Item 1. Financial Statements
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2020 AND DECEMBER
31, 2019
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and bank balances
|
|
$
|
8,209,905
|
|
|
$
|
5,837,745
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable (net of allowance for doubtful accounts of $64,435 and $59,922 as of September 30, 2020 and December 2019, respectively)
|
|
|
3,472,374
|
|
|
|
3,119,311
|
|
Inventories
|
|
|
8,582,912
|
|
|
|
1,607,463
|
|
Prepayments and other current assets
|
|
|
9,930,262
|
|
|
|
11,613,241
|
|
Due from related parties
|
|
|
215,192
|
|
|
|
1,863,479
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,410,645
|
|
|
|
24,041,239
|
|
|
|
|
|
|
|
|
|
|
Prepayment on property, plant and equipment
|
|
|
2,936,814
|
|
|
|
1,433,445
|
|
Finance lease right-of-use assets, net
|
|
|
2,336,399
|
|
|
|
-
|
|
Property, plant, and equipment, net
|
|
|
142,783,813
|
|
|
|
151,616,852
|
|
Value-added tax recoverable
|
|
|
2,497,129
|
|
|
|
2,621,841
|
|
Deferred tax asset non-current
|
|
|
12,365,164
|
|
|
|
10,485,053
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
193,329,964
|
|
|
$
|
190,198,430
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
6,314,151
|
|
|
$
|
6,163,814
|
|
Current portion of long-term loans from credit union
|
|
|
3,803,175
|
|
|
|
1,605,459
|
|
Lease liability
|
|
|
168,546
|
|
|
|
-
|
|
Accounts payable
|
|
|
308,611
|
|
|
|
250,486
|
|
Advance from customers
|
|
|
179,491
|
|
|
|
98,311
|
|
Due to related parties
|
|
|
657,433
|
|
|
|
539,985
|
|
Accrued payroll and employee benefits
|
|
|
254,887
|
|
|
|
291,924
|
|
Other payables and accrued liabilities
|
|
|
4,573,972
|
|
|
|
6,503,010
|
|
Income taxes payable
|
|
|
599,782
|
|
|
|
1,382,471
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,860,048
|
|
|
|
16,835,460
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
5,389,054
|
|
|
|
7,367,908
|
|
Deferred gain on sale-leaseback
|
|
|
406,767
|
|
|
|
-
|
|
Lease liability - non-current
|
|
|
385,650
|
|
|
|
-
|
|
Derivative liability
|
|
|
1,199,585
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $17,636,464 and $19,558,568 as of September 30, 2020 and December 31, 2019, respectively)
|
|
|
24,241,104
|
|
|
|
24,203,368
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common stock, 500,000,000 shares authorized, $0.001 par value
per share, 28,514,816 and 22,054,816 shares issued and outstanding as of September 30, 2020 and December, 31,2019, respectively
|
|
|
28,515
|
|
|
|
22,055
|
|
Additional paid-in capital
|
|
|
53,974,869
|
|
|
|
51,155,174
|
|
Statutory earnings reserve
|
|
|
6,080,574
|
|
|
|
6,080,574
|
|
Accumulated other comprehensive loss
|
|
|
(1,852,602
|
)
|
|
|
(6,057,537
|
)
|
Retained earnings
|
|
|
110,857,504
|
|
|
|
114,794,796
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
169,088,860
|
|
|
|
165,995,062
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
193,329,964
|
|
|
$
|
190,198,430
|
|
See
accompanying notes to condensed consolidated financial statements.
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,357,451
|
|
|
$
|
32,937,917
|
|
|
$
|
68,463,575
|
|
|
$
|
84,008,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(30,789,899
|
)
|
|
|
(27,563,185
|
)
|
|
|
(63,506,913
|
)
|
|
|
(75,917,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
2,567,551
|
|
|
|
5,374,732
|
|
|
|
4,956,662
|
|
|
|
8,090,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(2,390,920
|
)
|
|
|
(2,024,547
|
)
|
|
|
(8,445,356
|
)
|
|
|
(7,413,879
|
)
|
Gain on acquisition of a subsidiary
|
|
|
-
|
|
|
|
(879
|
)
|
|
|
-
|
|
|
|
30,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
176,631
|
|
|
|
3,349,306
|
|
|
|
(3,488,694
|
)
|
|
|
707,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,544
|
|
|
|
1,413
|
|
|
|
23,785
|
|
|
|
61,787
|
|
Subsidy income
|
|
|
61,152
|
|
|
|
(2,800
|
)
|
|
|
203,171
|
|
|
|
233,488
|
|
Interest expense
|
|
|
(258,438
|
)
|
|
|
(236,987
|
)
|
|
|
(744,592
|
)
|
|
|
(731,027
|
)
|
Loss on derivative liability
|
|
|
(482,515
|
)
|
|
|
|
|
|
|
(510,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Income Taxes
|
|
|
(494,626
|
)
|
|
|
3,110,932
|
|
|
|
(4,516,710
|
)
|
|
|
271,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
(26,348
|
)
|
|
|
(772,905
|
)
|
|
|
579,418
|
|
|
|
(205,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
|
(520,974
|
)
|
|
|
2,338,027
|
|
|
|
(3,937,292
|
)
|
|
|
65,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
6,670,510
|
|
|
|
(4,810,379
|
)
|
|
|
4,204,935
|
|
|
|
(5,065,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
$
|
6,149,536
|
|
|
$
|
(2,472,352
|
)
|
|
$
|
267,643
|
|
|
$
|
(4,999,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted (Losses) Earnings per Share
|
|
$
|
(0.02
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – Basic and Diluted
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
See
accompanying notes to condensed consolidated financial statements.
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
(3,937,292
|
)
|
|
$
|
65,502
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,301,703
|
|
|
|
11,547,650
|
|
Loss on derivative liability
|
|
|
510,380
|
|
|
|
-
|
|
Loss from disposal and impairment of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
(Recovery from) Allowance for bad debts
|
|
|
2,973
|
|
|
|
(339
|
)
|
Share-based compensation and expenses
|
|
|
1,242,000
|
|
|
|
-
|
|
Gain on acquisition of a subsidiary
|
|
|
|
|
|
|
(30,518
|
)
|
Deferred tax
|
|
|
(1,582,754
|
)
|
|
|
(1,853,728
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(272,857
|
)
|
|
|
16,894
|
|
Prepayments and other current assets
|
|
|
2,099,669
|
|
|
|
185,780
|
|
Inventories
|
|
|
(6,758,500
|
)
|
|
|
(4,307,754
|
)
|
Accounts payable
|
|
|
50,683
|
|
|
|
254,749
|
|
Advance from customers
|
|
|
76,763
|
|
|
|
85,993
|
|
Notes payable
|
|
|
-
|
|
|
|
(3,648,250
|
)
|
Related parties
|
|
|
1,767,888
|
|
|
|
367,277
|
|
Accrued payroll and employee benefits
|
|
|
(43,025
|
)
|
|
|
33,334
|
|
Other payables and accrued liabilities
|
|
|
(1,292,657
|
)
|
|
|
726,564
|
|
Income taxes payable
|
|
|
(795,487
|
)
|
|
|
1,155,880
|
|
Net Cash Provided by Operating Activities
|
|
|
2,369,487
|
|
|
|
4,599,034
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(3,144,261
|
)
|
|
|
(4,917,650
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
572,312
|
|
|
|
|
|
Acquisition of a subsidiary
|
|
|
-
|
|
|
|
(1,531,531
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(2,571,949
|
)
|
|
|
(6,449,181
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares and warrants, net
|
|
|
2,273,360
|
|
|
|
-
|
|
Proceeds from short term bank loans
|
|
|
-
|
|
|
|
3,940,110
|
|
Proceeds from credit union loans
|
|
|
-
|
|
|
|
2,334,880
|
|
Repayment of bank loans
|
|
|
-
|
|
|
|
(11,499,285
|
)
|
Payment of capital lease obligation
|
|
|
(32,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
2,241,043
|
|
|
|
(5,224,295
|
)
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
333,579
|
|
|
|
(237,122
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
2,372,160
|
|
|
|
(7,311,564
|
)
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash - Beginning of Period
|
|
|
5,837,745
|
|
|
|
12,117,425
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash - End of Period
|
|
$
|
8,209,905
|
|
|
$
|
4,805,861
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest cost
|
|
$
|
509,783
|
|
|
$
|
659,613
|
|
Cash paid for income taxes
|
|
$
|
1,784,107
|
|
|
$
|
888,881
|
|
|
|
|
|
|
|
|
|
|
Cash and bank balances
|
|
|
8,209,905
|
|
|
|
4,805,861
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
|
8,209,905
|
|
|
|
4,805,861
|
|
See
accompanying notes to condensed consolidated financial statements.
IT
TECH PACKAGING, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Statutory
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserve
|
|
|
Income (loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
22,022,316
|
|
|
$
|
22,022
|
|
|
$
|
51,137,657
|
|
|
$
|
6,080,574
|
|
|
$
|
(3,263,952
|
)
|
|
$
|
112,573,614
|
|
|
$
|
166,549,915
|
|
Issuance of shares to Weitian
|
|
|
32,500
|
|
|
|
33
|
|
|
|
17,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,550
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,065,381
|
)
|
|
|
|
|
|
|
(5,065,381
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,502
|
|
|
|
65,502
|
|
Balance at September 30, 2019
|
|
|
22,054,816
|
|
|
$
|
22,055
|
|
|
$
|
51,155,174
|
|
|
$
|
6,080,574
|
|
|
$
|
(8,329,333
|
)
|
|
$
|
112,639,116
|
|
|
$
|
161,567,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
22,054,816
|
|
|
$
|
22,055
|
|
|
$
|
51,155,174
|
|
|
$
|
6,080,574
|
|
|
$
|
(6,057,537
|
)
|
|
$
|
114,794,796
|
|
|
$
|
165,995,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to officer and directors
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
1,198,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,000
|
|
Issuance of shares
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
1,579,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584,155
|
|
Issuance of shares to a consultant
|
|
|
60,000
|
|
|
|
60
|
|
|
|
41,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,204,935
|
|
|
|
|
|
|
|
4,204,935
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,937,292
|
)
|
|
|
(3,937,292
|
)
|
Balance at September 30, 2020
|
|
|
28,514,816
|
|
|
$
|
28,515
|
|
|
$
|
53,974,869
|
|
|
$
|
6,080,574
|
|
|
$
|
(1,852,602
|
)
|
|
$
|
110,857,504
|
|
|
$
|
169,088,860
|
|
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Organization and Business Background
IT
Tech Packaging, Inc. (the “Company”) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral,
Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding Dongfang Paper Milling
Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and
effective December 21, 2007, we changed our name to “Orient Paper, Inc.”.
