Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion
of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data,
the financial statements, and the notes to those statements that are included elsewhere in this annual report.
Recent Developments
In late January 2018,
the Company temporarily suspended its production due to a government-mandated restriction on the natural gas supply, which is the
energy resource we need for production. As of March 14, 2018, the company resumed production at its manufacturing facilities. Therefore,
the Company’s revenues in the first quarter ended March 31, 2018 and the year ended December 31, 2018 are expected to be
significantly impacted.
Results of Operations
Revenue for the year
ended December 31, 2017 was $117,023,578, a decrease of $17,721,022, or 13.15%, from $134,744,600 for 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 year ended December 31, 2017 was $117,023,578, a decrease of $17,063,688,
or 12.73%, from $134,087,266 for the year ended December 31, 2016. This was mainly due to the decrease in sales volume of regular
CMP and offset printing paper, which was partially offset by the increase in ASP of these products.
Total quantities of
offset printing paper, CMP and tissue paper products sold during the year ended December 31, 2017 amounted to 235,503 tonnes, a
decrease of 99,892 tonnes, or 29.78%, compared to 335,395 tonnes sold in 2016. Total quantities of CMP and offset printing paper
sold decreased by 96,779 tonnes in 2017 as compared to 2016. We sold 1,804 tonnes of tissue paper products in 2017 as opposed to
4,917 tonnes in 2016. Production of tissue paper was suspended in September and October for the replacement of coal boilers, and
began intermittent production in the following months. In addition, we decreased the production volume of regular CMP, light-Weight
CMP and offset printing paper and sales of these products due to environmental conditions in Northern China. The government strengthened
its pollution control and rectification measures, resulting in restrictions on production in the manufacturing industry. As a
result, the production volume of regular CMP, light-Weight CMP and offset printing paper and sales of these products decreased
in 2017 as compared to 2016. The changes in revenue and quantity sold for the year ended December 31, 2017 and 2016 are summarized
as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Change in
|
|
|
Percentage
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
173,399
|
|
|
$
|
80,378,784
|
|
|
|
230,382
|
|
|
$
|
77,888,753
|
|
|
|
(56,983
|
)
|
|
$
|
2,490,031
|
|
|
|
-24.73
|
%
|
|
|
3.20
|
%
|
Light-Weight CMP
|
|
|
33,690
|
|
|
$
|
15,600,281
|
|
|
|
47,841
|
|
|
$
|
16,736,488
|
|
|
|
(14,151
|
)
|
|
$
|
(1,136,207
|
)
|
|
|
-29.58
|
%
|
|
|
-6.79
|
%
|
Total CMP
|
|
|
207,089
|
|
|
$
|
95,979,065
|
|
|
|
278,223
|
|
|
$
|
94,625,241
|
|
|
|
(71,134
|
)
|
|
$
|
1,353,824
|
|
|
|
-25.57
|
%
|
|
|
1.43
|
%
|
Offset Printing Paper
|
|
|
26,610
|
|
|
$
|
18,687,657
|
|
|
|
52,255
|
|
|
$
|
33,390,812
|
|
|
|
(25,645
|
)
|
|
$
|
(14,703,155
|
)
|
|
|
-49.08
|
%
|
|
|
-44.03
|
%
|
Tissue Paper Products
|
|
|
1,804
|
|
|
$
|
2,356,856
|
|
|
|
4,917
|
|
|
|
6,071,213
|
|
|
|
(3,113
|
)
|
|
$
|
(3,714,357
|
)
|
|
|
-63.31
|
%
|
|
|
-61.18
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
235,503
|
|
|
$
|
117,023,578
|
|
|
|
335,395
|
|
|
$
|
134,087,266
|
|
|
|
(99,892
|
)
|
|
$
|
(17,063,688
|
)
|
|
|
-29.78
|
%
|
|
|
-12.73
|
%
|
Monthly revenue (excluding
revenue of digital photo paper and tissue paper products) for the 24 months ended December 31, 2017, are summarized below:
The average selling
price, or ASP, for our major products for the years ended December 31, 2017 and 2016 are summarized as follows:
|
|
Offset Printing Paper ASP
|
|
|
Regular CMP ASP
|
|
|
Light-Weight CMP ASP
|
|
|
Tissue Paper Products ASP
|
|
Year Ended December 31, 2016
|
|
$
|
639
|
|
|
$
|
338
|
|
|
$
|
350
|
|
|
$
|
1235
|
|
Year Ended December 31, 2017
|
|
$
|
702
|
|
|
$
|
464
|
|
|
$
|
463
|
|
|
$
|
1306
|
|
Increase from comparable period in the previous year
|
|
$
|
63
|
|
|
$
|
126
|
|
|
$
|
113
|
|
|
$
|
71
|
|
Increase by percentage
|
|
|
9.86
|
%
|
|
|
37.28
|
%
|
|
|
32.29
|
%
|
|
|
5.75
|
%
|
The following is a
chart showing the month-by-month ASPs (excluding the ASPs of digital photo paper and tissue paper products) for the 24 month period
ended December 31, 2017:
Corrugating Medium Paper
Revenue from CMP amounted
to $95,979,065 (82.02% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December
31, 2017, representing an increase of $1,353,824, or 1.43%, from $94,625,241 during 2016.
We sold 207,089 tonnes
of CMP in the year ended December 31, 2017 as compared to 278,223 tonnes in the year ended December 31, 2016, representing a 25.57%
decrease in quantity sold.
ASP for regular CMP
increased from $338/tonne in 2016 to $464/tonne in 2017, representing a 37.28% increase. ASP in RMB for regular CMP in 2016 and
2017 was RMB2,249 and RMB3,125, respectively, representing a 38.95% increase. The quantity of regular CMP sold decreased by 56,983
tonnes, from 230,382 tonnes in 2016 to 173,399 tonnes in 2017.
ASP for light-weight
CMP increased from $350/tonne in 2016 to $463/tonne in 2017, representing a $32.29% increase. ASP in RMB for light-weight CMP in
2016 and 2017 was RMB2,327 and RMB3,122, respectively, representing a 34.16% increase. The quantity of light-weight CMP sold decreased
by 14,151 tonnes, from 47,841 tonnes in 2016, to 33,690 tonnes in 2017.
Our production was
suspended in September and October 2017 due to boiler replacement. Our production volume was also restricted temporarily by the
government due to environmental concerns. The government has been requiring outdated paper facilities to close since 2010 and is
expected to continue to force the closure of outdated facilities in the next few years. We estimate that the market demand and
ASPs for CMP and other packaging paper will remain stable in 2018.
Our PM6 production
line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December
31, 2017 and 2016 were 48.01% and 63.61%, respectively, representing a decrease of 15.60%.
Quantities of sold
CMP that was produced by the PM6 production line from January 2016 to December 2017 are as follows:
Offset Printing Paper
Revenue from offset
printing paper was $18,687,657 (15.97% of the total offset printing paper, CMP and tissue paper products revenues) for the year
ended December 31, 2017, representing a decrease of $14,703,155, or 44.03%, from $33,390,812 in 2016. We sold 26,610 tonnes of
offset printing paper in the year ended December 31, 2017, compared to 52,255 tonnes in 2016, a decrease of 25,645 tonnes, or 49.08%.
ASPs for offset printing paper in the year ended December 31, 2016 and 2017 was $639/tonne and $702/tonne, respectively, representing
a 9.86% increase. We estimate that the market demand and ASP of offset printing paper will remain stable in 2018.
Tissue Paper Products
We began the commercial
production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper purchased from a long-term
supplier and produce finished tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues
and paper napkins, as well as bathroom and kitchen paper towels, that are marketed and sold under the Orient Paper brand. We sold
1,804 tonnes of tissue paper products and generated revenues of $2,356,856 for the year ended December 31, 2017. We expect to continue
to increase production of tissue paper products in the near future.
Revenue of Digital Photo Paper
Revenue generated from
selling digital photo paper were $nil for the year ended December 31, 2017. In June 2016, we suspended the production of digital
photo paper due to low market demand for our products and now are upgrading the production line to produce more competitive photo
paper products. We expect to resume our digital photo paper production in the near future.
Changes in revenues
and quantities sold of our digital photo paper for the years ended December 31, 2017 and 2016 are summarized as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Change in
|
|
|
Percentage
Change
|
|
Sales
Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Photo Paper
|
|
|
-
|
|
|
$
|
-
|
|
|
|
372
|
|
|
$
|
657,334
|
|
|
(372
|
)
|
|
(657,334
|
)
|
|
|
-100.00
|
%
|
|
|
-100.00
|
%
|
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products in the year ended December 31, 2017 was $97,067,627, a decrease of $11,101,613,
or 10.26%, from $108,169,240 for the year ended December 31, 2016. This was mainly a result of the decrease in volume sold, partially
offset by increase in cost of recycled paper board. Cost of sales for CMP was $79,411,534 for the year ended December 31, 2017,
as compared to $77,014,583 in 2016. The increase in the cost of sales of $2,396,951 for CMP was mainly due to the increase in cost
of recycled paper board, partially offset by the decrease in the quantities of regular CMP and light-weight CMP sold in the year
of 2017. Average cost of sales per tonne for CMP increased by 38.27%, from $277 for the year ended December 31, 2016, to $383 in
2017. The increase was mainly attributable to the higher average unit purchase costs (net of applicable value added tax) of recycled
paper board in 2017 compared to 2016. Cost of sales for offset printing paper was $15,451,146 for the year ended December 31, 2017,
as compared to $25,799,916 in 2016. Average cost of sales per tonne of offset printing paper increased by 17.61%, from $494 in
the year ended December 31, 2016, to $581 in 2017. Cost of sales for tissue paper products was $2,204,947 for the year ended December
31, 2017. Average cost of sales per tonne of tissue paper products was $1,222 for the year ended December 31, 2017.
Changes in cost of
sales and cost per tonne by product for the year ended December 31, 2017 and 2016 are summarized below:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
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
|
|
$
|
66,763,206
|
|
|
$
|
385
|
|
|
$
|
64,540,961
|
|
|
$
|
280
|
|
|
$
|
2,222,245
|
|
|
$
|
105
|
|
|
|
3.44
|
%
|
|
|
37.50
|
%
|
Light-Weight CMP
|
|
$
|
12,648,328
|
|
|
$
|
375
|
|
|
$
|
12,473,622
|
|
|
$
|
261
|
|
|
$
|
174,706
|
|
|
$
|
114
|
|
|
|
1.40
|
%
|
|
|
43.68
|
%
|
Total CMP
|
|
$
|
79,411,534
|
|
|
$
|
383
|
|
|
$
|
77,014,583
|
|
|
$
|
277
|
|
|
$
|
2,396,951
|
|
|
$
|
106
|
|
|
|
3.11
|
%
|
|
|
38.27
|
%
|
Offset Printing Paper
|
|
$
|
15,451,146
|
|
|
$
|
581
|
|
|
$
|
25,799,916
|
|
|
$
|
494
|
|
|
$
|
(10,348,770
|
)
|
|
$
|
87
|
|
|
|
-40.11
|
%
|
|
|
17.61
|
%
|
Tissue Paper Products
|
|
$
|
2,204,947
|
|
|
$
|
1,222
|
|
|
$
|
5,354,741
|
|
|
$
|
1,089
|
|
|
$
|
(3,149,794
|
)
|
|
$
|
133
|
|
|
|
-58.82
|
%
|
|
|
12.21
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
$
|
97,067,627
|
|
|
$
|
n/a
|
|
|
$
|
108,169,240
|
|
|
$
|
n/a
|
|
|
$
|
(11,101,613
|
)
|
|
$
|
n/a
|
|
|
|
-10.26
|
%
|
|
|
n/a
|
%
|
Our average unit purchase
costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31,
2017 were RMB 1,655/tonne (approximately $245/tonne) and RMB 2,848/tonne (approximately $422/tonne), respectively, as compared
to RMB 1,100/tonne (approximately $165/tonne) and RMB 2,323/tonne (approximately 349/tonne) for the year ended December 31, 2016,
respectively. These changes (in US dollars) represent a year-over-year increase of 48.48% for the recycled paper board and a year-over-year
increase of 20.92% for the recycled white scrap paper. 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 average unit purchase costs (net of applicable value added tax) of recycled scrap binding
margin was RMB 2,415/tonne (approximately $358/tonne) in 2017, as compared to RMB 1,566/tonne (approximately $235/tonne) in 2016.
The pricing trends
of our major raw materials for the 24-month period from January 2016 to December 2017 are shown below:
Electricity and gas
are our two main energy sources. In order to reduce carbon emissions, we have been required to reduce coal consumption by the local
government. After replacing some of the coal burning boilers with gas boilers, we started using natural gas in December 2016 and
liquefied gas in February 2017, which accounted for approximately 4% of total sales in 2017. Electricity and coal accounted for
approximately 7% and 3% of total sales in 2017, respectively, compared to 8% and 4% of total sales in 2016. As all the coal boilers
were replaced in September 2017, we won’t be using coal in the future. The monthly energy cost (electricity, coal and gas)
as a percentage of total monthly sales of our main paper products for the 24 months ended December 31, 2017 are summarized as follows:
Gross Profit
Gross profit for December
31, 2017 was $19,955,951 (17.05% of the total revenue), representing a decrease of $5,575,932, or 21.84%, from the gross profit
of $25,531,883 (18.95% of the total revenue) for the year ended December 31, 2016. The decrease was mainly due to (i) the decrease
in quantities sold and (ii) the increase of material purchase price of CMP, partially offset by the increase of ASP of regular
CMP.
