
|
-33.02
|
%
|
|
|
-23.53
|
%
|
Total CMP
|
|
$
|
26,939,324
|
|
|
$
|
344
|
|
|
$
|
40,047,877
|
|
|
$
|
425
|
|
|
$
|
(13,108,553
|
)
|
|
$
|
(81
|
)
|
|
|
-32.73
|
%
|
|
|
-19.06
|
%
|
Offset Printing Paper
|
|
$
|
963,531
|
|
|
$
|
441
|
|
|
$
|
4,617,156
|
|
|
$
|
539
|
|
|
$
|
(3,653,625
|
)
|
|
$
|
(98
|
)
|
|
|
-79.13
|
%
|
|
|
-18.18
|
%
|
Tissue Paper Products
|
|
$
|
4,472,006
|
|
|
$
|
1,099
|
|
|
$
|
3,689,544
|
|
|
$
|
1,291
|
|
|
|
782,462
|
|
|
$
|
(192
|
)
|
|
|
21.21
|
%
|
|
|
-14.87
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
$
|
32,374,861
|
|
|
$
|
n/a
|
|
|
$
|
48,354,577
|
|
|
$
|
n/a
|
|
|
$
|
(15,979,716
|
)
|
|
$
|
n/a
|
|
|
|
-33.05
|
%
|
|
|
n/a
|
%
|
Gross Profit
Gross profit for the
six months ended June 30, 2020 was $2,389,110 (6.81% of the total revenue), representing a decrease of $326,553, or 12.02%, from
the gross profit of $2,715,663 (5.32% of the total revenue) for the six months ended June 30, 2019. The decrease was mainly due
to (i) the decrease in quantities sold of regular CMP and offset printing paper and (ii) the decrease of ASP of CMP, offset printing
paper and tissue paper products, partially offset by the decrease of material purchase price of CMP and tissue paper products.
Offset Printing Paper, CMP and Tissue
Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the six months ended June 30, 2020 was $1,885,710, a decrease of $829,953, or
30.56%, from the gross profit of $2,715,663 for the six months ended June 30, 2019. 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 0.18 percentage points, from 5.32% for the
six months ended June 30, 2019, to 5.50% for the six months ended June 30, 2020.
Gross profit margin
for regular CMP for the six months ended June 30, 2020 was 8.01%, or 3.29 percentage points higher, as compared to gross profit
margin of 4.72% for the six months ended June 30, 2019. Such increase was primarily due to decrease of material purchase price,
partially offset by the decrease in ASP of regular CMP.
Gross profit margin
for light-weight CMP for the six months ended June 30, 2020 was 12.63%, or 10.63 percentage points higher, as compared to gross
profit margin of 2.00% for the six months ended June 30, 2019.
Gross profit margin
for offset printing paper was 23.66% for the six months ended June 30, 2020, a decrease of 2.31 percentage points, as compared
to 25.97% for the six months ended June 30, 2019.
Gross profit margin
for tissue paper products was -32.07% for the six months ended June 30, 2020, a decrease of 11.07 percentage points, as compared
to -21.00% for the six months ended June 30, 2019.
Face Mask
Gross profit for face
masks for the six months ended June 30, 2020 was $503,400, representing a gross margin of 59.53%.
Selling, General and Administrative
Expenses
Selling, general and
administrative expenses for the six months ended June 30, 2020 were $6,012,435, an increase of $623,103, or 11.56% from $5,389,332
for the six months ended June 30, 2019. The increase was net impact of issuance of 2,000,000 shares of common stock valued at $1,200,000
to officers, directors and employees, issuance of 60,000 shares of common stock valued at $42,000 to a consultant and decrease
in sales commission to staff.
Loss from Operations
Operating loss for
the six months ended June 30, 2020 was $3,665,325, a decrease of $1,023,053, or 38.72%, from $2,642,272 for the six months ended
June 30, 2019. The decrease was primarily due to the decrease in gross profit and increase in selling, general and administrative
expenses.
Other Income and Expenses
Interest expense for
the six months ended June 30, 2020 decreased by $7,886, from $494,040 for the six months ended June 30, 2019, to $486,154. The
Company had short-term and long-term interest-bearing loans and related party loans that aggregated $14,916,307 as of June 30,
2020, as compared to $15,942,514 as of June 30, 2019.
Subsidy income of
$142,019 for the three month ended March 31, 2020 represents funding by the government to finance various expenditures during the
COVID-19 pandemic period.
Net Loss
As a result of the
above, net loss was $3,416,318 for the six months ended June 30, 2020, representing a decrease of $1,143,793, or 50.33%, from $2,272,525
for six months ended June 30, 2019.
Accounts Receivable
Net accounts receivable
increased by $44,831, or 1.44%, to $3,164,142 as of June 30, 2020, as compared with $3,119,311 as of December 31, 2019. We usually
collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist
of raw materials (accounting for 79.77% of total value of inventory as of June 30, 2020), semi-finished goods and finished goods.