Effective
on August 1, 2018, we changed our corporate name to IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary
short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change,
with and into us. We were the surviving entity. In connection with the name change, our common stock began being traded under
a new NYSE symbol, “ITP,” and a new CUSIP number, 46527C100, at such time.
On
October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang
Zhiye Holding Limited (“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British
Virgin Islands, and issued the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse
stock split effected in November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders
of Dongfang Holding in accordance with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement,
Dongfang Holding owned all of the issued and outstanding stock and ownership of Dongfang Paper and such shares of Dongfang Paper
were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders
of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s
behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant
PRC Administration of Industry and Commerce as the 100% owner of Dongfang Paper’s shares. As a result of the merger transaction,
Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned subsidiary, Dongfang
Paper, became an indirectly owned subsidiary of the Company.
Dongfang
Holding, as the 100% owner of Dongfang Paper, was unable to complete the registration of Dongfang Paper’s capital under
its name within the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions
described below, Dongfang Holding directed the trustees to return the shares of Dongfang Paper to their original shareholders,
and the original Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding
Shengde”) to transfer the control of Dongfang Paper over to Baoding Shengde.
On
June 24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued
and outstanding shares of Shengde Holdings Inc, a Nevada corporation. Shengde Holdings Inc was incorporated in the State of Nevada
on February 25, 2009. On June 1, 2009, Shengde Holdings Inc incorporated Baoding Shengde, a limited liability company organized
under the laws of the PRC. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as a wholly
foreign-owned entity under PRC law.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
To
ensure proper compliance of the Company’s control over the ownership and operations of Dongfang Paper with certain PRC regulations,
on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”) with
Dongfang Paper and Dongfang Paper Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde
Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”), a wholly foreign-owned
enterprise in the PRC with an original registered capital of $10,000,000 (subsequently increased to $60,000,000 in June 2010).
Baoding Shengde is mainly engaged in production and distribution of digital photo paper and single-use face masks and is 100%
owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and
Business Consulting Agreement, which generally provides that Baoding Shengde shall provide exclusive technical, business and management
consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80% of Dongfang Paper’s
total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal
amount of $10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its
proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among
other things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each
owner’s equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should
pay to each of Dongfang Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which
provides that Dongfang Paper Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security
for their obligations under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose
of the pledged equity interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement
or Dongfang Paper fails to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting
Agreement; and (v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding
Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s
rights at any equity owners’ meeting of Dongfang Paper or with respect to any equity owner action to be taken in accordance
with the laws and Dongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as
long as Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. An Dongfang Paper Equity Owner will
cease to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the
Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009, and continued
to control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements
is considered as a business combination under common control.
On
February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate
the above-mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through
Baoding Shengde instead of Dongfang Paper, the $10,000,000 loan contemplated was never made prior to the point of termination.
The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over
Dongfang Paper and its businesses in the PRC.
An
agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010,
reiterating that Baoding Shengde is entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the above mentioned
Contractual Agreements. In addition, Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s
unappropriated earnings as dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and
thereafter.
On
June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei
Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire
Hebei Tengsheng. Upon full payment of the consideration in the amount of RMB 320 million (approximately $45 million), Hebei Tengsheng
will become a wholly owned subsidiary of Dongfang Paper that manufactures and sells tissue paper products.
The
Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company
is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective
control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang
Paper being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the
Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”).
The revenue generated from Dongfang Paper for the three months ended September 30, 2020 and 2019 was accounted for 99.34% and
100% of the Company’s total revenue, respectively. The revenue generated from Dongfang Paper for the nine months ended September
30, 2020 and 2019 was accounted for 98.44% and 100% of the Company’s total revenue, respectively. Dongfang Paper also accounted
for 90.53% and 91.01% of the total assets of the Company as of September 30 2020 and December 31, 2019, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of September 30, 2020 and December 31, 2019, details of the Company’s subsidiaries and variable interest entities are as
follows:
|
|
Date of
|
|
Place of
|
|
|
|
|
|
|
Incorporation
|
|
Incorporation or
|
|
Percentage of
|
|
|
Name
|
|
or Establishment
|
|
Establishment
|
|
Ownership
|
|
Principal Activity
|
Subsidiary:
|
|
|
|
|
|
|
|
|
Dongfang Holding
|
|
November 13, 2006
|
|
BVI
|
|
100%
|
|
Inactive investment holding
|
Shengde Holdings
|
|
February 25, 2009
|
|
State of Nevada
|
|
100%
|
|
Investment holding
|
Baoding Shengde
|
|
June 1, 2009
|
|
PRC
|
|
100%
|
|
Paper production and
|
|
|
|
|
|
|
|
|
distribution
|
|
|
|
|
|
|
|
|
|
Variable interest entity (“VIE”):
|
|
|
|
|
|
|
|
|
Dongfang Paper
|
|
March 10, 1996
|
|
PRC
|
|
Control*
|
|
Paper production and
|
|
|
|
|
|
|
|
|
distribution
|
*
|
Dongfang
Paper is treated as a 100% controlled variable interest entity of the Company.
|
However,
uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation
of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to
enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different
than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the
aforementioned agreements.
In
addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future
PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of
the Company’s business and operating licenses, being required to restructure the Company’s operations or being required
to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material
and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate
or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer
be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company has aggregated the financial information of Dongfang Paper in the table below. The aggregate carrying value of Dongfang
Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed
consolidated balance sheets as of September 30, 2020 and December 31, 2019 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and bank balances
|
|
$
|
7,403,768
|
|
|
$
|
5,675,374
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable
|
|
|
3,472,374
|
|
|
|
3,119,312
|
|
Inventories
|
|
|
8,544,133
|
|
|
|
1,603,038
|
|
Prepayments and other current assets
|
|
|
9,927,537
|
|
|
|
11,610,576
|
|
Due from related parties
|
|
|
215,192
|
|
|
|
1,863,479
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
29,563,004
|
|
|
|
23,871,779
|
|
|
|
|
|
|
|
|
|
|
Prepayment on property, plant and equipment
|
|
|
1,468,407
|
|
|
|
1,433,445
|
|
Finance lease right-of-use assets, net
|
|
|
2,336,399
|
|
|
|
-
|
|
Property, plant, and equipment, net
|
|
|
130,868,053
|
|
|
|
138,920,440
|
|
Deferred tax asset non-current
|
|
|
10,777,428
|
|
|
|
8,869,385
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
175,013,291
|
|
|
$
|
173,095,049
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
6,314,151
|
|
|
$
|
6,163,814
|
|
Current portion of long-term loans from credit union
|
|
|
425,838
|
|
|
|
315,358
|
|
Lease liability
|
|
|
168,546
|
|
|
|
-
|
|
Accounts payable
|
|
|
308,611
|
|
|
|
250,486
|
|
Advance from customers
|
|
|
179,491
|
|
|
|
98,311
|
|
Due to related parties
|
|
|
-
|
|
|
|
56,552
|
|
Accrued payroll and employee benefits
|
|
|
251,585
|
|
|
|
287,584
|
|
Other payables and accrued liabilities
|
|
|
4,494,800
|
|
|
|
6,502,974
|
|
Income taxes payable
|
|
|
599,782
|
|
|
|
1,382,471
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,742,804
|
|
|
|
15,057,550
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
4,508,010
|
|
|
|
4,501,018
|
|
Lease liability - non-current
|
|
|
385,650
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
17,636,464
|
|
|
$
|
19,558,568
|
|
The
Company and its consolidated subsidiaries are not required to provide financial support to the VIE, and no creditor (or beneficial
interest holders) of the VIE have recourse to the assets of Company unless the Company separately agrees to be subject to such
claims. There are no terms in any agreements or arrangements, implicit or explicit, which require the Company or its subsidiaries
to provide financial support to the VIE. However, if the VIE does require financial support, the Company or its subsidiaries may,
at its option and subject to statutory limits and restrictions, provide financial support to the VIE.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2)
Basis of Presentation and Significant Accounting Policies
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and
notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial
statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019 of the Company, and its subsidiaries
and variable interest entity (which we sometimes refer to collectively as “the Company”, “we”, “us”
or “our”).
Principles
of Consolidation
Our
unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary
for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature,
unless otherwise noted. The balance sheet as of September 30, 2020 and the results of operations for the nine months ended September
30, 2020 are not necessarily indicative of the results to be expected for any future period.
Our
unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require
us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. We believe that the estimates, judgments and assumptions are reasonable, based on information available
at the time they are made. Actual results could differ materially from those estimates.
Valuation
of long-lived asset
The
Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review.
The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets
and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost
to dispose.
Fair
Value Measurements
The
Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source
of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable
inputs, which may be used to measure fair value and include the following:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The
Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable
judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that
the Company could realize in a current market exchange. As of September 30, 2020 and December 31, 2019, the carrying value of
the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes
payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values
because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at
their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank
of China.
Management
determined that liabilities created by beneficial conversion features associated with the issuance of certain warrants (see “Derivativeliabilities”
under Note (10)), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these
derivative liabilities wasdetermined based on management’s estimate of the expected future cash flows required to settle
the liabilities. This valuation technique involves management’s estimates and judgment based on unobservable inputs and
is classified in level 3.
Non-Recurring
Fair Value Measurements
The
Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the
possibility of impairment. For the continuing operations, long-lived assets are measured at fair value on a nonrecurring basis
when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. For discontinued
operations, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. The fair value of
these assets were determined using models with significant unobservable inputs which were classified as Level 3 inputs, primarily
the discounted future cash flow.
Share-Based
Compensation
The
Company uses the fair value recognition provision of ASC Topic 718, Compensation-Stock Compensation, which requires the
Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date
fair value of such instruments over the vesting period.