Corrugating Medium Paper, Offset Printing Paper and Tissue
Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the year ended December 31, 2017 was $19,955,951, a decrease of $5,962,075, or
23.00%, from the gross profit of $25,918,026 for the year ended December 31, 2016. The decrease was mainly the result of the factors
discussed above.
The overall gross profit
margin for offset printing paper, CMP and tissue paper products decreased by 2.28 percentage points, from 19.33% for the year ended
December 31, 2016, to 17.05% for the year ended December 31, 2017.
Gross profit margin
for regular CMP for the year ended December 31, 2017 was 16.94%, or 0.20 percentage points lower, as compared to gross profit margin
of 17.14% for the year ended December 31, 2016.
Gross profit margin
for light-weight CMP for the year ended December 31, 2017 was 18.92%, or 6.55 percentage points lower, as compared to gross profit
margin of 25.47% for the year ended December 31, 2016.
Gross profit margin
for offset printing paper was 17.32% for the year ended December 31, 2017, a decrease of 5.41 percentage points, as compared to
22.73% for the year ended December 31, 2016.
Gross profit margin
for tissue paper products for the year ended December 31, 2017 was 6.45%, a decrease of 5.35 percentage points, as compared to
11.80% for the year ended December 31, 2016.
Monthly gross profit
margins for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2017 are as follows:
Digital Photo Paper
Profit for digital
photo paper for the year ended December 31, 2017 was $nil, compared with a loss of $386,143 for the year ended December 31, 2016.
In June 2016, we suspended the production of digital photo paper due to low market demand for our products and now are upgrading
the production line to produce more competitive photo paper products. We expect to resume our digital photo paper production in
the near future.
Selling, General and Administrative
Expenses
Selling, general and
administrative expenses for the year ended December 31, 2017 were $11,307,395, a decrease of $1,094,463, or 8.82% from $12,401,858
for the year ended December 31, 2016. The expenses were higher in 2016 because the Company issued 1,133,916 shares of common stock,
valued at $1,417,395, pursuant to the Company’s compensatory incentive plans in January 2016.
Income from Operations
Operating income for
the year ended December 31, 2017 was $4,680,267, a decrease of $8,271,452, or 63.86%, from $12,951,719 for the year ended December
31, 2016. The decrease in operating income was primarily due to the decrease in gross profit and loss from impairment of fixed
assets and disposal of coal burning boilers, partially offset by the decrease in selling, general and administrative expenses.
Other Income and Expenses
Interest expense for
the year ended December 31, 2017 decreased by $187,377, from $2,621,147 in the year ended December 31, 2016, to $2,433,770. The
Company had short-term and long-term interest-bearing loans and related party loans that aggregated $25,466,009 as of December
31, 2017, as compared to $28,766,346 as of December 31, 2016. The interest incurred during the year ended December 31, 2017 and
2016, were $nil and $53,535 (a portion of interest related to the sale-leaseback arrangement with CNFTFL), respectively, and were
capitalized as soft-cost of construction-in-progress.
Net Income
As a result of the
above, net income was $1,659,788 for the year ended December 31, 2017, representing a decrease of $5,653,188, or 77.30%, from $7,312,976
for year ended December 31, 2016.
Accounts Receivable
Net accounts receivable
decreased by $2,050,754, or 52.66%, to $1,843,682 as of December 31, 2017, as compared with $3,894,436 as of December 31, 2016.
We usually collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist
of raw materials (accounting for 88.37% of total value of inventory as of December 31, 2017) and finished goods. As of December
31, 2017, the recorded value of inventory increased by 50.46% to $8,474,165 from $5,632,030 as of December 31, 2016. As of December
31, 2017, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $6,337,374, approximately
$2,999,725, or 89.88%, higher than the balance as of December 31, 2016. The increase was mainly due to the increase of unit cost
of recycled paper board in 2017. We made additional purchases of paper board as a hedge against further increases in cost.
A summary of changes
in major inventory items is as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
$ Change
|
|
|
% Change
|
|
Raw Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
6,337,374
|
|
|
$
|
3,337,649
|
|
|
|
2,999,725
|
|
|
|
89.88
|
%
|
Recycled white scrap paper
|
|
|
862,734
|
|
|
|
-
|
|
|
|
862,734
|
|
|
|
-
|
|
Recycled scrap binding margin
|
|
|
-
|
|
|
|
547,803
|
|
|
|
-547,803
|
|
|
|
-100.00
|
%
|
Tissue base paper
|
|
|
25,236
|
|
|
|
87,641
|
|
|
|
-62,405
|
|
|
|
-71.21
|
%
|
Coal & gas
|
|
|
71,674
|
|
|
|
242,307
|
|
|
|
-170,633
|
|
|
|
-70.42
|
%
|
Digital photo base paper and other raw materials
|
|
|
191,419
|
|
|
|
177,823
|
|
|
|
13,596
|
|
|
|
7.65
|
%
|
Total Raw Materials
|
|
|
7,488,437
|
|
|
|
4,393,223
|
|
|
|
3,095,214
|
|
|
|
70.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
|
985,728
|
|
|
|
1,238,807
|
|
|
|
-253,079
|
|
|
|
-20.43
|
%
|
Totals
|
|
$
|
8,474,165
|
|
|
$
|
5,632,030
|
|
|
|
2,842,135
|
|
|
|
50.46
|
%
|
Accounts Payable and Notes Payable
Accounts payable and
notes payable was $6,544,342 as of December 31, 2017, an increase of 3,822,072, or 140.40%, from $2,722,270 as of December 31,
2016. Accounts payable was $422,705 and $559,952 as of December 31, 2017 and December 31, 2016, respectively. We have been relying
on the bank acceptance notes issued under our credit facilities with Bank of Hebei and Bank of Cangzhou to make the majority of
our raw materials payments to our vendors. Our notes payable to Bank of Cangzhou and Bank of Hebei were $6,121,637 and $2,162,318
as of December 31, 2017 and December 31, 2016, respectively. We have paid off bank acceptance notes of $2,295,614 in February 2017.
We also acquired additional bank acceptance notes of $6,121,637 from Bank of Cangzhou in January 2017, which we paid off in January
2018.
Liquidity and Capital Resources
Overview
As of December 31,
2017, we had a net working capital deficit of $1,770,736, a decrease of $4,337,533, from the net working capital deficit of $6,108,269
at December 31, 2016. Total current assets as of December 31, 2017 amounted to $19,986,797. Substantially all cash and cash equivalents
are cash deposits in bank accounts. Restricted cash of $6,121,637 was included in our current assets as of December 31, 2017. Restricted
cash is deposited at the Bank of Cangzhou for purpose of securing the bank acceptance notes from the bank. The acceptance notes
were due and paid off in January 2018.
Current liabilities
as of December 31, 2017 totaled $21,757,533, an increase of $1,171,942, from the December 31, 2016 balance of $20,585,591. We
use bank acceptance notes, which are typically 6-to-12 month notes, to guarantee the payments to our vendors. Notes payable was
$6,121,637 as of December 31, 2017, representing an increase of $3,959,319, or 183.11%, from $2,162,318 as of December 31, 2016.
Most of our current short-term bank loans are either revolving or term loans. We expect to renew these loans with the banks on
similar terms at or before maturity. All of our short-term loans (with the exception of the notes payable, which carry no interest
but require a deposit equal to a portion of the credit facilities at the issuing banks) have interest-only monthly payments, with
a balloon payment for the entire principal amount upon maturity of the loan. The long term loans from the credit union require
monthly and quarterly interest payments, with one large balloon payment upon maturity.
From time to time,
we investigate financing opportunities with banks and other financial institutions and investors both inside and outside of China,
and we may seek long-term financings to pay off liabilities with shorter terms. We may seek additional funds through public and
private financing, including equity and debt offering. As of the date of this report, we have not entered into any material binding
agreement for additional long-term financing. There can be no assurance that we will be able to secure such financing either from
banks or through debt or equity investments from investors. If we are unable to obtain sufficient outside financing, whether short-term
or long-term, or generate sufficient operating cash flow internally, the progress of our construction or renovation projects may
slow down or may otherwise be negatively affected. We may also have to curtail the scope of our capital expenditure projects or
shelve some components of such projects, such as, delaying the installation of PM9 until additional capital resources are available.
Financing with Sale-Leaseback
The Company entered
into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013, for a total financing
proceeds in the amount of RMB 150 million (approximately US$23 million). Pursuant to the Lease Financing Agreement, Orient Paper
HB sold some equipment to CNFTFL for RMB 150 million (approximately US$23 million). Concurrent with the sale of equipment, Orient
Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient
Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,296) to CNFTFL to buy back all of the Leased Equipment.
On July 1, 2015, Orient
Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into an agreement (the “2015 Agreement”),
to amend and restate the Lease Financing Agreement entered into in 2013 (the “2013 Agreement”) with the final repayment
date extended to June 21, 2017. Orient Paper HB made install payments at revised schedule until it was fully paid off in August
2017. All the Lease Equipment was bought back at the nominal price according to the agreement. The balance of the long-term obligations
under capital lease were $nil as of December 31, 2017 and December 31, 2016, and its current portion in the amount of $nil and
$8,786,528, respectively.
Total interest expenses
for the sale-leaseback arrangement for the years ended December 31, 2017 and 2016 were $795,163 and $749,867, respectively.
As a result of the
sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The deferred gain was
amortized over the lease term and as an offset to depreciation of the Leased Equipment. In term of the extension of the new payment
schedule, the deferred gain was amortized over the remaining lease term through June 21, 2017.
Renewal of operating lease
On August 7, 2013,
the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound
(the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial
Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”)
to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. In connection
with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its
original use for a term of up to three years, with an annual rental payment of approximately $148,317 (RMB1,000,000). The lease
agreement expired in August 2016. On August 9, 2016, the Company paid off the rental for the first lease agreement and entered
into a supplementary agreement with Hebei Fangsheng, who agreed to extend the lease term for another two years, with the same rental
payment as original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $60,378 and $56,872, which was
recorded as part of the current liabilities as of December 31, 2017 and December 31, 2016, respectively.
Capital Expenditure Commitment as of
December 31, 2017
We finance our daily
operations mainly by cash flows generated from our business operations and loans from banking institutions (including leasing companies)
and our major shareholders. Major capital expenditures 2017 were primarily financed by cash generated from business operations.
As of December 31, 2017, we had approximately $11 million in capital expenditure commitments that were mainly related to the construction
costs of building equipment and other facilities in a new industrial park in Wei County of Hebei, China, where we expect to build
two tissue paper production lines (PM8 and PM9), and install other paper production machinery. These commitments are expected to
be financed by bank loans and cash flows generated from our business operations and loans.
Capital Expenditures
Our committed capital
expenditures for the next 12 months are approximately $11 million, which mainly includes budgeted costs for the projects described
below.
New Production Lines at the Wei County
Industrial Park
In November 2012, we
entered into a 15-year land lease with a land investment company in Wei County for the purpose of developing the 49.4 acres of
land into the base of our next capacity expansion. In December 2012, we signed a contract with an equipment contractor in Shanghai
to build the first of our two tissue paper production lines in Wei County. The two production lines, each having production capacity
of 15,000 tonnes/year, will be designated as PM8 and PM9 upon completion. Total estimated cost of the Wei County tissue paper project
is up to approximately $124 million (of which $116 million has been incurred thus far), including the estimated costs of general
infrastructure and administrative facilities such as warehouses, offices, dorms and landscaping, of up to $103 million (of which
$94 million has been incurred thus far) and the estimated costs for the two paper machines and related packaging equipment of up
to $22 million (of which $22 million has been incurred thus far). We had previously estimated that the installation and test operations
of the PM8 production line would be completed in the second half of 2014. Our current estimated completion time of the PM8 production
line is the first half of 2018. We have experienced delays resulting from our inability to obtain approval for a coal burning boiler
in the PM8 production line from the Hebei Provincial Government. According to the latest regulation announced by the Hebei Provincial
Government, coal burning boilers are no longer allowed for new plants. We will use gas boilers and launch biomass co-generation
projects to replace the coal burning boilers. We are consulting with relevant government departments on this solution. The delay
of completion of the PM8 production line did not have any major financial impact on our current period earnings, as we did not
previously budget significant revenue or net earnings from the PM8 production line tissue paper for 2017.
We plan to build a
second 15,000 tonnes/year tissue paper production line (designated as PM9) at an estimated cost of $7.8 million after the PM8 production
line is put into production.
Digital Photo Paper PM4 and PM5 Production
Lines
On December 31, 2009,
we acquired a digital photo paper production line, including two coating lines that are designated as PM4 and PM5 and ancillary
equipment, for a total purchase price of approximately $13.6 million. We suspended production of photo paper in June 2016 and now
are upgrading the production line to produce more competitive photo paper products. We expect to resume our digital photo paper
production in the near future.