As of June 30, 2020, the recorded value of inventory increased by 247.89% to $5,852,473 from $1,682,298 as of December 31, 2019.
As of June 30, 2020, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $4,116,442,
approximately $4,076,410, or 10182.88%, higher than the balance as of December 31, 2019. Due to the volatility of recycled paper
board price, a minimum level of inventory was maintained at the end of 2019.
A summary of changes
in major inventory items is as follows:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Raw Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
4,116,442
|
|
|
$
|
40,032
|
|
|
|
4,076,410
|
|
|
|
10182.88
|
%
|
Recycled white scrap paper
|
|
|
130,972
|
|
|
|
10,541
|
|
|
|
120,431
|
|
|
|
1142.51
|
%
|
Tissue base paper
|
|
|
83,084
|
|
|
|
122,648
|
|
|
|
-39,564
|
|
|
|
-32.26
|
%
|
Gas
|
|
|
111,573
|
|
|
|
41,675
|
|
|
|
69,898
|
|
|
|
167.72
|
%
|
Mask fabric and other raw materials
|
|
|
226,609
|
|
|
|
171,287
|
|
|
|
55,322
|
|
|
|
32.30
|
%
|
Total Raw Materials
|
|
|
4,668,680
|
|
|
|
386,183
|
|
|
|
4,282,497
|
|
|
|
1108.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi-finished Goods
|
|
|
122,010
|
|
|
|
83,266
|
|
|
|
38,744
|
|
|
|
46.53
|
%
|
Finished Goods
|
|
|
1,061,782
|
|
|
|
1,212,849
|
|
|
|
-151,067
|
|
|
|
-12.46
|
%
|
Total inventory, gross
|
|
|
5,852,473
|
|
|
|
1,682,298
|
|
|
|
4,170,175
|
|
|
|
247.89
|
%
|
Inventory reserve
|
|
|
-
|
|
|
|
(74,835
|
)
|
|
|
74,835
|
|
|
|
-100.00
|
%
|
Total inventory, net
|
|
$
|
5,852,473
|
|
|
$
|
1,607,463
|
|
|
|
4,245,010
|
|
|
|
264.08
|
%
|
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 $142,019 (RMB1,000,000). The lease
agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with
Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as provided for in the original
lease agreement. The accrued rental owed to Hebei Fangsheng was $nil and $56,552 as of June 30, 2020 and December 31, 2019, respectively,
and such amounts were recorded as part of the current liabilities.
Capital Expenditure Commitment as of June 30, 2020
On May 5, 2020,
the Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company has 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 June 30, 2020,
we had approximately $5 million in capital expenditure commitments that were mainly related to purchase of paper machine of PM10
and improvement of Industrial Buildings. These commitments are expected to be financed by bank loans and cash flows generated from
our business operations.
Cash and Cash Equivalents
Our cash, cash equivalents
and restricted cash as of June 30, 2020 was $12,828,030, an increase of $6,990,285, from $5,837,745 as of December 31, 2019. The
increase of cash and cash equivalents for the six months ended June 30, 2020 was attributable to a number of factors:
i. Net cash provided by operating activities
Net cash provided by operating activities was $5,856,625
for the six months ended June 30, 2020. The balance represented an increase of cash of $6,668,934, or 820.98%, from $812,309 used
in operating activities for the six months ended June 30, 2019. Net loss for the six months ended June 30, 2020 was $3,416,318,
representing a decrease of $1,143,793, or 50.33%, from a net loss of $2,272,525 for the six months ended June 30, 2019. Changes
in various asset and liability account balances throughout the six months ended June 30, 2020 also contributed to the net change
in cash from operating activities in six months ended June 30, 2020. Chief among such changes is the increase of $4,291,622 in
the ending inventory balance as of June 30, 2020 (a decrease to net cash for the six months ended June 30, 2020 cash flow purposes).
In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $7,496,314. The Company
also had a net decrease of $5,739,395 in prepayment and other current assets (an increase to net cash) and a net decrease of $447,448
in other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable
of $968,474 (a decrease to net cash) during the six months ended June 30, 2020.
ii. Net cash used in investing activities
We incurred $981,150
in net cash expenditures for investing activities during the six months ended June 30, 2020, as compared to $5,021,739 for the
same period of 2019. Payments in the six months ended June 30, 2020 were for the expenditures on improvement of Industrial Buildings.
iii. Net cash provided by financing activities
Net cash provided
by financing activities was proceeds from issuance of shares and warrants of $2,273,360 for the six months ended June 30, 2020,
as compared to net cash used in financing activities in the amount of $5,286,942 for the six months ended June 30, 2019.
Short-term bank loans
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
$
|
6,073,875
|
|
|
$
|
6,163,814
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
$
|
6,073,875
|
|
|
$
|
6,163,814
|
|
On December 20, 2019,
the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,073,875 and $6,163,814 as of June
30, 2020 and December 31, 2019, respectively. The working capital loan was secured by land use right of Hebei Tengsheng as collateral
for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid by December
23, 2020.