The
Company also applies the provisions of ASC Topic 505-50, Equity Based Payments to Non-Employees to account for stock-based
compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the
consideration received or the fair value of the instruments issued in exchange for such services, whichever is more reliably measurable.
(3)
Restricted Cash
Restricted
cash was nil as of September 30, 2020 and December 31, 2019.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4)
Inventories
Raw
materials inventory includes mainly recycled paper board and recycled white scrap paper. Finished goods include mainly products
of corrugating medium paper, offset printing paper and tissue paper products. Inventories consisted of the following as of September
30, 2020 and December 31, 2019:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw Materials
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
5,512,274
|
|
|
$
|
40,032
|
|
Recycled white scrap paper
|
|
|
1,016,905
|
|
|
|
10,541
|
|
Gas
|
|
|
46,891
|
|
|
|
41,675
|
|
Base paper and other raw materials
|
|
|
359,487
|
|
|
|
293,935
|
|
|
|
|
6,935,557
|
|
|
|
386,183
|
|
Semi-finished Goods
|
|
|
145,069
|
|
|
|
83,266
|
|
Finished Goods
|
|
|
1,502,286
|
|
|
|
1,212,849
|
|
Total inventory, gross
|
|
|
8,582,912
|
|
|
|
1,682,298
|
|
Inventory reserve
|
|
|
-
|
|
|
|
(74,835
|
)
|
Total inventory, net
|
|
$
|
8,582,912
|
|
|
$
|
1,607,463
|
|
(5)
Prepayments and other current assets
Prepayments
and other current assets consisted of the following as of September 30, 2020 and December 31, 2019:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid land lease
|
|
$
|
176,210
|
|
|
$
|
301,023
|
|
Prepayment for purchase of materials
|
|
|
2,615,556
|
|
|
|
5,394,297
|
|
Value-added tax recoverable
|
|
|
5,619,369
|
|
|
|
5,666,975
|
|
Others
|
|
|
1,519,127
|
|
|
|
250,946
|
|
|
|
$
|
9,930,262
|
|
|
$
|
11,613,241
|
|
(6)
Property, plant and equipment, net
As
of September 30, 2020 and December 31, 2019, property, plant and equipment consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Property, Plant, and Equipment:
|
|
|
|
|
|
|
Land use rights
|
|
$
|
11,974,214
|
|
|
$
|
11,689,114
|
|
Building and improvements
|
|
|
72,538,920
|
|
|
|
70,811,803
|
|
Machinery and equipment
|
|
|
154,703,327
|
|
|
|
152,954,020
|
|
Vehicles
|
|
|
602,143
|
|
|
|
587,806
|
|
Construction in progress
|
|
|
7,412,287
|
|
|
|
6,399,986
|
|
Totals
|
|
|
247,230,891
|
|
|
|
242,442,729
|
|
Less: accumulated depreciation and amortization
|
|
|
(104,447,078
|
)
|
|
|
(90,825,877
|
)
|
Property, Plant and Equipment, net
|
|
$
|
142,783,813
|
|
|
$
|
151,616,852
|
|
As
of September 30, 2020 and December 31, 2019, land use rights represented two parcel of state-owned lands located in Xushui District
and Wei County of Hebei Province in China, with lease terms of 50 years expiring in 2061 and 2066, respectively.
Construction
in progress mainly represents payments for paper machine of a new tissue paper production line PM10 and improvement of the office
building and essentially all industrial-use buildings in the Headquarters Compound.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of September 30, 2020 and December 31, 2019, certain property, plant and equipment of Dongfang Paper with net values of $2,690,540
and $3,935,270, respectively, have been pledged pursuant to a long-term loan from credit union for Dongfang Paper. Land use right
of Dongfang Paper with net values of $5,793,482 and $5,757,546 as of September 30, 2020 and December 31, 2019, respectively, was
pledged for the bank loan from Industrial & Commercial Bank of China. Land use right of Hebei Tengsheng with net value of
$5,327,293 and $5,200,452 as of September 30, 2020 and December 31, 2019, respectively, was pledged for a long-term loan from
credit union of Baoding Shengde. In addition, land use right of Hebei Tengsheng with net value of $8,253,440 and $8,056,930 as
of September 30, 2020 and December 31, 2019, respectively, was pledged for another long-term loan from credit union of Baoding
Shengde. See “Short-term bank loans” and “Long-term loans from credit union” under Note
(7), Loans Payable, for details of the transaction and asset collaterals.
Depreciation
and amortization of property, plant and equipment was $3,805,389 and $3,758,191 for the three months ended September 30, 2020
and 2019, respectively. Depreciation and amortization of property, plant and equipment was $11,301,703 and $11,547,650 for the
nine months ended September 30, 2020 and 2019, respectively.
(7)
Financing with Sale-Leaseback
The
Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”)
on August 6, 2020, for a total financing proceedsin the amount of RMB 16 million (approximately US$2.3 million). Under the sale-leaseback
arrangement, Hebei Tengsheng sold the Leased Equipment toTLCL for 16 million (approximately US$2.3 million). Concurrent with the
sale of equipment, Hebei Tengsheng leases back the equipment soldto TLCL for a lease term of three years. At the end of the lease
term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately$15) to TLCL and buy back the Leased Equipment.
The Leased Equipment in amount of $2,349,452 wasrecorded as right-of-use assets and the net present value of the minimum lease
paymentswasrecorded as lease liability andcalculated with TLCL’s implicit interest rate of 15.6% per annum and stated at
$567,099 at the inception of the lease on August 17, 2020.
Hebei
Tengsheng made two payments due according to the schedule. As of September 30, 2020, the balance ofLeased Equipment net of amortization
was $2,336,399. The lease liabilitywere $385,650 and its current portionin the amount of $168,546 as of September 30, 2020.
Amortization
of the Leased Equipment was $12,718 for the three and nine months ended September 30, 2020. Total interest expenses for the
sale-leaseback arrangement was $7,172 for the three and nine months ended September 30, 2020.
As
a result of the sale and leaseback, a deferred gain in the amount of $430,695 was recorded.The deferred gain isamortized over
the lease term and as an offset to amortization of the Leased Equipment.
The
future minimum lease payments of the capital lease as of September 30, 2020 were as follows:
September 30,
|
|
Amount
|
|
2021
|
|
|
243,168
|
|
2022
|
|
|
243,168
|
|
2023
|
|
|
202,640
|
|
Less: unearned discount
|
|
|
(134,781
|
)
|
|
|
|
554,196
|
|
Less: Current portion of lease liability
|
|
|
(168,546
|
)
|
|
|
$
|
385,650
|
|
(8)
Loans Payable
|
|
|
|
|
|
|
Short-term
bank loans
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
$
|
6,314,151
|
|
|
$
|
6,163,814
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
$
|
6,314,151
|
|
|
$
|
6,163,814
|
|
On
December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,314,151 and $6,163,814
as of September 30, 2020 and December 31, 2019, respectively. The working capital loan was secured by the land use right of Dongfang
Paper as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due
and repaid by December 23, 2020.
As
of September 30, 2020, there were guaranteed short-term borrowings of $6,314,151 and unsecured bank loans of $nil. As of December
31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil.
The
average short-term borrowing rates for the three months ended September 30, 2020 and 2019 were approximately 4.79% and 4.77%,
respectively. The average short-term borrowing rates for the nine months ended September 30, 2020 and 2019 were approximately
4.79% and 4.76%, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-term
loans from credit union
As
of September 30, 2020 and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $9,192,229 and
$8,973,367, respectively.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Rural Credit Union of Xushui District Loan 1
|
|
$
|
1,262,830
|
|
|
$
|
1,232,763
|
|
Rural Credit Union of Xushui District Loan 2
|
|
|
3,671,018
|
|
|
|
3,583,613
|
|
Rural Credit Union of Xushui District Loan 3
|
|
|
2,349,452
|
|
|
|
2,293,512
|
|
Rural Credit Union of Xushui District Loan 4
|
|
|
1,908,929
|
|
|
|
1,863,479
|
|
Total
|
|
|
9,192,229
|
|
|
|
8,973,367
|
|
Less: Current portion of long-term loans from credit union
|
|
|
(3,803,175
|
)
|
|
|
(1,605,459
|
)
|
Long-term loans from credit union
|
|
$
|
5,389,054
|
|
|
$
|
7,367,908
|
|
As
of September 30, 2020, the Company’s long-term debt repayments for the next five years were as follows:
|
|
Amount
|
|
Fiscal year
|
|
|
|
Remainder of 2020
|
|
$
|
1,644,616
|
|
2021
|
|
|
3,142,391
|
|
2022
|
|
|
1,615,248
|
|
2023
|
|
|
2,789,974
|
|
Total
|
|
|
9,192,229
|
|
On
April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent
third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed
for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of September
30, 2020 and December 31, 2019, total outstanding loan balance was $1,262,830 and $1,232,763, respectively. Out of the total outstanding
loan balance, current portion amounted were $176,209 and $143,345 as of September 30, 2020 and December 31, 2019, respectively,
which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,086,621 and $1,089,418
are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2020 and December 31, 2019, respectively.
On
July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan
was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023.
The loan is secured by certain of the Company’s manufacturing equipment with net book value of $2,690,540 and $3,935,270
as of September 30, 2020 and December 31, 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64%
per month. As of September 30, 2020 and December 31, 2019, the total outstanding loan balance was $3,671,018 and $3,583,613, respectively.
Out of the total outstanding loan balance, current portion amounted were $249,629 and $172,013 as of September 30, 2020 and December
31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $3,421,389 and $3,411,600 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2020
and December 31, 2019, respectively.
On
April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng
with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bears a fixed
rate of 0.6% per month. As of September 30, 2020 and December 31, 2019, the total outstanding loan balance was $2,349,452 and
$2,293,512, respectively. Out of the total outstanding loan balance, current portion amounted were $2,349,452 and $1,146,756 as
of September 30, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance
sheet and the remaining balance of $nil and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet
as of September 30, 2020 and December 31, 2019, respectively.
IT
TECH PACKAGING, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng
with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate
of 7.56% per annum. As of September 30, 2020 and December 31, 2019, the total outstanding loan balance was $1,908,929 and $1,863,479,
respectively. Out of the total outstanding loan balance, current portion amounted were $1,027,885 and $143,345 as of September
30, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and
the remaining balance of $881,044 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as
of September 30, 2020 and December 31, 2019, respectively.