Cash ,Cash Equivalents and restricted
cash
Our cash, cash equivalents
and restricted cash as of December 31, 2017 was $9,017,427, an increase of $4,522,463, from $4,494,964 as of December 31, 2016.
The increase of cash and cash equivalents for the year ended December 31, 2017 was attributable to a number of factors:
i. Net cash provided by operating activities
Net cash provided by
operating activities was $18,151,788 for the year ended December 31, 2017. The balance represented an increase of cash of $2,874,266,
or 18.81%, from $15,277,522 provided for the year ended December 31, 2016. Net income for the year ended December 31, 2017 was
$1,659,788, representing a decrease of $5,653,188, or 77.30%, from a net income of $7,312,976 for the year ended December 31, 2016.
Changes in various asset and liability account balances throughout the year ended December 31, 2017 also contributed to the net
change in cash from operating activities in year ended December 31, 2017. Chief among such changes is the decrease of accounts
receivable in the amount of $2,265,428 during the year of 2017 and the increase of notes payable in the amount of $3,707,933. There
was also an increase of $2,417,942 in the ending inventory balance as of December 31, 2017 (a decrease to net cash for the year
ended December 31, 2017 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization
in the amount of $14,633,780. The Company also had a net increase of $79,264 in prepayment and other current assets (a decrease
to net cash) and a net decrease of $1,495,164 in other payables and accrued liabilities and due to a related party (a decrease
to net cash), as well as a decrease in income tax payable of $839,047 (a decrease to net cash) during the year ended December 31,
2017.
ii. Net cash used in investing
activities
We incurred $9,321,636
in net cash expenditures for investing activities during the year ended December 31, 2017, as compared to $11,545,029 for the year
ended December 31, 2016. Expenditures in the year ended December 31, 2017 were for the progress payments for the construction of
our first tissue paper production line PM8 and related facilities, including three paper mill workshops and maintenance workshops
and four warehouses at the Wei County industrial park in Wei County, Hebei province.
iii. Net cash used in financing activities
Net cash used in financing
activities was $8,624,970 for the year ended December 31, 2017, as compared to net cash used in financing activities in the amount
of $3,681,346 for the year ended December 31, 2016. The increase was mainly attributable to (i) repayment of short-term and long-term
loans and capital leases during the year ended December 31, 2017, and (ii) cash outflow of $3,707,933 from the increase of restricted
deposits for notes payables to Bank of Cangzhou.
Short-term bank loans
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Bank of Hebei
|
|
(a)
|
|
|
$
|
-
|
|
|
$
|
2,162,318
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
(b)
|
|
|
|
-
|
|
|
|
2,883,091
|
|
ICBC Loan 2
|
|
(c)
|
|
|
|
4,285,145
|
|
|
|
-
|
|
ICBC Loan 3
|
|
(d)
|
|
|
|
2,907,778
|
|
|
|
-
|
|
Total short-term bank loans
|
|
|
|
|
$
|
7,192,923
|
|
|
$
|
5,045,409
|
|
(a)
|
On July 8, 2016, the Company entered into a working capital loan agreement with the Bank of Hebei, with a balance of $2,162,318 as of December 31, 2016. The loan bears a fixed interest rate of 5.22% per annum. The working capital loan was guaranteed by the CEO and Hebei Tengsheng with its land use right and real property pledged by Hebei Tengsheng as collateral for the benefit of the bank. The loan was due and repaid on July 6, 2017.
|
|
|
(b)
|
On September 13, 2016, the Company entered into a working capital loan agreement with ICBC, with a balance of $2,883,091 as of December 31, 2016. The loan bears a fixed interest rate of 4.5675% per annum. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit of the bank. The loan was due and repaid on September 7, 2017.
|
|
|
(c)
|
On January 10, 2017, the Company entered into a working capital loan agreement with the ICBC, with a balance of $4,285,145 as of December 31, 2017. The working capital loan is guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.5675% per annum. The loan was due and repaid on January 8, 2018.
|
|
|
(d)
|
On October 18, 2017, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,907,778 as of December 31, 2017. The working capital loan is secured by the Company’s land use right as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.945% per annum. The loan will be due on October 12, 2018.
|
As of December 31,
2017, there were guaranteed short-term borrowings of $7,192,923 and unsecured bank loans of $nil. As of December 31, 2016, there
were guaranteed short-term borrowings of $5,045,409 and unsecured bank loans of $nil.
The average short-term
borrowing rates for the years ended December 31, 2017 and 2016 were approximately 5.27% and 8.05%, respectively.
Long-term loans from credit union
As of December 31,
2017 and 2016, loans payable to Rural Credit Union of Xushui County, amounted to $7,560,221 and $4,843,592, respectively.
On April 16, 2014,
the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is payable
in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest
payment is due quarterly and bears the rate of 0.72% per month. In August 2015, after giving the required notice to the Rural Credit
Union of Xushui County in accordance with the terms on the agreement, the Company prepaid a portion of the loan in an amount of
$191,301, of which $68,868 was paid ahead of its original repayment schedule. As of December 31, 2017 and 2016, total outstanding
loan balance was $1,316,152 and $1,239,729, respectively. Out of the total outstanding loan balance, current portion amounted were
$1,316,152 and $nil as of December 31, 2017 and December 31, 2016, respectively, which are presented as current liabilities in
the consolidated balance sheet and the remaining balance of $nil and $1,239,729 are presented as non-current liabilities in the
consolidated balance sheet as of December 31, 2017 and December 31, 2016 respectively.
On July 15, 2013, the
Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is due and payable
in various installments from December 21, 2013 to July 26, 2018. The loan is secured by certain of the Company’s manufacturing
equipment with net book value of $7,963,285 and $9,813,294 as of December 31, 2017 and December 31, 2016, respectively. Interest
payment is due quarterly and bears a fixed rate of 0.72% per month. In August 2015, after giving the required notice to the Rural
Credit Union of Xushui County in accordance with the terms on the agreement, the Company prepaid a portion of the loan in an amount
of $198,953, of which $61,216 was paid ahead of its original repayment schedule. As of December 31, 2017 and 2016, the total outstanding
loan balance was $3,826,022 and $3,603,863, respectively. Out of the total outstanding loan balance, current portion amounted were
$3,826,022 and $nil as of December 31, 2017 and December 31, 2016, respectively, which are presented as current liabilities in
the consolidated balance sheet and the remaining balance of $nil and $3,603,863 are presented as non-current liabilities in the
consolidated balance sheet as of December 31, 2017 and December 31, 2016 respectively.
On April 20, 2017,
the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 2 years, which is due and
payable in various installments from August 26, 2017 to April 19, 2019. The loan is guaranteed by Hebei Tengsheng with its land
use right pledged 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 December 31, 2017 the total outstanding loan balance was $2,418,047, out of which $1,224,328 and $1,193,719 are presented
as current and non-current liabilities in the consolidated balance sheet respectively.
Total interest expenses
for the short-term bank loans and long-term loans for the years ended December 31, 2017 and 2016 were $1,196,814 and $1,411,731,
respectively.
Shareholder Loans
Mr. Zhenyong Liu has
loaned money to Orient Paper HB for working capital purposes over a period of time. On January 1, 2013, Orient Paper HB and Mr.
Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to
December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the
period from 2013 to 2015. Approximately $392,296 of interest is still outstanding to Mr. Zhenyong Liu and is recorded in other
payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of December 31, 2017.
On December 10, 2014,
the CEO provided an unsecured loan to the Company of $ 9,182,455 (RMB 60,000,000) , 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 loan will be due on December
2, 2020. The Company repaid $6,012,416 to Mr. Zhenyong Liu in 2016. As of December 31, 2017, the outstanding loan balance was $3,060,818
and the accrued interest was $45,912 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 the CEO which allows Orient Paper HB to borrow from the CEO an amount up to $18,364,911 (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 carry 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. The loan matures on July 12, 2021. As of December 31, 2017
and 2016, the outstanding loan balance were $7,652,047 and $7,207,727, respectively, and the accrued interest was $110,476 and
$104,062, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the
consolidated balance sheet.
As of December 31,
2017 and 2016, total amount of loans due to the CEO were $10,712,865 and $10,090,817, respectively. The interest expense incurred
for such related party loans are $451,626, $513,084 and $740,150 for the years ended December 31, 2017, 2016 and 2015, respectively.
The accrued interest owe to the CEO was approximately $548,684 and $516,825, as of December 31, 2017 and December 31, 2016, respectively,
which was recorded in other payables and accrued liabilities.
During the years ended
December 31, 2017 and 2016, the Company borrowed $nil and $14,000, respectively, from a shareholder to pay for various expenses
incurred in the U.S. The amount was due on demand with interest free. The Company repaid the entire balance by December 31, 2017.
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 years ended December 31, 2017 and 2016, 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 Orient Paper HB and Orient Paper 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 December 31, 2017 and 2016 to translate the Chinese RMB to the U.S.
Dollars are 6.5342:1 and 6.9370:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates
at 6.7423:1, and 6.6529:1 for the years ended December 31, 2017 and 2016, respectively. Translation adjustments are included in
other comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor for Baoding Huanrun
Trading Co., (formerly known as Dongfang Trading Co.,) for its long-term bank loans in an amount of $8,570,292 (RMB56,000,000),
which matures at various times in 2018. Baoding Huanrun Trading Co. 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 Huanrun Trading
Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance
sheet transactions.
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue
from Contracts with Customers” (“ASU 2014-09”). This ASU is a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the
consideration it expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue
from Contracts with Customers: Principal versus Agent Considerations (Reporting Gross versus Net), which is effective upon adoption
of ASU 2014-09. This ASU clarifies the implementation guidance in ASU 2014-09 on principal versus agent considerations. These ASUs
are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The
Company will adopt ASU 2014-09, and its related clarifying ASUs, as of January 1, 2018. The Company anticipates adopting the standard
using the modified retrospective transition approach. Under this approach, the new standard would apply to all new contracts initiated
on or after January 1, 2018. For existing contracts that have remaining obligations as of January 1, 2018, any difference between
the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized using
a cumulative effect adjustment to the opening balance of retained earnings. We do not expect the adoption of these ASUs to have
a material impact on our consolidated financial statements.
In January 2016, the
FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments
to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under
equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. In addition the amendments in this update eliminate the requirement
to disclose the method(s) and significant assumptions used to estimate the fair value that are required to be disclosed for financial
instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in
ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted.
We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
In February 2016, the
FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create
Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The
objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users
of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between
Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases
under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing
between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between
capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases
and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive
income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the
adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB
issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
(“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets
held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates
the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of
all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis
of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses
should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance
rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted
for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases,
off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have
the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements.
In August 2016, the
FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including
bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU
are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2016-15
to have a material impact on our consolidated financial statements.
In November 2016, the
FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which
requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted
cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. We do not expect the adoption of ASU 2016-18 to have a material impact on our consolidated financial statements. The Company
had $6,121,637 and $2,162,318 of restricted cash as of December 31, 2017 and December 31, 2016, respectively.
In January 2017, the
FASB issued ASU No. 2017-01, “‘Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU
2017-01”), which clarify the definition of a business. The amendments affect all companies and other reporting organizations
that must determine whether they have acquired or sold a business. The amendments in this ASU are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted
so long as the transaction has not been reported in financial statements that have been issued or made available for issuance.
We do not expect the adoption of ASU 2017-01 to have a material impact on our consolidated financial statements.
In May 2017, the FASB
issued ASU No. 2017-09, “‘Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU
2017-09”), which provide guidance on determining which changes to the terms and conditions of share-based payment awards
require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. We do not expect the adoption of ASU 2017-09 to have a material impact on our consolidated
financial statements.
Item 8.
|
Financial Statements and Supplementary Data
|
Our audited financial
statement for the fiscal year ended December 31, 2017 and 2016, together with the report of the independent certified public accounting
firms thereon and the notes thereto, are presented beginning at page F-1.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To:
|
The Board of Directors and Stockholders
of
|
|
Orient Paper, Inc.
|
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of Orient Paper, Inc. (the Company) as of December 31, 2017, and the related consolidated statement of income and
comprehensive income (loss), statement of changes in stockholders’ equity, and cash flows for the year ended December 31,
2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations
and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we
are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ WWC, P.C.
|
|
WWC, P.C.
|
|
Certified Public Accountants
|
|
We have served as the Company’s
auditor since March 25, 2018.
San Mateo, California
April 17, 2018
Report of Independent Registered Public Accounting
Firm
Board
of Directors and Stockholders
Orient
Paper, Inc.
We
have audited the accompanying consolidated balance sheets of Orient Paper, Inc. (the “Company”) as of December 31,
2016 and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash
flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company at December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016,
in conformity with accounting principles generally accepted in the United States of America.