As of June 30, 2020,
there were guaranteed short-term borrowings of $6,073,875 and unsecured bank loans of $nil. As of December 31, 2019, there were
guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil.
The average short-term
borrowing rates for the three months ended June 30, 2020 and 2019 were approximately 4.79% and 4.77%, respectively. The average
short-term borrowing rates for the six months ended June 30, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.
Long-term loans from credit union
As of June 30, 2020
and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443 and $8,973,367, respectively.
On April 16, 2014,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally
due 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 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years
and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of June 30, 2020 and December
31, 2019, total outstanding loan balance was $1,214,775 and $1,232,763, respectively. Out of the total outstanding loan balance,
current portion amounted were $169,503 and $143,345 as of June 30, 2020 and December 31, 2019, respectively, which are presented
as current liabilities in the consolidated balance sheet and the remaining balance of $1,045,272 and $1,089,418 are presented as
non-current liabilities in the consolidated balance sheet as of June 30, 2020 and December 31, 2019, respectively.
On July 15, 2013,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was 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 will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain
of the Company’s manufacturing equipment with net book value of $3,013,792 and $3,935,270 as of June 30, 2020 and December
31, 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of June 30, 2020 and December
31, 2019, the total outstanding loan balance was $3,531,322 and $3,583,613, respectively. Out of the total outstanding loan balance,
current portion amounted were $240,130 and $172,013 as of June 30, 2020 and December 31, 2019, respectively, which are presented
as current liabilities in the consolidated balance sheet and the remaining balance of $3,291,192 and $3,411,600 are presented as
non-current liabilities in the consolidated balance sheet as of June 30, 2020 and December 31, 2019, respectively.
On April 17, 2019,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and
payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use
right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As
of June 30, 2020 and December 31, 2019, the total outstanding loan balance was $2,260,047 and $2,293,512, respectively. Out of
the total outstanding loan balance, current portion amounted were $2,260,047 and $1,146,756 as of June 30, 2020 and December 31,
2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil
and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020 and December 31,
2019, respectively.
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 is secured by Hebei Tengsheng with its land use
right as collateral for the benefit of the bank. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As
of June 30, 2020 and December 31, 2019, the total outstanding loan balance was $1,836,288 and $1,863,479, respectively. Out of
the total outstanding loan balance, current portion amounted were $988,770 and $143,345 as of June 30, 2020 and December 31, 2019,
respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $847,518
and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020 and December 31,
2019, respectively.
Total interest expenses
for the short-term bank loans and long-term loans for the three months ended June 30, 2020 and 2019 were $241,436 and $214,907,
respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months ended June 30, 2020
and 2019 were $486,154 and $445,860, respectively.
Shareholder Loans
Mr. Zhenyong Liu, the Company’s CEO
has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper 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 $362,079 and $367,441 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 June 30, 2020
and December 31, 2019, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided
a loan to the Company, amounted to $8,483,083 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 June 30, 2020 and December 31, 2019, approximately $42,376 and $43,003 of interest 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.
On March 1, 2015, the Company entered an
agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $ 16,950,350 (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 $4,324,636 was drawn from the facility. On October
14, 2016 an unsecured amount of $2,883,091 was drawn from the 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 June 30, 2020 and December 31, 2019, the outstanding loan balance were $nil and the accrued interest was $194,134 and $197,009,
respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated
balance sheet.
As of June 30, 2020 and December 31, 2019,
total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil and
$23,865 for the three months ended June 30, 2020 and 2019, respectively. The interest expenses incurred for such related party
loans are $nil and $48,180 for the six months ended June 30, 2020 and 2019, respectively. The accrued interest owed to the CEO
was approximately $598,589 and $607,453, as of June 30, 2020 and December 31, 2019, respectively, which was recorded in other payables
and accrued liabilities.
As of June 30, 2020 and December 31, 2019,
amount due to shareholder are $657,433 and $483,433, respectively, which represents funds from shareholders to pay for various
expenses incurred in the U.S. The amount is due on demand with interest free.
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 June 30, 2020 and 2019, 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 Dongfang Paper and Baoding 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 June 30, 2020 and December 31, 2019 to translate the Chinese RMB to the U.S. Dollars are
7.0795:1 and 6.9762:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 7.0413:1,
and 6.7087:1 for the three months ended June 30, 2020 and 2019, respectively. Translation adjustments are included in other comprehensive
income (loss).
Off-Balance Sheet Arrangements
We were the guarantor
for Baoding Huanrun Trading Co., Ltd.(“Baoding Huanrun”) for its long-term bank loans in an amount of $4,378,840 (RMB31,000,000),
which matures at various times in 2020 -2023. Baoding Huanrun is one of our major 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 Baoding Huanrun 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 August 2018, the
FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments
in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective
of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020,
with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied
either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s
consolidated financial statements.
In December 2019,
the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update
related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis
for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries
should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning
of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied
on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment
to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective
basis. We do not expect the adoption of ASU 2019-12 to have a material impact on our condensed consolidated financial statements.