Total
interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2020 and 2019 were
$251,266 and $214,907, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months
ended September 30, 2020 and 2019 were $737,420 and $659,613, respectively.
(9)
Related Party Transactions
Mr.
Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On
January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and
extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together
with interest of $391,374 for the period from 2013 to 2015. Approximately $376,403 and $367,441 of interest were outstanding to
Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated
balance sheet as of September 30, 2020 and December 31, 2019, respectively.
On
December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083 to Dongfang Paper for working capital
purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China.
The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016,
the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the Company paid off
the remaining balance, together with interest of $20,400. As of September 30, 2020 and December 31, 2019, approximately $44,052
and $43,003 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as
part of the current liabilities in the consolidated balance sheet.
On
March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount
up to $17,620,887 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years
from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary
lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636
was drawn from the facility. On October 14, 2016, an unsecured amount of $2,883,091 was drawn from the facility. In February 2018,
the Company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed
to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the Company
repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the Company paid off the remaining
balance, together with interest of $94,636. As of September 30, 2020 and December 31, 2019, the outstanding loan balance were
$nil and the accrued interest was $201,814 and $197,009, respectively, which was recorded in other payables and accrued liabilities
as part of the current liabilities in the consolidated balance sheet.
As
of September 30, 2020 and December 31, 2019, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred
for such related party loans are $nil and $23,234 for the three months ended September 30, 2020 and 2019, respectively. The interest
expenses incurred for such related party loans are $nil and $71,415 for the nine months ended September 30, 2020 and 2019, respectively.
The accrued interest owed to Mr. Zhenyong Liu was approximately $622,269 and $607,453, as of September 30, 2020 and December 31,
2019, respectively, which was recorded in other payables and accrued liabilities.
As
of September 30, 2020 and December 31, 2019, amount due to shareholder are $657,433 and $483,433, respectively, which represents
funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.
Lease
of Headquarters Compound Real Properties from a Related Party
On
August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the
Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters
Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound
(the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million,
respectively. Sales of the LUR and the Industrial Buildings were completed in year 2013.
In
connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company
for its original use for a term of up to three years, with an annual rental payment of approximately $143,078 (RMB1,000,000).
The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements
with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same rental payment as original
lease agreement.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(10) Other payables and accrued liabilities
Other payables and accrued liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued electricity
|
|
$
|
124,812
|
|
|
$
|
129,466
|
|
Value-added tax payable
|
|
|
183,221
|
|
|
|
854,728
|
|
Accrued interest to a related party
|
|
|
622,269
|
|
|
|
607,453
|
|
Payable for purchase of equipment
|
|
|
3,271,052
|
|
|
|
3,936,047
|
|
Accrued commission to salesmen
|
|
|
15,229
|
|
|
|
17,162
|
|
Accrued bank loan interest
|
|
|
233,624
|
|
|
|
-
|
|
Others
|
|
|
123,765
|
|
|
|
958,154
|
|
Totals
|
|
$
|
4,573,972
|
|
|
$
|
6,503,010
|
|
(11) Derivative Liabilities
The Company analyzed the warrant for derivative
accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument
should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit
to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market
value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income
or expense item.
The Company determined our derivative liabilities
to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of September 30,
2020. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest
rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these
inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using
the Black-Scholes valuation model. The following weighted-average assumptions were used in the September 30, 2020:
|
|
Nine months ended
|
|
|
September 30,
|
|
|
2020
|
Expected term
|
|
2.55 - 2.75
|
Expected average volatility
|
|
79% - 85%
|
Expected dividend yield
|
|
-
|
Risk-free interest rate
|
|
0.16% - 0.24%
|
The
following table summarizes the changes in the derivative liabilities during the nine months ended September 30, 2020:
Fair Value Measurements Using Significant Observable Inputs (Level 3)
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
-
|
|
Addition of new derivatives recognized as warrant
|
|
|
689,205
|
|
Addition of new derivatives recognized as loss on derivatives
|
|
|
306,215
|
|
Change in fair value of derivative liability
|
|
|
(278,350
|
)
|
Balance at September 30, 2020
|
|
$
|
717,070
|
|
The following table summarizes
the loss on derivative liability included in the income statement for the nine months ended September 30, 2020 and 2019, respectively.
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Day one loss due to derivative liabilities as warrant
|
|
$
|
306,215
|
|
|
$
|
-
|
|
Loss on change in fair value of derivative liability
|
|
|
204,165
|
|
|
|
-
|
|
|
|
|
510,380
|
|
|
|
-
|
|
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(12) Common Stock
Issuance of common stock to investors
On August 27, 2014, the Company issued 1,562,500 shares of our
common stock and warrants to purchase up to 781,250 shares of our common stock.
Each share of common stock and accompanying warrant was sold
at a price of $1.60.
On April 29, 2020, the Company and certain
institutional investors entered into a securities purchase agreement, as amended on May 4, 2020 (the “2020 Purchase Agreement”),
pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered
direct offering and warrants to purchase up to 4,400,000 shares of the Company’s common stock in a concurrent private placement,
for gross proceeds of approximately $2.55 million (net proceeds of approximately 2.27 million). The purchase price for each share
of Common Stock and the corresponding warrant was $0.58.
Issuance of common stock pursuant to the 2012 Incentive Stock
Plan, 2015 Omnibus Equity Incentive and 2019 Omnibus Equity Incentive
On January 12, 2016, the Company granted
an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans to nine officers, directors and employees
of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416
shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus
Equity Incentive. Please see Note (14), Stock Incentive Plans for more details. Total fair value of the stock was calculated at
$1,417,395 as of the date of grant.
On September 13, 2018, the compensation
committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen officers, directors and employees
of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock
granted was calculated at $470,360 as of the date of issuance.
On April 2, 2020, the compensation committee
granted an aggregate of 2,000,000 shares of restricted common stock to fifteen officers, directors and employees of the Company,
which were granted under the 2019 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated
at $1,200,000 as of the date of issuance at $0.60 per share.
Issuance of common stock to Weitian
On October 15, 2018, the Company entered
into an agreement with Weitian Group LCC (“Weitian”) and agreed as compensation to issue to Weitian in the aggregate
of 70,000 shares of common stock for investor relation consulting service rendered from October 15, 2018 to October 15, 2019. 37,500
shares of common stock were issued to Weitian on November 12, 2018. Total fair value of the shares of common stock granted was
calculated at $32,625 at $0.87 per share. 32,500 shares of common stock were issued to Weitian on August 13, 2019. Total fair value
of the shares of common stock granted was calculated at $17,550 at $0.54 per share.
Issuance of common stock to a consultant
On January 2, 2020, the Company entered
into an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 60,000 shares of
common stock for merger and acquisition consulting service rendered from January 2, 2020 to January 2, 2021. 60,000 shares of common
stock were issued to this consultant on April 28, 2020. Total fair value of the shares of common stock issued was calculated at
$42,000 at $0.70 per share.
(13) Warrants
Pursuant to the 2020 Purchase Agreement,
the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock and warrants to purchase up to 4,400,000
shares of the Common Stock in a concurrent private placement. The exercise price of the warrant is $0.7425 per share. These warrants
are exercisable on November 4, 2020 and have a term of exercise equal to five years and six months from the date of issuance till
November 4, 2025. The Company classified warrant as liabilities and accounted for the issuance of the Warrants as a derivative.
A summary of stock warrant activities is as below:
|
|
Nine months Ended
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
Weight
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
|
Number
|
|
|
price
|
|
Outstanding and exercisable at beginning of the period
|
|
|
|
|
|
|
Issued during the period
|
|
|
4,400,000
|
|
|
$
|
0.7425
|
|
Exercised during the period
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired during the period
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at end of the period
|
|
|
4,400,000
|
|
|
$
|
0.7425
|
|
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The
following table summarizes information relating to outstanding and exercisable warrants as of September 30, 2020.
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Contractual life
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
Shares
|
|
|
(in years)
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
4,400,000
|
|
|
|
5.34
|
|
|
$
|
0.7425
|
|
|
|
4,400,000
|
|
|
$
|
0.7425
|
|
Aggregate intrinsic value is the sum of
the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at September
30, 2020 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants).
There is no intrinsic value of the warrants as of September 30, 2020.
(14) Earnings Per Share
For the three months ended September 30, 2020 and 2019, basic
and diluted net income per share are calculated as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Basic (loss) income per share
|
|
|
|
|
|
|
Net (loss) income for the period - numerator
|
|
$
|
(520,974
|
)
|
|
$
|
2,338,027
|
|
Weighted average common stock outstanding - denominator
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
Net income for the period- numerator
|
|
$
|
(520,974
|
)
|
|
$
|
2,338,027
|
|
Weighted average common stock outstanding - denominator
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.11
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Basic (loss) income per share
|
|
|
|
|
|
|
Net (loss) income for the period - numerator
|
|
$
|
(3,937,292
|
)
|
|
$
|
65,502
|
|
Weighted average common stock outstanding - denominator
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
(0.15
|
)
|
|
$
|
0.003
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
|
|
|
|
|
|
|
Net (loss) income for the period - numerator
|
|
$
|
(3,937,292
|
)
|
|
$
|
65,502
|
|
Weighted average common stock outstanding - denominator
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
25,816,354
|
|
|
|
22,028,171
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(0.15
|
)
|
|
$
|
0.003
|
|
For the three and nine months ended September 30, 2020 and 2019
there were no securities with dilutive effect issued and outstanding.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(15) Income Taxes
United States
The Company and Shengde Holdings are incorporated
in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively. On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJAAct”), which significantly changed U.S.
tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35% to 21%
effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to
pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and
creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides
guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the
2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent
that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate
to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws
that were in effect immediately before the enactment of the 2017 TCJA.
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.
PRC
Dongfang Paper and Baoding Shengde
are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise
Income Tax is generally imposed at a statutory rate of 25%.