BDO
China Shu Lun Pan Certified Public Accountants LLP
Shenzhen,
The People’s Republic of China
March
22, 2017 except for liquidity and going concern discussed in Note 2, as to which the date is April 17, 2018
ORIENT PAPER,
INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and bank balances
|
|
$
|
2,895,790
|
|
|
$
|
2,332,646
|
|
Restricted cash
|
|
|
6,121,637
|
|
|
|
2,162,318
|
|
Accounts
receivable (net of allowance for doubtful accounts of $37,626 and $79,478 as of December 31, 2017 and 2016, respectively)
|
|
|
1,843,682
|
|
|
|
3,894,436
|
|
Inventories
|
|
|
8,474,165
|
|
|
|
5,632,030
|
|
Prepayments and other current
assets
|
|
|
651,523
|
|
|
|
455,892
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,986,797
|
|
|
|
14,477,322
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
189,388,709
|
|
|
|
187,689,880
|
|
Value-added tax recoverable
|
|
|
3,041,416
|
|
|
|
2,945,575
|
|
Deferred tax asset non-current
|
|
|
6,572,559
|
|
|
|
3,264,841
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
218,989,481
|
|
|
$
|
208,377,618
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
7,192,923
|
|
|
$
|
5,045,409
|
|
Current portion of long-term loans from credit union
|
|
|
6,366,502
|
|
|
|
-
|
|
Current obligations under capital lease
|
|
|
-
|
|
|
|
8,786,528
|
|
Accounts payable
|
|
|
422,705
|
|
|
|
559,952
|
|
Advance from customers
|
|
|
-
|
|
|
|
28,831
|
|
Notes payable
|
|
|
6,121,637
|
|
|
|
2,162,318
|
|
Due to a related party
|
|
|
60,378
|
|
|
|
56,872
|
|
Accrued payroll and employee benefits
|
|
|
231,247
|
|
|
|
209,936
|
|
Other payables and accrued liabilities
|
|
|
836,337
|
|
|
|
2,424,778
|
|
Income taxes payable
|
|
|
525,804
|
|
|
|
1,310,967
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,757,533
|
|
|
|
20,585,591
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
1,193,719
|
|
|
|
4,843,592
|
|
Loans from a related party
|
|
|
10,712,865
|
|
|
|
10,090,817
|
|
Deferred gain on sale-leaseback
|
|
|
-
|
|
|
|
102,232
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities (including amounts of the consolidated VIE without recourse to the Company of $31,235,520 and $35,618,995 as of
December 31, 2017 and 2016, respectively)
|
|
|
33,664,117
|
|
|
|
35,622,232
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common stock, 500,000,000
shares authorized, $0.001 par value per share, 21,450,316 shares issuedand outstanding as of December 31, 2017 and 2016, respectively
|
|
|
21,450
|
|
|
|
21,450
|
|
Additional paid-in capital
|
|
|
50,635,243
|
|
|
|
50,635,243
|
|
Statutory earnings reserve
|
|
|
6,080,574
|
|
|
|
6,080,574
|
|
Accumulated other comprehensive income (loss)
|
|
|
5,468,799
|
|
|
|
(5,441,391
|
)
|
Retained earnings
|
|
|
123,119,298
|
|
|
|
121,459,510
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
185,325,364
|
|
|
|
172,755,386
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders'
Equity
|
|
$
|
218,989,481
|
|
|
$
|
208,377,618
|
|
See accompanying notes to consolidated
financial statements.
ORIENT PAPER, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
|
|
Year Ended
|
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
117,023,578
|
|
|
$
|
134,744,600
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(97,067,627)
|
|
|
|
(109,212,717)
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
19,955,951
|
|
|
|
25,531,883
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(11,307,395
|
)
|
|
|
(12,401,858
|
)
|
Loss on impairment of assets
|
|
|
(2,291,027
|
)
|
|
|
-
|
|
Loss from disposal of property, plant
and equipment
|
|
|
(1,677,262
|
)
|
|
|
(178,306
|
)
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
4,680,267
|
|
|
|
12,951,719
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
34,590
|
|
|
|
96,976
|
|
Subsidy income
|
|
|
41,529
|
|
|
|
-
|
|
Interest expense
|
|
|
(2,433,770)
|
|
|
|
(2,621,147)
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
2,322,616
|
|
|
|
10,427,548
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
(662,828)
|
|
|
|
(3,114,572)
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
1,659,788
|
|
|
|
7,312,976
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
|
10,910,190
|
|
|
|
(11,784,410)
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive
Income (Loss)
|
|
$
|
12,569,978
|
|
|
$
|
(4,471,434
|
)
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
Diluted Earnings per Share
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– Basic and Diluted
|
|
|
21,450,316
|
|
|
|
21,416,143
|
|
See accompanying notes to consolidated
financial statements.
ORIENT PAPER, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Statutory
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserve
|
|
|
Income (loss)
|
|
|
Earnings
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
|
20,316,400
|
|
|
$
|
20,316
|
|
|
$
|
49,218,982
|
|
|
$
|
6,080,574
|
|
|
$
|
6,343,019
|
|
|
$
|
114,146,534
|
|
|
$
|
175,809,425
|
|
Issuance of shares to officer and directors
|
|
|
1,133,916
|
|
|
|
1,134
|
|
|
|
1,416,261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,417,395
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,784,410
|
)
|
|
|
-
|
|
|
|
(11,784,410
|
)
|
Net income for the year of 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,312,976
|
|
|
|
7,312,976
|
|
Balance at December 31, 2016
|
|
|
21,450,316
|
|
|
$
|
21,450
|
|
|
$
|
50,635,243
|
|
|
$
|
6,080,574
|
|
|
$
|
(5,441,391
|
)
|
|
$
|
121,459,510
|
|
|
$
|
172,755,386
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,910,190
|
|
|
|
-
|
|
|
|
10,910,190
|
|
Net income for the year of 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,659,788
|
|
|
|
1,659,788
|
|
Balance at December 31, 2017
|
|
|
21,450,316
|
|
|
$
|
21,450
|
|
|
$
|
50,635,243
|
|
|
$
|
6,080,574
|
|
|
$
|
5,468,799
|
|
|
$
|
123,119,298
|
|
|
$
|
185,325,364
|
|
See accompanying notes to consolidated
financial statements.
ORIENT PAPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
1,659,788
|
|
|
$
|
7,312,976
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,633,780
|
|
|
|
15,287,509
|
|
Loss from impairment and disposal of property, plant and equipment
|
|
|
3,968,289
|
|
|
|
178,306
|
|
(Recovery from) Allowance for bad debts
|
|
|
(45,309
|
)
|
|
|
44,938
|
|
Share-based compensation expenses
|
|
|
-
|
|
|
|
1,417,395
|
|
Deferred tax
|
|
|
(3,010,577
|
)
|
|
|
(1,959,494
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,265,428
|
|
|
|
(2,246,882
|
)
|
Prepayments and other current assets
|
|
|
(79,264
|
)
|
|
|
1,410,080
|
|
Inventories
|
|
|
(2,417,942
|
)
|
|
|
3,112,465
|
|
Accounts payable
|
|
|
(166,464
|
)
|
|
|
336,507
|
|
Advance from customers
|
|
|
(29,663
|
)
|
|
|
26,173
|
|
Notes payable
|
|
|
3,707,933
|
|
|
|
(11,273,279
|
)
|
Due to a related party
|
|
|
-
|
|
|
|
(300,621
|
)
|
Accrued payroll and employee benefits
|
|
|
8,111
|
|
|
|
(300,275
|
)
|
Other payables and accrued liabilities
|
|
|
(1,503,275
|
)
|
|
|
1,509,196
|
|
Income taxes payable
|
|
|
(839,047
|
)
|
|
|
722,528
|
|
Net Cash Provided by Operating Activities
|
|
|
18,151,788
|
|
|
|
15,277,522
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(9,380,702
|
)
|
|
|
(11,586,214
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
59,066
|
|
|
|
41,185
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(9,321,636)
|
|
|
|
(11,545,029)
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from related party loans
|
|
|
-
|
|
|
|
3,020,208
|
|
Repayments of related party loans
|
|
|
-
|
|
|
|
(6,026,416
|
)
|
Proceeds from short term bank loans
|
|
|
12,903,609
|
|
|
|
6,463,347
|
|
Proceeds from credit union loans
|
|
|
2,373,077
|
|
|
|
-
|
|
Repayment of bank loans
|
|
|
(11,153,463
|
)
|
|
|
(14,730,418
|
)
|
Payment of capital lease obligation
|
|
|
(9,040,260
|
)
|
|
|
(675,139
|
)
|
(Increase in) Release of restricted cash
|
|
|
(3,707,933
|
)
|
|
|
8,267,072
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(8,624,970)
|
|
|
|
(3,681,346)
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
357,962
|
|
|
|
(360,418)
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
563,144
|
|
|
|
(309,271
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - Beginning of Year
|
|
|
2,332,646
|
|
|
|
2,641,917
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Year
|
|
$
|
2,895,790
|
|
|
$
|
2,332,646
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest cost
|
|
$
|
2,103,340
|
|
|
$
|
2,414,458
|
|
Cash paid for income taxes
|
|
$
|
4,512,453
|
|
|
$
|
4,351,538
|
|
|
|
|
|
|
|
|
|
|
Cash and bank balances
|
|
|
2,895,790
|
|
|
|
2,332,646
|
|
Restricted cash
|
|
|
6,121,637
|
|
|
|
2,162,318
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
|
9,017,427
|
|
|
|
4,494,964
|
|
See accompanying notes to consolidated
financial statements.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Organization and Business Background
Orient
Paper, Inc. 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 Orient Paper Milling Company Limited (“Orient
Paper HB”), 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.” to more accurately describe our business.
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 Orient Paper HB and such shares of Orient Paper
HB were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders
of Orient Paper HB) to exercise control over the disposition of Dongfang Holding’s shares in Orient Paper HB on Dongfang
Holding’s behalf until Dongfang Holding successfully completed the change in registration of Orient Paper HB’s capital
with the relevant PRC Administration of Industry and Commerce as the 100% owner of Orient Paper HB’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, Orient Paper HB, became an indirectly owned subsidiary of the Company.
Dongfang
Holding, as the 100% owner of Orient Paper HB, was unable to complete the registration of Orient Paper HB’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 Orient Paper HB to their original shareholders,
and the original Orient Paper HB shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Orient
Paper Shengde”) to transfer the control of Orient Paper HB over to Orient Paper 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 Orient Paper Shengde, a limited liability company organized
under the laws of the PRC. Because Orient Paper Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as
a wholly foreign-owned entity under PRC law.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
To
ensure proper compliance of the Company’s control over the ownership and operations of Orient Paper HB with certain PRC
regulations, on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”)
with Orient Paper HB and Orient Paper HB Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde
Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Orient Paper Shengde”), a wholly foreign-owned
enterprise in the PRC with an original registered capital of $10,000,000 (subsequently increased to $60,000,000 in June 2010).
Orient Paper Shengde is mainly engaged in production and distribution of digital photo paper and is 100% owned by Shengde Holdings.
Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement,
which generally provides that Orient Paper Shengde shall provide exclusive technical, business and management consulting services
to Orient Paper HB, in exchange for service fees including a fee equivalent to 80% of Orient Paper HB’s total annual net
profits; (ii) Loan Agreement, which provides that Orient Paper Shengde will make a loan in the aggregate principal amount of $10,000,000
to Orient Paper HB Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan
to the registered capital of Orient Paper HB; (iii) Call Option Agreement, which generally provides, among other things, that
Orient Paper HB Equity Owners irrevocably grant to Orient Paper Shengde an option to purchase all or part of each owner’s
equity interest in Orient Paper HB. The exercise price for the options shall be RMB1 which Orient Paper Shengde should pay to
each of Orient Paper HB Equity Owner for all their equity interests in Orient Paper HB; (iv) Share Pledge Agreement, which provides
that Orient Paper HB Equity Owners will pledge all of their equity interests in Orient Paper HB to Orient Paper Shengde as security
for their obligations under the other agreements described in this section. Specifically, Orient Paper Shengde is entitled to
dispose of the pledged equity interests in the event that Orient Paper HB Equity Owners breach their obligations under the Loan
Agreement or Orient Paper HB fails to pay the service fees to Orient Paper Shengde pursuant to the Exclusive Technical Service
and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Orient Paper HB Equity Owners shall irrevocably
entrust a designee of Orient Paper 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 Orient Paper HB or with respect to any equity owner
action to be taken in accordance with the laws and Orient Paper HB’s Articles of Association. The terms of the agreement
are binding on the parties for as long as Orient Paper HB Equity Owners continue to hold any equity interest in Orient Paper HB.
An Orient Paper HB Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior
approval of Orient Paper Shengde. As the Company had controlled Orient Paper HB since July 16, 2007 through Dongfang Holding and
the trust until June 24, 2009, and continues to control Orient Paper HB through Orient Paper Shengde and the Contractual Agreements,
the execution of the Contractual Agreements is considered as a business combination under common control.
On
February 10, 2010, Orient Paper Shengde and the Orient Paper HB Equity Owners entered into a Termination of Loan Agreement to
terminate the abovementioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions
through Orient Paper Shengde instead of Orient Paper HB, the $10,000,000 loan contemplated was never made prior to the point of
termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of
the Company over Orient Paper HB and its businesses in the PRC.