The provisions for income taxes
for three months ended September 30, 2020 and 2019 were as follows:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
Current Tax Provision U.S.
|
|
$
|
14,717
|
|
|
$
|
-
|
|
Current Tax Provision PRC
|
|
|
572,686
|
|
|
|
1,367,499
|
|
Deferred Tax Provision PRC
|
|
|
(561,055
|
)
|
|
|
(594,594
|
)
|
Total Provision for (Deferred tax benefit)/ Income Taxes
|
|
$
|
26,348
|
|
|
$
|
772,905
|
|
The provisions for income taxes
for the nine months ended September 30, 2020 and 2019 were as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
Current Tax Provision U.S.
|
|
$
|
14,747
|
|
|
$
|
14,747
|
|
Current Tax Provision PRC
|
|
|
988,589
|
|
|
|
2,044,761
|
|
Deferred Tax Provision PRC
|
|
|
(1,582,754
|
)
|
|
|
(1,853,728
|
)
|
Total Provision for (Deferred tax benefit)/ Income Taxes
|
|
$
|
(579,418
|
)
|
|
$
|
205,780
|
|
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
In addition to the reversible future PRC
income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset
depreciation, the Company was incorporated in the United States and incurred aggregate net operating losses of approximately $nil
and $6,710,939 for U.S. income tax purposes for the years ended December 31, 2018 and 2017, respectively. The net operating loss
carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized,
during the period of 2030 through 2035. As of December 31, 2019, management believed that the realization of all the U.S. income
tax benefits from these losses, which generally would generate a deferred tax asset if it can be expected to be utilized in the
future, appears not more than likely due to the Company’s limited operating history and continuing losses for United States
income tax purposes. Accordingly, As of December 31, 2019, the Company provided a 100% valuation allowance on the U.S. deferred
tax asset benefit to reduce the total deferred tax asset to the amount realizable for the PRC income tax purposes. Management reviews
this valuation allowance periodically and will make adjustments as warranted. A summary of the otherwise deductible (or taxable)
deferred tax items is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
|
|
$
|
11,263,430
|
|
|
$
|
9,277,009
|
|
Impairment of property, plant and equipment
|
|
|
522,334
|
|
|
|
521,803
|
|
Miscellaneous
|
|
|
230,052
|
|
|
|
277,511
|
|
Net operating loss carryover of PRC company
|
|
|
349,348
|
|
|
|
408,730
|
|
Total deferred tax assets
|
|
|
12,365,164
|
|
|
|
10,485,053
|
|
Less: Valuation allowance
|
|
|
|
|
|
|
-
|
|
Total deferred tax assets, net
|
|
$
|
12,365,164
|
|
|
|
10,485,053
|
|
The following table reconciles the statutory
rates to the Company’s effective tax rate:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of different tax jurisdiction
|
|
|
|
|
|
|
-
|
|
Effect of reconciling items in the PRC for tax purposes
|
|
|
(30.3
|
)
|
|
|
(0.2
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
-
|
|
Effective income tax rate
|
|
|
(5.3
|
)%
|
|
|
24.8
|
%
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of different tax jurisdiction
|
|
|
|
|
|
|
-
|
|
Effect of reconciling items in the PRC for tax purposes
|
|
|
(12.2
|
)
|
|
|
50.9
|
|
Change in valuation allowance
|
|
|
|
|
|
|
-
|
|
Effective income tax rate
|
|
|
12.8
|
%
|
|
|
75.9
|
%
|
During the three months ended September 30, 2020 and 2019, the
effective income tax rate was estimated by the Company to be -5.3% and 24.8%, respectively.
During the nine months ended September 30, 2020 and 2019, the
effective income tax rate was estimated by the Company to be 12.8% and 75.9%, respectively.
As of December 31, 2017, except for the
one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated foreign E&Ps, the Company
does not believe that its future dividend policy and the available U.S. tax deductions and net operating losses will cause the
Company to recognize any other substantial current U.S. federal or state corporate income tax liability in the near future. Nor
does it believes that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will
change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected
to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S.
resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable
future, additional tax provisions would be required.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company has adopted ASC Topic 740-10-05,
Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of
operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the
liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities.
Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion
of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s
liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly
or annual period based, in part, upon the results of operations for the given period. As of December 31, 2019 and 2018, management
considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations
or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties
provided in the Company’s consolidated financial statements for the years ended December 31, 2019 and 2018, respectively.
The Company’s tax positions related to open tax years are subject to examination by the relevant tax authorities and the
major one is the China Tax Authority.
(16) Stock Incentive Plans
Issuance of common stock pursuant to the 2011 Incentive Stock
Plan and 2012 Incentive Stock Plan
On August 28, 2011, the Company’s
Annual General Meeting approved the 2011 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2011 ISP”) as previously
adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant an aggregate of 375,000 shares of
the Company’s common stock to the Company’s directors, officers, employees or consultants. No stock or option was issued
under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares of restricted common stock to
certain officers and directors of the Company when the stock was at $3.45 per share, as compensation for their services in the
past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance.
On September 10, 2012, the Company’s
Annual General Meeting approved the 2012 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2012 ISP”) as previously
adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant an aggregate of 200,000 shares of
the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board
and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options,
Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any
grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to
be included in such grants; and (d) make all other determinations necessary or advisable for the 2012 ISP’s administration.
On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which 265,416 shares were
granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees of the Company when
the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of the stock was calculated
at $790,020 as of the date of grant.
2015 Incentive Stock Plan
On August 29, 2015, the Company’s
Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2015 ISP”)
as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company may grant an aggregate of 1,500,000
shares of the Company’s common stock to the directors, officers, employees and/or consultants of the Company and its subsidiaries.
On January 12, 2016, the Compensation Committee granted restricted common shares of 1,133,916, of which 168,416 shares were granted
under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors, employees and a consultant of the Company
as compensation for their services in the past years. Total fair value of the stock was calculated at $1,417,395 as of the date
of issuance at $1.25 per share.
On September 13, 2018, the compensation
committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors and employees of the Company, which
were granted under the 2015 ISP. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date
of issuance at $0.88 per share.
2019 Incentive Stock Plan
On October 31, 2019, the shareholders of
the Company at the Company’s Annual Shareholders General Meeting adopted and approved the 2019 Omnibus Equity Incentive Plan
of IT Tech Packaging, Inc. (the “2019 ISP”). Under the 2019 ISP, the Company has reserved a total of 2,000,000 shares
of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company
and its subsidiaries. On April 2, 2020, 2,000,000 shares of common stock were granted under the 2019 ISP. Total fair value of the
shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(17) Commitments and Contingencies
Operating Lease
The Company leases 32.95 acres of land
from a local government in Xushui District, Baoding City, Hebei, China through a real estate lease with a 30-year term, which expires
on December 31, 2031. The lease requires an annual rental payment of approximately $17,169 (RMB120,000). This operating lease is
renewable at the end of the 30-year term.
As mentioned in Note (8) Related Party
Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial
Buildings back to the Company at an annual rental of $143,078 (RMB1,000,000), for a total term of up to five years.
Future minimum lease payments of all operating
leases are as follows:
September 30,
|
|
Amount
|
|
2021
|
|
|
38,842
|
|
2022
|
|
|
139,988
|
|
2023
|
|
|
17,621
|
|
2024
|
|
|
17,621
|
|
2025
|
|
|
17,621
|
|
Thereafter
|
|
|
110,131
|
|
Total operating lease payments
|
|
$
|
341,824
|
|
Capital commitment
As of September 30, 2020, the Company has
entered into several contracts for the purchase of paper machine of a new tissue paper production line PM10 and the improvement
of Industrial Buildings. Total outstanding commitments under these contracts were $5,205,861 and $1,101,989 as of September 30,
2020 and December 31, 2019, respectively. The Company expected to pay off all the balances within 1-3 years.
On June 25, 2019, Dongfang Paper entered
into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei Tengsheng”), a limited liability
company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. The consideration for
the acquisition is RMB320 million (approximately $46 million), of which $2.8 million was paid by the Company, and the balance consideration
of $43.2 million is payable by December 31, 2021.
Guarantees and Indemnities
The Company agreed with Baoding Huanrun
Trading Co., Ltd.(“Baoding Huanrun”), a major supplier of raw materials, to guarantee certain obligations of this third
party, and as of September 30, 2020 and December 31, 2019, the Company guaranteed its long-term loan from financial institutions
amounting to $4,552,062 (RMB31,000,000) that matured at various times in 2020-2023. If Baoding Huanrun were to become insolvent,
the Company could be materially adversely affected.
(18) Segment Reporting
Since March 10, 2010, Baoding Shengde started
its operations and thereafter the Company manages its operations through two business operating segments: Dongfang Paper, which
produces offset printing paper and corrugating medium paper and Baoding Shengde, which produces digital photo paper and single-use
face masks. They are managed separately because each business requires different technology and marketing strategies.
The Company evaluates performance of its
operating segments based on net income. Administrative functions such as finance, treasury, and information systems are centralized.
However, where applicable, portions of the administrative function expenses are allocated between the operating segments based
on gross revenue generated. The operating segments share facilities in Xushui District, Baoding City, Hebei Province, China. All
sales were sold to customers located in the PRC.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Summarized financial information for the
three reportable segments is as follows:
|
|
Three Months Ended
|
|
|
|
September 30, 2020
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not
Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
30,756,297
|
|
|
$
|
2,380,052
|
|
|
$
|
221,102
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,357,451
|
|
Gross profit
|
|
|
2,888,037
|
|
|
|
(345,084
|
)
|
|
|
24,598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,567,551
|
|
Depreciation and amortization
|
|
|
1,645,309
|
|
|
|
2,155,505
|
|
|
|
4,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,805,389
|
|
Interest income
|
|
|
6,544
|
|
|
|
977
|
|
|
|
1,023
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,544
|
|
Interest expense
|
|
|
172,003
|
|
|
|
7,172
|
|
|
|
79,263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
258,438
|
|
Income tax expense(benefit)
|
|
|
578,029
|
|
|
|
(538,191
|
)
|
|
|
(13,490
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
26,348
|
|
Net income (loss)
|
|
|
1,722,774
|
|
|
|
(1,394,727
|
)
|
|
|
(67,334
|
)
|
|
|
(781,687
|
)
|
|
|
-
|
|
|
|
(520,974
|
)
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not
Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
61,630,714
|
|
|
|
5,766,207
|
|
|
|
1,066,654
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,463,575
|
|
Gross profit
|
|
|
5,859,599
|
|
|
|
(1,430,934
|
)
|
|
|
527,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,956,662
|
|
Depreciation and amortization
|
|
|
4,769,348
|
|
|
|
6,396,006
|
|
|
|
136,349
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,301,703
|
|
Loss from impairment and disposal of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
19,638
|
|
|
|
1,524
|
|
|
|
2,623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,785
|
|
Interest expense
|
|
|
505,000
|
|
|
|
7,172
|
|
|
|
232,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
744,592
|
|
Income tax expense(benefit)
|
|
|
927,129
|
|
|
|
(1,586,876
|
)
|
|
|
65,612
|
|
|
|
14,717
|
|
|
|
-
|
|
|
|
(579,418
|
)
|
Net income (loss)
|
|
|
2,667,923
|
|
|
|
(4,338,839
|
)
|
|
|
56,764
|
|
|
|
(2,323,140
|
)
|
|
|
-
|
|
|
|
(3,937,292
|
)
|
|
|
As of September 30, 2020
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not
Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
75,258,630
|
|
|
|
99,754,660
|
|
|
|
18,262,508
|
|
|
|
54,165
|
|
|
|
-
|
|
|
|
193,329,964
|
|
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Not
|
|
|
|
|
|
Enterprise-
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Attributable
|
|
|
Elimination of
|
|
|
wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
31,364,795
|
|
|
$
|
1,573,122
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,937,917
|
|
Gross profit
|
|
|
5,978,125
|
|
|
|
(603,393
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,374,732
|
|
Depreciation and amortization
|
|
|
1,606,856
|
|
|
|
2,151,329
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,758,191
|
|
Interest income
|
|
|
1,317
|
|
|
|
47
|
|
|
|
49
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413
|
|
Interest expense
|
|
|
194,992
|
|
|
|
-
|
|
|
|
41,995
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236,987
|
|
Income tax expense(benefit)
|
|
|
1,324,462
|
|
|
|
(537,402
|
)
|
|
|
(14,155
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
772,905
|
|
Net income (loss)
|
|
|
3,968,168
|
|
|
|
(1,611,552
|
)
|
|
|
(31,487
|
)
|
|
|
13,777
|
|
|
|
(879
|
)
|
|
|
2,338,027
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Not
|
|
|
|
|
|
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
81,228,917
|
|
|
$
|
2,779,240
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
84,008,157
|
|
Gross profit
|
|
|
9,367,456
|
|
|
|
(1,277,061
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,090,395
|
|
Depreciation and amortization
|
|
|
7,193,605
|
|
|
|
4,354,027
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,547,650
|
|
Loss from impairment and disposal of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
61,512
|
|
|
|
73
|
|
|
|
202
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,787
|
|
Interest expense
|
|
|
607,483
|
|
|
|
-
|
|
|
|
123,544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
731,027
|
|
Income tax expense(benefit)
|
|
|
1,333,450
|
|
|
|
(1,087,850
|
)
|
|
|
(54,567
|
)
|
|
|
14,747
|
|
|
|
-
|
|
|
|
205,780
|
|
Net income (loss)
|
|
|
4,007,833
|
|
|
|
(3,591,696
|
)
|
|
|
(103,709
|
)
|
|
|
(277,444
|
)
|
|
|
30,518
|
|
|
|
65,502
|
|
|
|
As of December 31, 2019
|
|
|
|
Dongfang
|
|
|
Hebei
|
|
|
Baoding
|
|
|
Not
Attributable
|
|
|
Elimination of
|
|
|
Enterprise-wide,
|
|
|
|
Paper
|
|
|
Tengsheng
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
73,347,811
|
|
|
|
99,747,236
|
|
|
|
17,031,392
|
|
|
|
71,991
|
|
|
|
-
|
|
|
|
190,198,430
|
|
(19) Concentration and Major Customers and Suppliers
For the three months ended September 30, 2020, the Company had
no single customer contributed over 10% of total sales.
For the three months ended September 30, 2019, the Company had
no single customer contributed over 10% of total sales.
For the three months ended September 30, 2020, the Company had
three major suppliers accounted for 75%, 11% and 3% of total purchases.For the three months ended September 30, 2019, the Company
had four major suppliers accounted for 71%, 13%, 4% and 4% of total purchases.
For the nine months ended September 30, 2020, the Company had
three major suppliers accounted for 74%, 11% and 4% of total purchases. For the nine months ended September 30, 2019, the Company
had three major suppliers accounted for 77%, 10% and 4% of total purchases.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(20) Concentration of Credit Risk
Financial instruments for which the Company
is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial
institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind
all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection
provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of September 30, 2020 and December
31, 2019. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection
would be up to RMB500,000 (US$73,420) per depositor per insured financial intuition, including both principal and interest. For
the cash placed in financial institutions in the United States, the Company’s U.S. bank accounts are all fully covered by
the FDIC insurance as of September 30, 2020 and December 31, 2019, respectively, while for the cash placed in financial institutions
in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB53,960,058 (US$7,923,534) as of September
30, 2020.
(21) Risks and Uncertainties
The Company is subject to substantial risks
from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity
requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various
laws and restrictions.
Our business, financial condition and
results of operations may be materially adversely affected by global health epidemics, including the recent COVID-19 outbreak.
Outbreaks of epidemic, pandemic, or contagious
diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread
of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. While the COVID-19
pandemic is still growing worldwide, international stock markets have reflected the uncertainty associated with the slow-down in
the global economy and the reduced levels of international travel experienced since the beginning of January, large declines in
oil prices and the significant decline in the Dow Industrial Average at the end of February and beginning of March 2020 was largely
attributed to the effects of COVID-19. Any resulting financial impact cannot be reasonably estimated at this time. The extent to
which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain
the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may
arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our
results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact
from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.
(22) Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial
statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented.
The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on
a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year
of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective
basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as
of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We do not expect
the adoption of ASU 2019-12 to have a material impact on our condensed consolidated financial statements.
(23) Subsequent Event
None.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary
Notice Regarding Forward-Looking Statements
The
following discussion of the financial condition and results of operations of the Company for the periods ended September 30, 2020
and 2019 should be read in conjunction with the financial statements and the notes to the financial statements that are included
elsewhere in this quarterly report.
In
this quarterly report, references to “the Company,” “we,” “our” and “us” refer
to IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise.
We
make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial
condition, future economic performance (including growth and earnings), demand for our products, and other statements of our plans,
beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements.
In some cases these statements are identifiable through the use of words such as “anticipate”, “believe”,
“estimate”, “expect”, “intend”, “plan”, “project”, “target”,
“can”, “could”, “may”, “should”, “will”, “would”, and
similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section
27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future
performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially
from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some
of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied
in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking
statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents
that we file with the Securities and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking
statements. In evaluating the forward-looking statements contained in this report, you should consider various factors, including,
without limitation, the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are
able to manage our planned growth efficiently and operate profitably, (c) whether we are able to generate sufficient revenues
or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements
for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities
laws.
Results
of Operations
Comparison
of the Three months ended September 30, 2020 and 2019
Revenue
for the three months ended September 30, 2020 was $33,357,451, an increase of $419,534, or 1.27%, from $32,937,917 for the same
period in the previous year.This was mainly due to the increase in sales volume of face mask, tissue paper products and corrugating
medium paper (“CMP”).
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 three months ended September 30, 2020 was $33,136,349,
an increase of $198,432, or 0.60%, from $32,937,917 for the third quarter of 2019. Total offset printing paper, CMP and tissue
paper products sold during the three months ended September 30, 2020 amounted to 74,126 tonnes, an increase of 1,880 tonnes, or
2.60%, compared to 72,246 tonnes sold in the comparable period in the previous year. The changes in revenue dollar amount and
in quantity sold for the three months ended September 30, 2020 and 2019 are summarized as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
48,107
|
|
|
$
|
19,553,861
|
|
|
|
47,487
|
|
|
$
|
19,332,044
|
|
|
|
620
|
|
|
$
|
221,818
|
|
|
|
1.31
|
%
|
|
|
1.15
|
%
|
Light-Weight CMP
|
|
|
12,884
|
|
|
$
|
5,076,133
|
|
|
|
12,721
|
|
|
$
|
5,017,008
|
|
|
|
163
|
|
|
$
|
59,125
|
|
|
|
1.28
|
%
|
|
|
1.18
|
%
|
Total CMP
|
|
|
60,991
|
|
|
$
|
24,629,994
|
|
|
|
60,209
|
|
|
$
|
24,349,052
|
|
|
|
782
|
|
|
$
|
280,943
|
|
|
|
1.30
|
%
|
|
|
1.15
|
%
|
Offset Printing Paper
|
|
|
10,280
|
|
|
$
|
6,126,303
|
|
|
|
10,198
|
|
|
$
|
7,037,582
|
|
|
|
82
|
|
|
$
|
(911,279
|
)
|
|
|
0.80
|
%
|
|
|
(12.95
|
)%
|
Tissue Paper Products
|
|
|
2,855
|
|
|
$
|
2,380,052
|
|
|
|
1,840
|
|
|
$
|
1,551,283
|
|
|
|
1,015
|
|
|
$
|
828,769
|
|
|
|
55.16
|
%
|
|
|
53.42
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
74,126
|
|
|
$
|
33,136,349
|
|
|
|
72,246
|
|
|
$
|
32,937,917
|
|
|
|
1,880
|
|
|
$
|
198,432
|
|
|
|
2.60
|
%
|
|
|
0.60
|
%
|
Monthly
sales revenue for the 24 months ended September 30, 2020, are summarized below:
The
Average Selling Prices (ASPs) for our main products in the three months ended September 30, 2020 and 2019 are summarized as follows:
|
|
Offset Printing
Paper ASP
|
|
|
Regular
CMP ASP
|
|
|
Light-Weight
CMP ASP
|
|
|
Tissue
Paper
Products
ASP
|
|
Three Months ended September 30, 2019
|
|
$
|
690
|
|
|
$
|
407
|
|
|
$
|
394
|
|
|
$
|
843
|
|
Three Months ended September 30, 2020
|
|
$
|
596
|
|
|
$
|
406
|
|
|
$
|
394
|
|
|
$
|
834
|
|
Decrease from comparable period in the previous year
|
|
$
|
(94
|
)
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
Decrease by percentage
|
|
|
-13.62
|
%
|
|
|
-0.25
|
%
|
|
|
0.00
|
%
|
|
|
-1.07
|
%
|
The
following chart shows the month-by-month ASPs for the 24-month period ended September 30, 2020:
Corrugating
Medium Paper
Revenue
from CMP amounted to $24,629,994 (74.33% of the total offset printing paper, CMP and tissue paper products revenues) for the three
months ended September 30, 2020, representing an increase of $280,943, or 1.15%, from $24,349,052 for the comparable period in
2019.