An
agreement was also entered into among Orient Paper Shengde, Orient Paper HB and the Orient Paper HB Equity Owners on December
31, 2010, reiterating that Orient Paper Shengde is entitled to 100% of the distributable profit of Orient Paper HB, pursuant to
the above mentioned Contractual Agreements. In addition, Orient Paper HB and the Orient Paper HB Equity Owners shall not declare
any of Orient Paper HB’s unappropriated earnings as dividend, including the unappropriated earnings of Orient Paper HB from
its establishment to 2010 and thereafter.
Orient Paper has no direct equity interest
in Orient Paper HB. However, through the Contractual Agreements described above Orient Paper is found to be the primary beneficiary
(the “Primary Beneficiary”) of Orient Paper HB and is deemed to have the effective control over Orient Paper HB’s
activities that most significantly affect its economic performance, resulting in Orient Paper HB being treated as a controlled
variable interest entity of Orient Paper 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
Orient Paper HB for the years ended December 31, 2017 and 2016 was accounted for 100% and 99.51%, respectively, of the Company’s
total revenue for the same years. Orient Paper HB also accounted for 87.96% and 86.23% of the total assets of the Company as of
December 31, 2017 and 2016, respectively.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2017 and 2016, details of the Company’s subsidiaries and variable interest entity are as follows:
|
|
|
|
Place of
|
|
|
|
|
|
|
|
Date 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
|
Orient
Paper Shengde
|
|
June
1, 2009
|
|
PRC
|
|
|
100
|
%
|
|
Paper
Production and distribution
|
Variable
interest entity(“VIE”):
|
|
|
|
|
|
|
|
|
|
|
Orient
Paper HB
|
|
March
10, 1996
|
|
PRC
|
|
|
Control
|
*
|
|
Paper
Production and distribution
|
*
Orient Paper HB 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.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has aggregated the financial information of Orient Paper HB in the table below. The aggregate carrying value of Orient
Paper HB’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s consolidated
balance sheets as of December 31, 2017 and 2016 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
( Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and bank balances
|
|
$
|
2,681,942
|
|
|
$
|
2,005,288
|
|
Restricted cash
|
|
|
6,121,637
|
|
|
|
2,162,318
|
|
Accounts receivable
|
|
|
1,843,682
|
|
|
|
3,894,435
|
|
Inventories
|
|
|
8,431,972
|
|
|
|
5,592,230
|
|
Prepayments and other current assets
|
|
|
646,598
|
|
|
|
451,349
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,725,831
|
|
|
|
14,105,620
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
167,727,768
|
|
|
|
162,779,492
|
|
Deferred tax asset
non-current
|
|
|
5,167,288
|
|
|
|
2,804,019
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
192,620,887
|
|
|
$
|
179,689,131
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
7,192,923
|
|
|
$
|
5,045,409
|
|
Current portion of long-term loans from
credit union
|
|
|
5,142,175
|
|
|
|
-
|
|
Current obligations under capital lease
|
|
|
|
|
|
|
8,786,528
|
|
Accounts payable
|
|
|
422,705
|
|
|
|
559,952
|
|
Advance from customers
|
|
|
|
|
|
|
28,831
|
|
Notes payable
|
|
|
6,121,637
|
|
|
|
2,162,318
|
|
Due to a related party
|
|
|
60,378
|
|
|
|
56,872
|
|
Accrued payroll and employee benefits
|
|
|
227,163
|
|
|
|
206,642
|
|
Other payables and accrued liabilities
|
|
|
836,309
|
|
|
|
2,424,751
|
|
Income taxes payable
|
|
|
519,365
|
|
|
|
1,311,051
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,522,655
|
|
|
|
20,582,354
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
-
|
|
|
|
4,843,592
|
|
Loans from a related party
|
|
|
10,712,865
|
|
|
|
10,090,817
|
|
Deferred gain
on sale-leaseback
|
|
|
-
|
|
|
|
102,232
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
31,235,520
|
|
|
$
|
35,618,995
|
|
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(2)
Basis of Presentation and Significant Accounting Policies
Basis
of Consolidation
The
consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”), and include the assets, liabilities, revenues, expenses and cash flows of all
subsidiaries and variable interest entity. All significant inter-company balances, transactions and cash flows are eliminated
on consolidation.
Liquidity and Going Concern
As of December 31, 2016, the Company had
current assets of $14,477,322 and current liabilities of $20,585,591 (including amounts due to related parties of $573,697), resulting
in a working capital deficit of approximately $6,108,269. In addition, included in the current liabilities, there was an overdue
amount of RMB 20,000,000 (US$3,006,208) in respect of the sale-leaseback arrangement (the “Lease Financing Agreement”)
with China National Foreign Trade Financial & Leasing Co., Ltd (“CNFTFL”). See “Financing with Sale-Leaseback”
under Note (7), Loans Payable, for details. Therefore, there was a substantial doubt about the ability of the Company to continue
as a going concern that it may be unable to realize its assets and discharge its liabilities in the normal course of business
as of December 31, 2016.
On August 24. 2017, the Company has paid off the total outstanding
amount, including overdue amount, in respect of the Lease Financing Agreement with CNFTFL. As of December 31, 2017, the working
capital deficit decreased by $4,337,533 to $1,770,736 compared to December 31, 2016. The management evaluated that there
is no conditions or events, considered in aggregate, that may raise substantial doubt about the Company’s ability to continue
as a going concern as of December 31, 2017.
Foreign
Currency Translation
The
Company accounts for foreign currency translation pursuant to ASC Topic 830,
Foreign Currency Matters
. The functional
currency of Orient Paper HB and Orient Paper Shengde is the Chinese Yuan Renminbi (“RMB”). Monetary assets and liabilities
denominated in currencies other than RMB are translated into RMB at the rates of exchange ruling at the balance sheet date. Transactions
in currencies other than RMB are converted into RMB at the applicable rates of exchange prevailing the transactions occurred.
Transaction gains and losses are recognized in the consolidated statements of income. The functional currency of Orient Paper
and Shengde Holdings is United States dollars. Monetary assets and liabilities denominated in currencies other than United States
dollars are translated into United States dollars at the rates of exchange ruling at the balance sheet date. Translation in currencies
other than United States dollars are converted into United States dollars at the applicable rates of exchange prevailing when
the transactions occurred. Transaction gains or losses are recognized in the consolidated statement of income.
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 December 31, 2017 and 2016 to translate the Chinese RMB to the U.S. Dollars are 6.5342:1,
and 6.9370:1, respectively. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective
years at 6.7423:1 and 6.6529:1 for the years ended December 31, 2017 and 2016, respectively. Translation adjustments are included
in other comprehensive income (loss).
Use of Estimates
The preparation of consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of December 31, 2017 and 2016, and revenues and expenses for the years ended December 31, 2017 and 2016.
The most significant estimates relate to allowance for uncollectible accounts receivable, inventory valuation, useful lives and
impairment for property, plant and equipment, valuation allowance for deferred tax assets and contingencies. Actual results could
differ from those estimates made by management.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Cash
and Cash Equivalents
For
purposes of reporting within the statements of cash flows, Orient Paper considers all cash on hand, cash accounts not subject
to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less
to be cash and cash equivalents.
Accounts
Receivable
Trade
accounts receivable are recorded on shipment of products to customers. The trade receivables are all without customer collateral
and interest is not accrued on past due accounts. Periodically, management reviews the adequacy of its provision for doubtful
accounts based on historical bad debt expense results and current economic conditions using factors based on the aging of its
accounts receivable. Additionally, the Company may identify additional allowance requirements based on indications that a specific
customer may be experiencing financial difficulties. Actual bad debt results could differ materially from these estimates. As
of December 31, 2017 and 2016, the balance of allowance for doubtful accounts was $37,626 and $79,478, respectively; and the movement
of the provision of the doubtful accounts is as below. While management uses the best information available upon which to base
estimates, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions
used for the purposes of analysis.
|
|
December 31,
|
|
|
December 31,
|
|
Allowance of doubtful accounts
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
79,478
|
|
|
$
|
38,865
|
|
Provision (Reversal) for the year
|
|
|
(45,309
|
)
|
|
|
44,938
|
|
Exchange difference
|
|
|
3,457
|
|
|
|
(4,325
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
37,626
|
|
|
$
|
79,478
|
|
Inventories
Inventories consist principally of raw
materials and finished goods, and are stated at the lower of cost (average cost method) or market. Cost includes labor, raw materials,
and allocated overhead. No provision in inventories has been provided for the years ended December 31, 2017 and 2016.
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation and any impairment losses. Major renewals, betterments,
and improvements are capitalized to the asset accounts while replacements, maintenance, and repairs, which do not improve or extend
the lives of the respective assets, are expensed to operations. At the time property, plant, and equipment are retired or otherwise
disposed of, the asset and related accumulated depreciation or amortization accounts are relieved of the applicable amounts. Gains
or losses from retirements or sales are credited or charged to operations.
Construction-in-progress
is stated at cost and capitalized as expenses are incurred or as payments are made pursuant to relevant construction contracts.
Contract retention is recorded as accrued liability. Construction in progress is not depreciated until project completion and
the constructed property being placed in service, at which time the capitalized balance will be transferred to appropriate account
of property, plant and equipment.
The
Company depreciates property, plant, and equipment using the straight-line method as follows:
Land use right
|
|
Over the lease term
|
Building and improvements
|
|
30 years
|
Machinery and equipment
|
|
5-15 years
|
Vehicles
|
|
15 years
|
Valuation
of long-lived asset
The
Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review.
The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets
and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost
to dispose.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory
Reserves
According
to the laws and regulations in the PRC, the Company is required to provide for certain statutory funds, namely, a reserve fund
by an appropriation from net profit after taxation but before dividend distribution based on the local statutory financial statements
of the PRC subsidiary and variable interest entity prepared in accordance with the PRC accounting principles and relevant financial
regulations.
Each
of the Company’s wholly owned subsidiary and variable interest entity in the PRC are required to allocate at least 10% of
its net profit to the reserve fund until the balance of such fund has reached 50% of its registered capital. Appropriations of
additional reserve fund are determined at the discretion of its directors. The reserve fund can only be used, upon approval by
the relevant authority, to offset accumulated losses or increase capital.
For the years ended December 31,
2017 and 2016, Orient Paper made transfers of $nil to this reserve fund. As a result of net loss in fiscal year 2017 and 2016
of Orient Paper Shengde, no statutory reserves were provided for the year ended December 31, 2017 and 2016. The
Company’s variable interest entity Orient Paper HB, the statutory reserve account of which has been fully funded for
50% of its registered capital in the amount of RMB 75,030,000 (or approximately $11,811,470) since December 31, 2010, did not
make any transfer to statutory reserves during the years ended December 31, 2017 and 2016.
Employee Benefit Plan
Full time employees of the PRC entities
participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance and other welfare benefits are provided to employees. The total provision for such employee benefits
was $nil for the years ended December 31, 2017 and 2016.
Revenue
Recognition Policy
The
Company recognizes revenue when goods are delivered, when 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 customer’s truck picks up goods at our finished goods inventory warehouse.
Shipping
Cost
Substantially
all customers use their own trucks or hire commercial trucking companies to pick up goods from the Company. The Company usually
incurs no shipping cost for delivery of goods to customers. For those rare situations where products are not shipped utilizing
customer specified shipping services, the Company charges customers a shipping fee which is included in net revenues and was not
material. Freight-in and handling costs incurred by the Company with respect to purchased goods are recorded as a component of
inventory cost and charged to cost of sales when the inventory items are sold.
Advertising
The Company expenses all advertising and
promotion costs as incurred. The Company incurred $nil of advertising and promotion costs for the years ended December 31, 2017
and 2016.
Research and development costs
Research and development costs are expensed
as incurred and included in selling, general and administrative expenses. Research and development expenses incurred $31,922 and
$21,598 for the years ended December 31, 2017 and 2016, respectively.
Borrowing
costs
Borrowing
costs attributable directly to the acquisition, construction or production of qualifying assets which require a substantial period
of time to be ready for their intended use or sale, are capitalized as part of the cost of those assets. Income earned on temporary
investments of specific borrowings pending their expenditure on those assets is deducted from borrowing costs capitalized. All
other borrowing costs are recognized in interest expenses in the period in which they are incurred.
Government
subsidies
A government subsidy is not recognized
until there is reasonable assurance that: (a) the enterprise will comply with the conditions attached to the grant; and (b) the
grant will be received. When the Company received the government subsidies but the conditions attached to the grants have not
been fulfilled, such government subsidies are deferred and recorded under other payables and accrued expenses, and other long-term
liability. The classification of short-term or long-term liabilities is depended on the management's expectation of when the conditions
attached to the grant can be fulfilled. For the years ended December 31, 2017 and 2016, the Company received government subsidies
of $41,529 and $nil, which are recognized as subsidy income in the consolidated statements of income in that fiscal year.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Lease
Obligations
All
non-cancellable leases with an initial term greater than one year are categorized as either capital or operating leases. For the
lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the
end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated
remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more
of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was
an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for
as operating leases. Assets recorded under capital leases are amortized according to the same depreciation methods employed for
property, plant and equipment or over the term of the related lease, if shorter.
The
Company defers any profit or loss from a sale-leaseback transaction unless any of the following conditions exist: a) the seller-lessee
relinquishes the right to substantially all of the remaining use of the property sold retaining only a minor portion of such use;
b) the seller-lessee retains more than a minor part but less than substantially all of the use of the property through the leaseback
and realizes a profit on the sale in excess of the recorded amount of the leased assets; or c) the fair value of the property
at the time of the transaction is less than its undepreciated cost, in which circumstance a loss shall be recognized immediately.
Income
Taxes
The
Company accounts for income taxes pursuant to ASC Topic 740, Income Taxes. Income taxes are provided on an asset and liability
approach for financial accounting and reporting of income taxes. Any tax paid by subsidiaries during the year is recorded. Current
tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income
tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. ASC Topic
740 also requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the
financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax
losses and tax credit carry-forwards. ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S.
net operating loss carry-forwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain.
The
Company adopted ASC Topic 740-10-05,
Income Tax
, which provides guidance for recognizing and measuring uncertain tax
positions, it prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position
to be recognized in the financial statements. It also provides accounting guidance on derecognizing, classification and disclosure
of these uncertain tax positions.
The
Company’s policy on classification of all interest and penalties related to unrecognized income tax positions, if any, is
to present them as a component of income tax expense.
Value
Added Tax
Both
the PRC subsidiary and variable interest entity of the Company are subject to value added tax (“VAT”) imposed by the
PRC government on its purchase and sales of goods. The output VAT is charged to customers who purchase goods from the Company
and the input VAT is paid when the Company purchases goods from its vendors. VAT rate is 17% in general, depending on the types
of products purchased and sold. The input VAT can be offset against the output VAT. Debit balance of VAT payable represents a
credit against future collection of output VAT instead of a receivable due from government.
Comprehensive
Income (Loss)
The
Company presents comprehensive income (loss) in accordance with ASC Topic 220,
Comprehensive Income
. ASC Topic 220
states that all items that are required to be recognized under accounting standards as components of comprehensive income (loss)
be reported in the consolidated financial statements. The components of comprehensive income (loss) were the net income for the
years and the foreign currency translation adjustments.
Earnings
Per Share
Basic
earnings per share is computed by dividing the net income attributable to the common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common shares were dilutive.
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.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Its
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.
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 December 31, 2017 and 2016, the carrying value of the Company’s
short term financial instruments, such as cash and bank balances, accounts receivable, accounts and notes payable, short-term
bank loans and balance due to a related party, approximate at their fair values because of the short maturity of these instruments;
while loans from credit union, loans from a related party and obligation under capital lease approximate at their fair value as
the interest rates thereon are close to the market rates of interest published by the People’s Bank of China.
The
Company does not have any assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016.
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.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(3)
Restricted Cash
Restricted
cash of $6,121,637 as of December 31, 2017 was presented for the cash deposited at the Bank of Cangzhou for purpose of securing
the bank acceptance notes from these banks (see Note (9)). The restriction will be lifted upon the maturity of the notes payable
on January 5, 2018.
Restricted
cash of $2,162,318 as of December 31, 2016 was presented for the cash deposited at the Bank of Hebei for purpose of securing the
bank acceptance notes from these banks. The restriction has been lifted upon the maturity of the notes payable on February 1,
2017.
(4)
Inventories
Raw
materials inventory includes mainly recycled paper and coal. Finished goods include mainly products of corrugating medium
paper and offset printing paper. Inventories consisted of the following as of and December 31, 2017 and 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw Materials
|
|
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
6,337,374
|
|
|
$
|
3,337,649
|
|
Recycled white scrap paper
|
|
|
862,734
|
|
|
|
-
|
|
Recycled scrap binding margin
|
|
|
-
|
|
|
|
547,803
|
|
Coal & gas
|
|
|
71,674
|
|
|
|
242,307
|
|
Base paper and other raw materials
|
|
|
216,655
|
|
|
|
265,464
|
|
|
|
|
7,488,437
|
|
|
|
4,393,223
|
|
Finished Goods
|
|
|
985,728
|
|
|
|
1,238,807
|
|
Totals
|
|
$
|
8,474,165
|
|
|
$
|
5,632,030
|
|
(5)
Prepayments and other current assets
Prepayments
and other current assets consisted of the following as of December 31, 2017 and 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid land lease
|
|
$
|
459,123
|
|
|
$
|
432,464
|
|
Prepayment for purchase of materials
|
|
|
183,649
|
|
|
|
4,325
|
|
Others
|
|
|
8,751
|
|
|
|
19,103
|
|
|
|
$
|
651,523
|
|
|
$
|
455,892
|
|
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6)
Property, plant and equipment
As
of December 31, 2017 and 2016, property, plant and equipment consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Property, Plant, and Equipment:
|
|
|
|
|
|
|
Land use rights
|
|
$
|
12,479,814
|
|
|
$
|
11,755,168
|
|
Building and improvements
|
|
|
98,866,703
|
|
|
|
92,927,111
|
|
Machinery and equipment
|
|
|
118,670,578
|
|
|
|
123,932,336
|
|
Vehicles
|
|
|
593,265
|
|
|
|
590,619
|
|
Construction in progress
|
|
|
36,077,498
|
|
|
|
25,084,416
|
|
Totals
|
|
|
266,687,858
|
|
|
|
254,289,650
|
|
Less: accumulated depreciation and amortization
|
|
|
(77,299,149
|
)
|
|
|
(66,599,770
|
)
|
Property, Plant and Equipment, net
|
|
$
|
189,388,709
|
|
|
$
|
187,689,880
|
|
As
of December 31, 2017 and December 31, 2016, land use rights represented two parcel of state-owned lands located in Xushui County
of Hebei Province in China, with lease terms of 50 years expiring from 2061 to 2066.
The
Company entered into a sale-leaseback arrangement with a leasing company in China on June 16, 2013 for a total financing proceeds
in the amount of RMB 150 million (approximately US$23 million). Under the sale-leaseback arrangement, Orient Paper HB sold certain
of its paper manufacturing equipment to the leasing company for an amount of RMB 150 million (approximately US$23 million). Concurrent
with the sale of equipment, Orient Paper HB leases back all of the equipment (“Leased Equipment”) sold to the leasing
company for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB
15,000 (approximately $2,296) to the leasing company and buy back all of the Leased Equipment. The sale-leaseback was treated
by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately
recognized) under ASC 840-40-25-4. All of the Leased Equipment was included as part of the property, plant and equipment of the
Company during the lease period. As a result of the sale, a deferred gain on sale of Leased Equipment in the amount of $1,379,282
was created at the closing of the transaction and presented as a non-current liability. The deferred gain has been amortized by
the Company during the lease term and used to offset the depreciation of the Leased Equipment. See ”Financing with Sale-Leaseback”
under Note (7), Loans Payable, for details of the transaction and asset collaterals.
On
July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into the 2015 Agreement,
to amend and restate the Lease Financing Agreement entered into in 2013. The 2015 Agreement sets forth a modified and extended
payment schedule with respect to the remaining payment obligation, with the final repayment date extended to June 21, 2017. In
accordance with ASC 840-30-35, the present balances of the capital lease assets and obligations under capital lease were adjusted
by an amount equal to the difference between the present value of the future minimum lease payments under the revised agreement
(computed using the interest rate used to recognize the lease initially) and the present balance of the obligation, which was
approximately $1,617,574 at the date of the 2015 Agreement. As a result, the capital lease asset cost was recorded at the new
cost of $27,599,774 at the date of the 2015 Agreement.
On
August 24, 2017, the Company made a final payment on outstanding obligations and bought back all of the Lease Equipment at nominal
price according to the agreement. The lease assets were reclassified as own assets and capital lease cost were $nil and $24,328,940
as of December 31, 2017 and December 31, 2016, respectively.
Construction in progress mainly represents
payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue paper workshops and general infrastructure
and administrative facilities in the Wei County Industrial Park. The tissue paper development project at the Wei County Industrial
Park is expected to be completed in 2018. For the years ended December 31, 2017 and 2016, the amount of interest capitalized is
$9,833 and $53,535, respectively.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017 and 2016, certain
property, plant and equipment of Orient Paper HB with net values of $7,963,285 and $9,813,294, respectively, have been pledged
pursuant to a long-term loan from credit union of Orient Paper HB. In addition, land use right of Orient Paper HB with net values
of $6,437,419 and $nil as of December 31, 2017 and 2016 were pledged for the bank loan from Bank of Industrial & Commercial
Bank of China. See ”Short-term bank loans ” under Note (7), Loans Payable, for details of the transaction and asset
collaterals.
As of December 31, 2017 and 2016, land
use right with net values of $nil and $6,200,401 was pledged for the saleleaseback financing. In addition, production equipment
of Orient Paper Shengde with net value of $nil and $23,654,125 as of December 31, 2017 and 2016 has been pledged for the guarantee
of Orient Paper HB’s performance under the capital lease. See “ Financing with Sale-Leaseback ” under Note (8),
Loans Payable, for details of the transaction and asset collaterals.
Depreciation and amortization of property,
plant and equipment was $14,633,780 and $15,287,509 for the years ended December 31, 2017 and 2016, respectively.
(7)
Loans Payable
Short-term
bank loans
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Bank of Hebei
|
|
|
(a)
|
|
|
$
|
-
|
|
|
$
|
2,162,318
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
|
(b)
|
|
|
|
-
|
|
|
|
2,883,091
|
|
ICBC Loan 2
|
|
|
(c)
|
|
|
|
4,285,145
|
|
|
|
-
|
|
ICBC Loan 3
|
|
|
(d)
|
|
|
|
2,907,778
|
|
|
|
-
|
|
Total short-term bank loans
|
|
|
|
|
|
$
|
7,192,923
|
|
|
$
|
5,045,409
|
|
(a)
|
On
July 8, 2016, the Company entered into a working capital loan agreement with the Bank of Hebei, with a balance of $2,162,318
as of December 31, 2016. The loan bears a fixed interest rate of 5.22% per annum. The working capital loan is guaranteed by
the Company’s CEO and Hebei Tengsheng with its land use right and real property pledged by Hebei Tengsheng as collateral
for the benefit of the bank. The loan was due and repaid on July 6, 2017.
|
|
|
(b)
|
On
September 13, 2016, the Company entered into a working capital loan agreement with ICBC, with a balance of $2,883,091 as of
December 31, 2016. The loan bears a fixed interest rate of 4.5675% per annum. The working capital loan was guaranteed by Hebei
Tengsheng with its land use right pledged as collateral for the benefit of the bank. The loan was due and repaid on September
7, 2017.
|
|
|
(c)
|
On
January 10, 2017, the Company entered into a working capital loan agreement with the
ICBC, with a balance of $4,285,145 as of December 31, 2017. The working capital loan
is guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the
benefit of the bank. The loan bears a fixed interest rate of 4.5675% per annum. The loan
was due and repaid on January 8, 2018.
|
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(d)
|
On
October 18, 2017, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,907,778 as
of December 31, 2017. The working capital loan is secured by the Company’s land use right as collateral for the benefit
of the bank. The loan bears a fixed interest rate of 4.945% per annum. The loan will be due on October 12, 2018.
|
As
of December 31, 2017, there were guaranteed short-term borrowings of $7,192,923 and unsecured bank loans of $nil. As of December
31, 2016, there were guaranteed short-term borrowings of $5,045,409 and unsecured bank loans of $nil.
The average short-term borrowing rates
for the years ended December 31, 2017 and 2016 were approximately 5.27% and 8.05%, respectively.
Long-term
loans from credit union
As
of December 31, 2017 and 2016, loans payable to Rural Credit Union of Xushui County, amounted to $7,560,221 and $4,843,592, respectively.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Rural Credit Union of Xushui County Loan 1
|
|
$
|
1,316,152
|
|
|
$
|
1,239,729
|
|
Rural Credit Union of Xushui County Loan 2
|
|
|
3,826,022
|
|
|
|
3,603,863
|
|
Rural Credit Union of Xushui County Loan 3
|
|
|
2,418,047
|
|
|
|
-
|
|
Total
|
|
|
7,560,221
|
|
|
|
4,843,592
|
|
Less: Current portion of long-term loans from credit union
|
|
|
(6,366,502
|
)
|
|
|
-
|
|
Long-term loans from credit union
|
|
$
|
1,193,719
|
|
|
$
|
4,843,592
|
|
As
of December 31, 2017, the Company’s long-term debt repayments for the next five years were as follows:
|
|
Amount
|
|
Fiscal year
|
|
|
|
|
2018
|
|
$
|
6,366,502
|
|
2019
|
|
|
1,193,719
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Total
|
|
|
7,560,221
|
|
On
April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years,
which is payable in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third
party. Interest payment is due quarterly and bears the rate of 0.72% per month. In August 2015, after giving the required notice
to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company prepaid a portion of the
loan in an amount of $191,301, of which $68,868 was paid ahead of its original repayment schedule. As of December 31, 2017 and
2016, total outstanding loan balance was $1,316,152 and $1,239,729, respectively. Out of the total outstanding loan balance, current
portion amounted were $1,316,152 and $nil as of December 31, 2017 and December 31, 2016, respectively, which are presented as
current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,239,729 are presented as non-current
liabilities in the consolidated balance sheet as of December 31, 2017 and December 31, 2016 respectively.