We
sold 60,991 tonnes of CMP in the three months ended September 30, 2020 as compared to 60,209 tonnes for the same period in 2019,
representing a 1.30% increase in quantity sold
ASP
for regular CMP dropped from $407/tonne for the three months ended September 30, 2019 to $406/tonne for the three months ended
September 30, 2020, representing a 0.25% decrease. ASP in RMB for regular CMP for the third quarter of 2019 and 2020 was RMB2,846
and RMB2,816, respectively, representing a 1.05% decrease. The quantity of regular CMP sold increased by 620 tonnes, from 47,487
tonnes in the third quarter of 2019 to 48,107 tonnes in the third quarter of 2020.
ASP
for light-weight CMP were $394/tonne for the three months ended September 30, 2019 and 2020. ASP in RMB for light-weight CMP for
the third quarter of 2019 and 2020 was RMB2,758 and RMB2,727, respectively, representing a 1.12% decrease. The quantity of light-weight
CMP sold increased by 163 tonnes, from 12,721 tonnes in the third quarter of 2019, to 12,884 tonnes in the third quarter of 2020.
Our
PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for
the third quarter of 2020 and 2019 were 53.77% and 53.19%, respectively, representing an increase of 0.58%.
Quantities
sold for regular CMP that was produced by the PM6 production line from October 2018 to September 2020 are as follows:
Tissue
Paper Products
We
produce tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues and paper napkins,
as well as bathroom and kitchen paper towels that are marketed and sold under the brand “Qingmu”. In December 2018
and November 2019, we completed the construction, installation and test of operation of our PM8 and PM9 production lines. We launched
the complete line of processing base tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue
paper products with designated capacity of 15,000 tonnes/year.
Revenue
from tissue paper products was $2,380,052 (7.18% of the total offset printing paper, CMP and tissue paper products revenues) for
the three months ended September 30, 2020, representing an increase of $828,769, or 53.42%, from $1,551,283 for the three months
ended September 30, 2019. We sold 2,855 tonnes of tissue paper in the third quarter of 2020, as compared to 1,840 tonnes in the
comparable period of 2019, representing an increase of 1,015 tonnes, or 55.16%. Except for the production suspension in the first
quarter of 2020, the production and sales of tissue paper products have been growing up steadily since the launch of PM8 and PM9
in December 2018 and November 2019.
ASP
for tissue paper products decreased from $843/tonne for the three months ended September 30, 2019 to $834/tonne for the three
months ended September 30, 2020, representing a 1.07% decrease. ASP in RMB for tissue paper products for the third quarter of
2019 and 2020 was RMB5,912 and RMB5,766, respectively, representing a 2.47% decrease. The quantity of tissue paper products sold
increased by 1,015 tonnes, from 1,840 tonnes in the third quarter of 2019, to 2,855 tonnes in the third quarter of 2020.
Offset
printing paper
Revenue
from offset printing paper was $6,126,303 (18.49% of the total offset printing paper, CMP and tissue paper products revenues)
for the three months ended September 30, 2020, representing a decrease of $911,279, or 12.95%, from $7,037,582 for the three months
ended September 30, 2019. This is mainly due to the decrease in ASP of offset printing paper. We sold 10,280 tonnes of offset
printing paper in the third quarter of 2020, as compared to 10,198 tonnes in the comparable period of 2019, an increase of 82
tonnes, or 0.80%. ASPs for offset printing paper for the third quarter of 2019 and 2020 were $690 and $596, respectively, representing
a 13.62% decrease. ASP in RMB for offset printing paper for the third quarter of 2019 and 2020 was RMB4,779 and RMB4,159, respectively,
representing a 12.97% decrease.
Revenue
of Face Mask
On
April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials
preparation, trial run of the equipment and the sample products inspection. Revenue generated from selling face masks were $221,102
for the three months ended September 30, 2020. We sold 3,576 thousand pieces of face masks in the third quarter of 2020.
Cost
of Sales
Total
cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended September 30, 2020 was $30,593,395,
an increase of $3,030,210, or 10.99%, from $27,563,185 for the comparable period in 2019. This was mainly due to the increase
in material costs.
Cost
of sales for CMP was $22,898,910 for the quarter ended September 30, 2020, as compared to $20,711,656 for the comparable period
in 2019. The increase in the cost of sales of $2,187,254 for CMP was mainly due to the increase in average cost of sales. Average
cost of sales per tonne for CMP increased by 9.01%, from $344 in the third quarter of 2019 to $375 in the third quarter of 2020.
The increase in average cost of sales was mainly attributable to the higher average unit purchase costs (net of applicable value
added tax) of recycled paper board in third quarter of 2020 compared to the third quarter of 2019.
Cost
of sales for offset printing paper was $4,969,350 for the quarter ended September 30, 2020, as compared to $4,696,459 for the
comparable period in 2019. Average cost of sales per tonne of offset printing paper increased by 4.77%, from $461 in the three
months ended September 30, 2019, to $483 during the comparable period in 2020. The increase in average cost of sales of offset
printing paper was mainly due to the increase in average unit purchase costs(net of applicable value added tax) of recycled white
scrap paper.
Cost
of sales for tissue paper products was $2,725,135 for the quarter ended September 30, 2020, as compared to $2,155,070 for the
comparable period in 2019. The increase in the cost of sales of $570,065 for tissue paper products was mainly due to the increase
in sales volume of tissue paper products, partially offset by the decrease in average cost of sales. Average cost of sales per
tonne of tissue paper products decreased by 18.45%, from $1,171 in the three months ended September 30, 2019, to $955 for the
comparable period in 2020. This is mainly due to the decrease in cost of tissue base paper.
Changes
in cost of sales and cost per tonne by product for the quarters ended September 30, 2020 and 2019 are summarized below:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
Change in
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
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
|
|
$
|
18,301,720
|
|
|
$
|
380
|
|
|
$
|
16,493,658
|
|
|
$
|
347
|
|
|
$
|
1,808,062
|
|
|
$
|
33
|
|
|
|
10.96
|
%
|
|
|
9.51
|
%
|
Light-Weight CMP
|
|
$
|
4,597,190
|
|
|
$
|
357
|
|
|
$
|
4,217,998
|
|
|
$
|
332
|
|
|
$
|
379,192
|
|
|
$
|
25
|
|
|
|
8.99
|
%
|
|
|
7.53
|
%
|
Total CMP
|
|
$
|
22,898,910
|
|
|
$
|
375
|
|
|
$
|
20,711,656
|
|
|
$
|
344
|
|
|
$
|
2,187,254
|
|
|
$
|
31
|
|
|
|
10.56
|
%
|
|
|
9.01
|
%
|
Offset Printing Paper
|
|
$
|
4,969,350
|
|
|
$
|
483
|
|
|
$
|
4,696,459
|
|
|
$
|
461
|
|
|
$
|
272,891
|
|
|
$
|
22
|
|
|
|
5.81
|
%
|
|
|
4.77
|
%
|
Tissue Paper Products
|
|
$
|
2,725,135
|
|
|
$
|
955
|
|
|
|
2,155,070
|
|
|
$
|
1,171
|
|
|
$
|
570,065
|
|
|
$
|
(216
|
)
|
|
|
26.45
|
%
|
|
|
-18.45
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper
|
|
$
|
30,593,395
|
|
|
|
$ n/a
|
|
|
$
|
27,563,185
|
|
|
$
|
n/a
|
|
|
$
|
3,030,210
|
|
|
$
|
n/a
|
|
|
|
10.99
|
%
|
|
|
n/a
|
|
Our
average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper in the
three months ended September 30, 2020 were RMB 1,754/tonne (approximately $251/tonne) and RMB 2,078/tonne (approximately $297/tonne),
as compared to RMB 1,372/tonne (approximately $200/tonne) and RMB 1,770/tonne (approximately $258/tonne) for the three months
ended September 30, 2019. These changes (in US dollars) represent a year-over-year increase of 25.50% for the recycled paper board.
We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely
on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests
that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled paper.
The pricing trends of our major raw materials for the
24-month period from October 2018 to September 2020 are shown below:
Electricity and gas
are our two main energy sources. Electricity and gas accounted for approximately 4% and 10.9% of total sales in the third quarter
of 2020, respectively, compared to 5% and 10.4% of total sales in the third quarter of 2019. The monthly energy cost as a percentage
of total monthly sales of our main paper products for the 24 months ended September 30, 2020 are summarized as follows:
Gross Profit
Gross profit for the
three months ended September 30, 2020 was $2,567,551 (7.70% of the total revenue), representing a decrease of $2,807,181, or 52.23%,
from the gross profit of $5,374,732 (16.32% of the total revenue) for the three months ended September 30, 2019, as a result of
factors described above.
Offset Printing Paper, CMP and Tissue
Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the three months ended September 30, 2020 was $2,542,954, a decrease of $2,831,778,
or 52.69%, from the gross profit of $5,374,731 for the three months ended September 30, 2019. The decrease was mainly the result
of the factors discussed above.
The overall gross
profit margin for offset printing paper, CMP and tissue paper products decreased by 8.65 percentage points, from 16.32% for the
three months ended September 30, 2019, to 7.67% for the three months ended September 30, 2020.
Gross profit margin
for regular CMP for the three months ended September 30, 2020 was 6.40%, or 8.28 percentage points lower, as compared to gross
profit margin of 14.68% for the three months ended September 30, 2019. Such decrease was mainly due to the increase in cost of
recycled paper board in the third quarter of 2020.
Gross profit margin
for light-weight CMP for the three months ended September 30, 2020 was 9.44%, or 6.49 percentage points lower, as compared to gross
profit margin of 15.93% for the three months ended September 30, 2019. The decrease was mainly due to the increase in cost of recycled
paper board in the third quarter of 2020.