ORIENT PAPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On
July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which
is due and payable in various installments from December 21, 2013 to July 26, 2018. The loan is secured by certain of the Company’s
manufacturing equipment with net book value of $8,186,436 and $9,813,294 as of December 31, 2017 and December 31, 2016, respectively.
Interest payment is due quarterly and bears a fixed rate of 0.72% per month. In August 2015, after giving the required notice
to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company prepaid a portion of the
loan in an amount of $198,953, of which $61,216 was paid ahead of its original repayment schedule. As of December 31, 2017 and
2016, the total outstanding loan balance was $3,826,022 and $3,603,863, respectively. Out of the total outstanding loan balance,
current portion amounted were $3,826,022 and $nil as of December 31, 2017 and December 31, 2016, respectively, which are presented
as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $3,603,863 are presented as non-current
liabilities in the consolidated balance sheet as of December 31, 2017 and December 31, 2016 respectively.
On
April 20, 2017, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 2 years,
which is due and payable in various installments from August 26, 2017 to April 19, 2019. The loan is guaranteed by Hebei Tengsheng
with its land use right pledged 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 December 31, 2017 the total outstanding loan balance was $2,418,047, out of which $1,224,328 and
$1,193,719 are presented as current and non-current liabilities in the consolidated balance sheet respectively.
Total interest expenses for the short-term
bank loans and long-term loans for the years ended December 31, 2017 and 2016 were $1,196,814 and $1,411,731, respectively.
Financing
with Sale-Leaseback
The
Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013,
for a total financing proceeds in the amount of RMB 150 million (approximately US$23 million). Under the sale-leaseback arrangement,
Orient Paper HB sold the Leased Equipment to CNFTFL for RMB 150 million (approximately US$23 million). Concurrent with the sale
of equipment, Orient Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the
lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,296) to CNFTFL and buy back all of
the Leased Equipment. The sale-leaseback was treated by the Company as a mere financing and capital lease transaction, rather
than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment
were included as part of the property, plant and equipment of the Company for the periods presented; while the net present value
of the minimum lease payment (including a lease service charge equal to 5.55% of the amount financed, i.e. approximately US$1.36
million) was recorded as obligations under capital lease and was calculated with CNFTFL’s implicit interest rate of 6.15%
per annum and stated at $25,750,170 at the inception of the lease on June 16, 2013.
Orient
Paper HB made all payments due according to the schedule prior to December 15, 2014. On December 15, 2014, Orient Paper HB stopped
making principal payments and entered into negotiations with the CNFTFL regarding a modified payment schedule for the remaining
obligations. On July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into an
agreement (the “2015 Agreement”), to amend and restate the Lease Financing Agreement entered into in 2013 (the “2013
Agreement”). The 2015 Agreement sets forth a modified and extended payment schedule with respect to the remaining payment
obligation, with the final repayment date extended to June 21, 2017. Under the 2015 Agreement, the interest accrues at a rate
of 15% per annum starting on June 16, 2015, and is payable on the 20th of every March, June, September and December until the
principal is paid off, except for the first payment, which is due on July 31, 2015. Orient Paper HB made all payments due according
to the modified schedule prior to June 20, 2016. Orient Paper HB made partial payments in the following payment obligations as
well as interests on overdue balance in accordance with the 2015 Agreement until August 24, 2017, when the remaining overdue amount
was fully paid off. All the Lease Equipment was bought back at the nominal price according to the agreement. The balance of the
long-term obligations under capital lease were $nil as of December 31, 2017 and 2016, and its current portion in the amount of
$nil and $8,786,528, respectively.
Total interest expenses for the sale-leaseback
arrangement for the years ended December 31, 2017 and 2016 were $795,163 and $749,867, respectively.
As
a result of the sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The
deferred gain was amortized over the lease term and as an offset to depreciation of the Leased Equipment. In term of the extension
of the new payment schedule, the deferred gain was amortized over the remaining lease term up to June 21, 2017.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8)
Related Party Transactions
The
Company’s CEO has loaned money to Orient Paper HB for working capital purposes over a period of time. On January 1, 2013,
Orient Paper HB and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the
maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest
of $391,374 for the period from 2013 to 2015. Approximately $392,296 and $369,517 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 December 31, 2017 and 2016, respectively.
On
December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $9,182,455 and $8,649,272 as of December 31, 2017
and 2016, to Orient Paper HB 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.
Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on December 2, 2020. As
of December 31, 2017 and 2016, the outstanding loan balance was $3,060,818 and $2,883,090, respectively and the accrued interest
was $45,912 and $43,246, respectively, 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 Orient Paper HB to borrow from the CEO an amount
up to $18,364,911 (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. 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. As of December 31, 2017 and 2016, the outstanding loan balance were $7,652,047 and $7,207,727, respectively
and the accrued interest was $110,476 and $104,062, respectively, which was recorded in other payables and accrued liabilities
as part of the current liabilities in the consolidated balance sheet.
As of December 31, 2017 and 2016, total
amount of loans due to Mr. Zhenyong Liu were $10,712,865 and $10,090,817, respectively. The interest expense incurred for such
related party loans are $451,626 and $513,084 for the years ended December 31, 2017 and 2016, respectively. The accrued interest
owe to the CEO was approximately $548,684 and $516,825, as of December 31, 2017 and December 31, 2016, respectively, which was
recorded in other payables and accrued liabilities.
During the years ended December 31, 2017
and 2016, the Company borrowed $nil and $14,000, respectively, from a shareholder to pay for various expenses incurred in the
U.S. The amount was due on demand with interest free. The Company repaid the entire balance by December 31, 2017.
Sale
of Headquarters Compound Real Properties to 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 $148,317 (RMB1,000,000).
The lease agreement expired in August 2016. On August 9, 2016, the Company paid off the rental for the first lease agreement and
entered into a supplementary agreement with Hebei Fangsheng, who agreed to extend the lease term for another two years, with the
same rental payment as original lease agreement.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
Notes payable
As
of December 31, 2017, the Company had bank acceptance notes of $6,121,637 from the Bank of Cangzhou to one of its major suppliers
for settling purchase of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and
are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $6,121,637 in the bank as
mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at nil% per annum and 0.05% of notes amount
as handling charge. The acceptance notes were due and paid off in January 2018.
As
of December 31, 2016, the Company had bank acceptance notes of $2,162,318 from the Bank of Hebei to one of its major suppliers
for settling purchases of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and
are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $2,162,318 in the bank as
mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at nil% per annum and 0.05% of notes amount
as handling change. The acceptance note was repaid in February 2017.
(10)
Other payables and accrued liabilities
Other
payables and accrued liabilities consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued electricity
|
|
$
|
2,862
|
|
|
$
|
335,169
|
|
Value-added tax payable
|
|
|
196,395
|
|
|
|
1,080,055
|
|
Accrued interest to a related party
|
|
|
548,684
|
|
|
|
516,825
|
|
Payable for purchase of equipment
|
|
|
49,585
|
|
|
|
223,143
|
|
Accrued commission to salesmen
|
|
|
16,992
|
|
|
|
160,014
|
|
Others
|
|
|
21,819
|
|
|
|
109,572
|
|
Totals
|
|
$
|
836,337
|
|
|
$
|
2,424,778
|
|
(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 (the “Offering”). Each share of common stock and accompanying warrant was sold at a price of $1.60. Please
refer to Note (12), Stock Warrants, for details.
Issuance
of common stock pursuant to the 2012 Incentive Stock Plan and 2015 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 (15), Stock Incentive Plans for more details. Total
fair value of the stock was calculated at $1,417,395 as of the date of grant.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12)
Stock warrants
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. The warrants have an exercise price of $1.70 per share. These warrants are exercisable immediately upon issuance
on September 3, 2014 and have a term of exercise equal to five years from the date of issuance till September 2, 2019. The fair
value of these shares amounted to $780,000, is classified as equity at the date of issuance.
The
fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:
Terms of warrants
|
|
5 years
|
|
Expected volatility
|
|
|
72.0
|
%
|
Risk-free interest rate
|
|
|
1.69
|
%
|
Expected dividend yield
|
|
|
0.81
|
%
|
In
connection with the Offering, the Company issued warrants to its placement agent of this Offering, which can purchase an aggregate
of up to 2.50% of the aggregate number of shares of common stock sold in the Offering, i.e. 39,062 shares. These warrants have
substantially the same terms as the warrants issued to purchaser in the Offering, except that the exercise price is $2.00 per
share and the expiration date is from September 3, 2014 to June 26, 2019. The fair value of these shares amounted to $35,191,
is classified in the equity at the date of issuance to net off the proceeds from the issuance of the shares and warrants.
The
fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:
Terms of warrants
|
|
4.81 years
|
|
Expected volatility
|
|
|
69.8
|
%
|
Risk-free interest rate
|
|
|
1.62
|
%
|
Expected dividend yield
|
|
|
0.81
|
%
|
The
Company applied judgment in estimating key assumptions in determining the fair value of the warrants on the date of issuance.
The Company used historical data to estimate stock volatilities and expected dividend yield. The risk-free rates are consistent
with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.
A
summary of stock warrant activities is as below:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
Number
|
|
|
Weight
average exercise price
|
|
|
Number
|
|
|
Weight
average exercise price
|
|
Outstanding
and exercisable at beginning of the year
|
|
|
820,312
|
|
|
$
|
1.71
|
|
|
|
820,312
|
|
|
$
|
1.71
|
|
Issued
during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
and exercisable at end of the year
|
|
|
820,312
|
|
|
$
|
1.71
|
|
|
|
820,312
|
|
|
$
|
1.71
|
|
Range
of exercise price
|
|
$ 1.70
to $2.00
|
|
|
$ 1.70
to $2.00
|
|
No
warrants were issued, exercised, cancelled or expired during the years ended December 31, 2017 and 2016. As of December 31, 2017
and 2016, the aggregated intrinsic value of warrants outstanding and exercisable was $nil.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13)
Earnings Per Share
For
the years ended December 31, 2017 and 2016, basic and diluted net income per share are calculated as follows:
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic income per share
|
|
|
|
|
|
|
Net income for the period - numerator
|
|
$
|
1,659,788
|
|
|
$
|
7,312,976
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,416,143
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
Net income for the period- numerator
|
|
$
|
1,659,788
|
|
|
$
|
7,312,976
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,416,143
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,416,143
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
For the years ended December 31, 2017
and 2016, 820,312 shares related to warrants are excluded from the calculations of dilutive net income per share as their effects
would have been anti-dilutive since the average share price for the years ended December 31, 2017 and 2016 were lower than the
warrants exercise price.
(14)
Income Taxes
United
States
Orient
Paper 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:
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
Orient Paper HB and Orient
Paper 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 the years ended December 31, 2017 and 2016 were as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
Current Tax Provision U.S.
|
|
$
|
6,528
|
|
|
$
|
-
|
|
Current Tax Provision PRC
|
|
|
3,519,311
|
|
|
|
5,074,066
|
|
Deferred Tax Provision PRC
|
|
|
(2,863,011
|
)
|
|
|
(1,959,494
|
)
|
Total Provision for Income Taxes
|
|
$
|
662,828
|
|
|
$
|
3,114,572
|
|
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, Orient Paper, Inc. was incorporated in the United States and has incurred aggregate net operating losses of approximately
$nil and $6,710,939 for U.S. income tax purposes for the years ended December 31, 2017 and 2016, 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, 2016, management believes 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, 2016, the Company has 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:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
of property, plant and equipment
|
|
$
|
5,123,762
|
|
|
$
|
2,766,595
|
|
Impairment of property, plant and equipment
|
|
|
440,080
|
|
|
|
372,514
|
|
Miscellaneous
|
|
|
712,517
|
|
|
|
(21,472
|
)
|
Net operating loss carryover of PRC company
|
|
|
296,200
|
|
|
|
147,204
|
|
Net operating loss
carryover for U.S. income tax purposes
|
|
|
-
|
|
|
|
2,949,287
|
|
Total deferred tax assets
|
|
|
6,572,559
|
|
|
|
6,214,128
|
|
Less: Valuation
allowance
|
|
|
-
|
|
|
|
(2,949,287
|
)
|
Total
deferred tax assets, net
|
|
$
|
6,572,559
|
|
|
$
|
3,264,841
|
|
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table reconciles the statutory rates to the Company's effective tax rate as of:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of the U.S. Transition Tax under
the 2017 TCJA
|
|
|
8.6
|
|
|
|
-
|
|
Effect of different tax jurisdiction
|
|
|
(0.8
|
)
|
|
|
(1.7
|
)
|
Effect of expenses not deductible for PRC
tax purposes
|
|
|
(6.2
|
)
|
|
|
0.1
|
|
Effect of income not taxable for PRC tax
purposes
|
|
|
-
|
|
|
|
-
|
|
(Over) Underprovision in previous year
|
|
|
(1.1
|
)
|
|
|
0.1
|
|
Change in valuation
allowance
|
|
|
3.0
|
|
|
|
6.4
|
|
Effective income tax
rate
|
|
|
28.5
|
%
|
|
|
29.9
|
%
|
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 Orient Paper Shengde and the VIE, Orient Paper HB 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.
During the years ended December 31, 2017
and 2016, the effective income tax rate was estimated by the Company to be 28.5% and 29.9%, respectively.
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, 2017 and 2016, 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, 2017 and 2016, 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.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Orient Paper, Inc. (the
“2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant
an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants.
No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares
of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share, as compensation
for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance.
On
September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of Orient Paper, Inc. (the
“2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant
an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants.
Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options
or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value
of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions,
terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012
ISP's administration. On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which
265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees
of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of
the stock was calculated at $790,020 as of the date of grant.
2015
Incentive Plan
On
August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of Orient Paper, 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 un-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.
(16)
Commitments and Contingencies
Operating
Lease
Orient
Paper leases 32.95 acres of land from a local government in Xushui County, 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 $17,798
(RMB 120,000). This operating lease is renewable at the end of the 30-year term.
On
November 27, 2012, Orient Paper entered into a 49.4 acres land lease with an investment company in the Economic Development Zone
in Wei County, Hebei Province, China. The lease term of the Wei County land lease commences on the date of the lease and lasts
for 15 years. The lease requires an annual rental payment of $533,942 (RMB 3,600,000). The Company is currently building two new
tissue paper production lines and future production facilities in the leased Wei County land.
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 Orient Paper at an annual rental of $148,317 (RMB 1,000,000), for a
total term of up to five years.
Future
minimum lease payments are as follows:
December 31,
|
|
Amount
|
|
2018
|
|
|
658,586
|
|
2019
|
|
|
569,312
|
|
2020
|
|
|
569,312
|
|
2021
|
|
|
569,312
|
|
2022
|
|
|
569,312
|
|
Thereafter
|
|
|
2,414,986
|
|
Total operating lease payments
|
|
$
|
5,350,820
|
|
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Capital
commitment
As
of December 31, 2017, the Company has signed several contracts for construction of equipment and facilities, including a new tissue
paper production line PM8. Total outstanding commitments under these contracts were $11,227,896 and $13,921,168 as of December
31, 2017 and 2016, respectively. The Company expected to pay off all the balances within 1 year.
Guarantees
and Indemnities
The Company agreed with Baoding Huanrun
Trading Co. (formerly known as Dongfang Trading Co.), a major supplier of raw materials, to guarantee certain obligations of this
third party, and as of December 31, 2017 and December 31, 2016, the Company guaranteed its long-term loan from financial institutions
amounting to $8,570,292 (RMB56,000,000) and $8,072,654 (RMB56,000,000) that matured at various times in 2018. If Huanrun Trading
Co., were to become insolvent, the Company could be materially adversely affected.
(17)
Segment Reporting
Since
March 10, 2010, Orient Paper Shengde started its operations and thereafter the Company manages its operations through two business
operating segments: Orient Paper HB, which produces offset printing paper and corrugating medium paper, and Orient Paper Shengde,
which produces digital photo paper. They are managed separately because each business requires different technology and marketing
strategies.
The
Company evaluates performance of its operating segments based on net income. Administrative functions such as finance, treasury,
and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated
between the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui County,
Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC.
Summarized
financial information for the two reportable segments is as follows:
|
|
Year Ended
|
|
|
|
December 31, 2017
|
|
|
|
Orient Paper
|
|
|
Orient Paper
|
|
|
Not Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
117,023,578
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
117,023,578
|
|
Gross profit
|
|
|
19,955,951
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,955,951
|
|
Depreciation and amortization
|
|
|
13,719,661
|
|
|
|
914,119
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,633,780
|
|
Loss from impairment and disposal of property, plant and equipment
|
|
|
1,896,320
|
|
|
|
2,071,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,968,289
|
|
Interest income
|
|
|
29,565
|
|
|
|
5,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,590
|
|
Interest expense
|
|
|
2,320,147
|
|
|
|
113,623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,433,770
|
|
Income tax expense(benefit)
|
|
|
1,544,069
|
|
|
|
(887,769
|
)
|
|
|
6,528
|
|
|
|
-
|
|
|
|
662,828
|
|
Net income (loss)
|
|
|
4,746,326
|
|
|
|
(2,293,731
|
)
|
|
|
(792,807
|
)
|
|
|
-
|
|
|
|
1,659,788
|
|
Total Assets
|
|
|
192,620,887
|
|
|
|
26,363,435
|
|
|
|
5,159
|
|
|
|
-
|
|
|
|
218,989,481
|
|
|
|
Year Ended
|
|
|
|
December
31, 2016
|
|
|
|
Orient Paper
|
|
|
Orient Paper
|
|
|
Not Attributable
|
|
|
Elimination
|
|
|
Enterprise-wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
of Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
134,087,266
|
|
|
$
|
657,334
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
134,744,600
|
|
Gross profit (loss)
|
|
|
25,918,026
|
|
|
|
(386,143
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
25,531,883
|
|
Depreciation and amortization
|
|
|
14,360,363
|
|
|
|
927,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,287,509
|
|
Loss from disposal of property, plant and
equipment
|
|
|
178,306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178,306
|
|
Interest income
|
|
|
95,915
|
|
|
|
1,061
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,976
|
|
Interest expense
|
|
|
2,621,147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,621,147
|
|
Income tax expense(benefit)
|
|
|
3,339,041
|
|
|
|
(224,469
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,114,572
|
|
Net income (loss)
|
|
|
9,999,297
|
|
|
|
(722,883
|
)
|
|
|
(1,963,438
|
)
|
|
|
-
|
|
|
|
7,312,976
|
|
Total assets
|
|
|
179,689,131
|
|
|
|
28,687,027
|
|
|
|
1,460
|
|
|
|
-
|
|
|
|
208,377,618
|
|
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18)
Concentration and Major Customers and Suppliers
For the years ended December 31, 2017
and 2016, the Company had no single customer contributed over 10% of total sales. For the year ended December 31, 2017,
the Company had two major suppliers that accounted for 69% and 8% of total purchases by the Company.
For the year ended December 31, 2016,
the Company had two major suppliers that accounted for 62% and 8% of its total purchases.
(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 December 31, 2017 and December 31, 2016. 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$76,520) 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 December 31, 2017 and 2016, respectively, while for the cash
placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB56,768,856
(US$8,687,958) as of December 31, 2017.
(20)
Risks and Uncertainties
Orient
Paper is subject to substantial risks from, among other things, intense competition associated with the industry in general, other
risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates,
and operating in the PRC under its various laws and restrictions.
(21)
Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This ASU is a comprehensive new revenue
recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an
amount that reflects the consideration it expects to receive in exchange for those goods or services. In March 2016, the FASB
issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Gross versus Net),
which is effective upon adoption of ASU 2014-09. This ASU clarifies the implementation guidance in ASU 2014-09 on principal versus
agent considerations. These ASUs are effective for annual reporting periods beginning after December 15, 2017 and interim periods
within those annual periods. The Company will adopt ASU 2014-09, and its related clarifying ASUs, as of January 1, 2018. The Company
anticipates adopting the standard using the modified retrospective transition approach. Under this approach, the new standard
would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations
as of January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition
practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. We do not expect
the adoption of these ASUs to have a material impact on our consolidated financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity
investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted
for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also
require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. In addition the amendments in this update eliminate the requirement
to disclose the method(s) and significant assumptions used to estimate the fair value that are required to be disclosed for financial
instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments
in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is
not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in
this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting
for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information
to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference
between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating
leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria
for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing
between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance
leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive
income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the
adoption of ASU 2016-02 on our consolidated financial statements.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines
on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at
amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that
is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale
debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit
losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net
investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities,
trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment
or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after
a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect
the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
In
November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU
2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described
as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We do not expect the adoption of ASU 2016-18 to have a material impact on our consolidated financial
statements. The Company had $6,121,637 and $2,162,318 of restricted cash as of December 31, 2017 and December 31, 2016, respectively.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”
(“ASU 2017-01”), which clarify the definition of a business. The amendments affect all companies and other reporting
organizations that must determine whether they have acquired or sold a business. The amendments in this ASU are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted so long as the transaction has not been reported in financial statements that have been issued or made available
for issuance. We do not expect the adoption of ASU 2017-01 to have a material impact on our consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”), which provide guidance on determining which changes to the terms and conditions of share-based payment
awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2017-09 to have a material impact
on our consolidated financial statements.
(22)
Subsequent Event
On
January 2, 2018, the Company entered into a working capital loan agreement with Bank of Cangzhou, for a credit line of up to $5,356,432
(RMB35,000,000). The loan bears a fixed interest rate of 6.09% per annum. The working capital loan is secured by the Company’s
land use right and guaranteed by the Company’s CEO and Orient Paper Shengde with its production equipment as collateral
for the benefit of the bank. $5,356,432 of loan was withdrawn on January 4, 2018.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(23)
Summarized Quarterly Financial Data (Unaudited)
Quarterly
financial information for 2017 and 2016 is as follows:
|
|
Quarter
|
|
2017
|
|
|
First
|
|
|
|
Second
|
|
|
|
Third
|
|
|
|
Fourth
|
|
Revenues
|
|
$
|
25,289,659
|
|
|
$
|
22,787,683
|
|
|
$
|
33,507,053
|
|
|
$
|
35,439,183
|
|
Gross profit
|
|
|
5,653,920
|
|
|
|
3,464,666
|
|
|
|
7,221,288
|
|
|
|
3,616,077
|
|
Income from operations
|
|
|
2,871,578
|
|
|
|
764,016
|
|
|
|
2,719,550
|
|
|
|
(1,674,877
|
)
|
Net income(loss)
|
|
|
1,707,869
|
|
|
|
15,917
|
|
|
|
1,572,335
|
|
|
|
(1,636,333
|
)
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
0.001
|
|
|
$
|
0.07
|
|
|
$
|
-0.076
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.001
|
|
|
$
|
0.07
|
|
|
$
|
-0.076
|
|
|
|
Quarter
|
|
2016
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Revenues
|
|
$
|
27,914,333
|
|
|
$
|
37,991,892
|
|
|
$
|
37,462,066
|
|
|
$
|
31,376,309
|
|
Gross profit
|
|
|
3,765,884
|
|
|
|
6,889,754
|
|
|
|
7,330,843
|
|
|
|
7,545,402
|
|
Income (loss) from operations
|
|
|
(580,367
|
)
|
|
|
4,168,522
|
|
|
|
4,731,145
|
|
|
|
4,632,419
|
|
Net income (loss)
|
|
|
(1,373,896
|
)
|
|
|
2,581,606
|
|
|
|
3,034,542
|
|
|
|
3,070,724
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-0.06
|
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
-0.06
|
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
(24)
Condensed Financial Information of the Parent Company
The
condensed financial statements of Orient Paper Inc. (“ONP”, the “parent company”) have been prepared in
accordance with accounting principles generally accepted in the United States of America. Under the PRC laws and regulations,
the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the parent company
in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital, capital surplus and statutory
reserves, as determined pursuant to PRC generally accepted accounting principles, totaling $45,589,643 and $46,441,462 as of December
31, 2017 and 2016, respectively.
ORIENT
PAPER, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following represents condensed unconsolidated financial information of the parent company only:
CONDENSED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,158
|
|
|
$
|
1,457
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,158
|
|
|
|
1,457
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
188,894,696
|
|
|
|
175,915,611
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
188,899,854
|
|
|
$
|
175,917,068
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Inter-company payable
|
|
$
|
3,567,962
|
|
|
$
|
3,161,682
|
|
Income tax payable
|
|
|
6,528
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,574,490
|
|
|
|
3,161,682
|
|
Total liabilities
|
|
$
|
3,574,490
|
|
|
$
|
3,161,682
|
|
Total stockholders' equity
|
|
|
185,325,364
|
|
|
|
172,755,386
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
188,899,854
|
|
|
$
|
175,917,068
|
|
CONDENSED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(402,579
|
)
|
|
$
|
(1,963,438
|
)
|
Loss from Operations
|
|
|
(402,579
|
)
|
|
|
(1,963,438
|
)
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
2,068,895
|
|
|
|
9,276,414
|
|
Income before Income Taxes
|
|
|
1,666,316
|
|
|
|
7,312,976
|
|
Provision for Income Taxes
|
|
|
(6,528
|
)
|
|
|
-
|
|
Net Income
|
|
$
|
1,659,788
|
|
|
$
|
7,312,976
|
|
Other comprehensive income (loss)
|
|
|
10,910,190
|
|
|
|
(11,784,410
|
)
|
Total Comprehensive Income (loss)
|
|
$
|
12,569,978
|
|
|
$
|
(4,471,434
|
)
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Cash Used in Operating Activities
|
|
$
|
(402,579
|
)
|
|
$
|
(24,722
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
406,280
|
|
|
|
17,339
|
|
|
|
|
|
|
|
|
|
|
Net (Increase) Decrease in Cash and Cash Equivalents
|
|
|
3,701
|
|
|
|
(7,383
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - Beginning
of Year
|
|
|
1,457
|
|
|
|
8,840
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Year
|
|
$
|
5,158
|
|
|
$
|
1,457
|
|
BASIS
OF PRESENTATION
The
condensed financial information has been prepared using the same accounting policies as set out in the Company’s consolidated
financial statements except that the parent company has used equity method to account for its investments in the subsidiaries.