Gross profit margin
for offset printing paper was 18.89% for the three months ended September 30, 2020, a decrease of 14.38 percentage points, as compared
to 33.27% for the three months ended September 30, 2019. The decrease was mainly due to the increase in cost of recycled white
scrap paperand decrease in ASP of offset printing paper.
Gross profit margin
for tissue paper products for the three months ended September 30, 2020 was -14.50%, or 24.42 percentage points higher, as compared
to gross profit margin of -38.92% for the three months ended September 30, 2019. The increase was mainly due to increase in sales
volume and decrease in cost of base paper, partially offset by decrease in ASP of tissue paper products in the third quarter of
2020.
Monthly gross profit margins on the
sales of our CMP and offset printing paper for the 24-month period ended September 30, 2020 are as follows:
Face Masks
Gross profit for face masks for the three months ended
September 30, 2020 was $24,598, representing a gross margin of 11.13%.
Selling, General and Administrative Expenses
Selling, general and
administrative expenses for the three months ended September 30, 2020 were $2,390,920, an increase of $366,373, or 18.10% from
$2,024,547 for the three months ended September 30, 2019. The increase was mainly due to additional expenditure on investment
relation activities (e.g. consultancy, board meeting etc.) in the third quarter of 2020 and reversal of over-provision of lease
expenses for the lands of Heibei Tengsheng in the third quarter of 2019.
Income (Loss) from Operations
Operating income for
the quarter ended September 30, 2020 was $176,631, a decrease of $3,172,675, or 94.73%, from $3,349,306 for the quarter ended September
30, 2019. The decrease in income from operations was primarily due to the decrease in gross profit and increase in selling, general
and administrative expenses.
Other Income and Expenses
Interest expense for
the three months ended September 30, 2020 increased by $21,451, from $236,987 in the three months ended September 30, 2019, to
$258,438. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated
$16,060,576 as of September 30, 2020, as compared to $15,495,765 as of September 30, 2019.
Net Income (Loss)
As a result and the
factors discussed above, net loss was $520,974 for the quarter ended September 30, 2020, representing a decrease of $2,859,001,
or 122.28%, from net income of $2,338,027 for the quarter ended September 30, 2019.
Comparison of the nine months
ended September 30, 2020 and 2019
Revenue for the nine
months ended September 30, 2020 was $68,463,575, a decrease of $15,544,582, or 18.5%, from $84,008,157 for the same period in the
previous year.
Revenue of Offset Printing Paper, Corrugating Medium Paper
and Tissue Paper Products
Revenue from sales
of offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2020 was $67,396,920, a decrease
of $16,611,237, or 19.77%, from $84,008,157 for the nine months ended September 30, 2019. This was mainly due to the decrease in
sales volume of Regular CMP and offset printing paper and the decrease in ASP of CMP, offset printing paper and tissue paper products.
Total quantities of offset printing paper, CMP and tissue paper products sold during the nine months ended September 30, 2020 amounted
to 158,644 tonnes, a decrease of 19,312 tonnes, or 10.85%, compared to 177,956 tonnes sold during the nine months ended September
30, 2019. Total quantities of CMP and offset printing paper sold decreased by 21,538 tonnes in the nine months of 2020 as compared
to the same period of 2019. We sold 6,923 tonnes of tissue paper products in the nine months of 2020 as opposed to 4,697 tonnes
in the same period of 2019. CMP production was suspended in mid-January to early March 2020 due to Chines New Yearand COVID-19
outbreak. We resumed full capacity of CMP production in May 2020. The production of offset printing paper was suspended duringJanuary
to May 2020 and resumed in June 2020. The changes in revenue and quantity sold for the nine months ended September 30, 2020 and
2019 are summarized as follows:
A summary of the above changes and further analyses
of the changes in our sales revenue are as follows:
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity
(Tonne)
|
|
|
Amount
|
|
|
Quantity
(Tonne)
|
|
|
Amount
|
|
|
Quantity
(Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
108,874
|
|
|
$
|
42,647,898
|
|
|
|
121,774
|
|
|
$
|
52,440,243
|
|
|
|
(12,900
|
)
|
|
$
|
(9,792,345
|
)
|
|
|
-10.59
|
%
|
|
|
-18.67
|
%
|
Light-Weight CMP
|
|
|
30,384
|
|
|
$
|
11,594,324
|
|
|
|
32,728
|
|
|
$
|
13,692,911
|
|
|
|
(2,344
|
)
|
|
$
|
(2,098,587
|
)
|
|
|
-7.16
|
%
|
|
|
-15.33
|
%
|
Total CMP
|
|
|
139,258
|
|
|
$
|
54,242,222
|
|
|
|
154,502
|
|
|
$
|
66,133,154
|
|
|
|
(15,244
|
)
|
|
$
|
(11,890,932
|
)
|
|
|
-9.87
|
%
|
|
|
-17.98
|
%
|
Offset Printing Paper
|
|
|
12,463
|
|
|
$
|
7,388,491
|
|
|
|
18,757
|
|
|
$
|
13,274,547
|
|
|
|
(6,294
|
)
|
|
$
|
(5,886,056
|
)
|
|
|
-33.56
|
%
|
|
|
-44.34
|
%
|
Tissue Paper Products
|
|
|
6,923
|
|
|
$
|
5,766,207
|
|
|
|
4,697
|
|
|
|
4,600,456
|
|
|
|
2,226
|
|
|
$
|
1,165,751
|
|
|
|
47.39
|
%
|
|
|
25.34
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
158,644
|
|
|
$
|
67,396,920
|
|
|
|
177,956
|
|
|
$
|
84,008,157
|
|
|
|
(19,312
|
)
|
|
$
|
(16,611,237
|
)
|
|
|
-10.85
|
%
|
|
|
-19.77
|
%
|
ASPs
for our main products in the six-month period ended September 30, 2020 and 2019 are summarized as follows:
|
|
Offset
Printing
Paper ASP
|
|
|
Regular
CMP ASP
|
|
|
Light-Weight
CMP ASP
|
|
|
Tissue
Paper
Products ASP
|
|
Nine
Months Ended September 30, 2019
|
|
$
|
708
|
|
|
$
|
431
|
|
|
$
|
418
|
|
|
$
|
979
|
|
Nine
Months Ended September 30, 2020
|
|
$
|
593
|
|
|
$
|
392
|
|
|
$
|
382
|
|
|
$
|
833
|
|
Decrease
from comparable period in the previous year
|
|
$
|
-115
|
|
|
$
|
-39
|
|
|
$
|
-36
|
|
|
$
|
-146
|
|
Decrease
by percentage
|
|
|
-16.24
|
%
|
|
|
-9.05
|
%
|
|
|
-8.61
|
%
|
|
|
-14.91
|
%
|
Revenue
of Face Mask
Revenue
generated from selling face mask were $1,066,654 for the nine months ended September 30, 2020. We sold 9,856 thousand pieces of
face masks in the third quarter of 2020.
Cost
of Sales
Total
cost of sales for CMP, offset printing paper and tissue paper products in the nine months ended September 30, 2020 was $62,968,256,
a decrease of $12,949,506, or 17.06%, from $75,917,762 for the nine months ended September 30, 2019. This was mainly a result
of the decrease in volume sold, partially offset by decrease in cost of materials. Cost of sales for CMP was $49,838,234 for the
nine months ended September 30, 2020, as compared to $60,759,533 in the same period of 2019. The decrease in the cost of sales
of $10,921,299 for CMP was mainly due to the decrease in the quantities of regular CMP sold, partially offset by the decrease
in cost of recycled paper board in the nine months of 2020. Average cost of sales per tonne for CMP decreased by 8.91%, from $393
for the nine months ended September 30, 2019, to $358 in the same period of 2020. The decrease was mainly attributable to the
lower average unit purchase costs (net of applicable value added tax) of recycled paper board. Cost of sales for offset printing
paper was $5,932,881 for the nine months ended September 30, 2020, as compared to $9,313,615 in the same period of 2019. Average
cost of sales per tonne of offset printing paper decreased by 4.23%, from $497 for the nine months ended September 30, 2019, to
$476 in the same period of 2020.Cost of sales for tissue paper products was $7,197,141 for the nine months ended September 30,
2020, as compared to $5,844,614 in the same period of 2019. Average cost of sales per tonne of tissue paper products decreased
by 16.40%, from $1,244 for the nine months ended September 30, 2019, to $1,040 for the same period of 2020.
Changes
in cost of sales and cost per tonne by product for the nine months ended September 30, 2020 and 2019 are summarized below:
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
|
Change
in
|
|
|
Change
in percentage
|
|
|
|
Cost
of Sales
|
|
|
Cost
per
Tonne
|
|
|
Cost
of Sales
|
|
|
Cost
per
tonne
|
|
|
Cost
of Sales
|
|
|
Cost
per
Tonne
|
|
|
Cost
of Sales
|
|
|
Cost
per
Tone
|
|
Regular
CMP
|
|
$
|
39,545,909
|
|
|
$
|
363
|
|
|
$
|
48,038,937
|
|
|
$
|
394
|
|
|
$
|
(8,493,028
|
)
|
|
$
|
(31
|
)
|
|
|
-17.68
|
%
|
|
|
-7.87
|
%
|
Light-Weight
CMP
|
|
$
|
10,292,325
|
|
|
$
|
339
|
|
|
$
|
12,720,596
|
|
|
$
|
389
|
|
|
$
|
(2,428,270
|
)
|
|
$
|
(50
|
)
|
|
|
-19.09
|
%
|
|
|
-12.85
|
%
|
Total
CMP
|
|
$
|
49,838,234
|
|
|
$
|
358
|
|
|
$
|
60,759,533
|
|
|
$
|
393
|
|
|
$
|
(10,921,299
|
)
|
|
$
|
(35
|
)
|
|
|
-17.97
|
%
|
|
|
-8.91
|
%
|
Offset
Printing Paper
|
|
$
|
5,932,881
|
|
|
$
|
476
|
|
|
$
|
9,313,615
|
|
|
$
|
497
|
|
|
$
|
(3,380,734
|
)
|
|
$
|
(21
|
)
|
|
|
-36.30
|
%
|
|
|
-4.23
|
%
|
Tissue
Paper Products
|
|
$
|
7,197,141
|
|
|
$
|
1,040
|
|
|
$
|
5,844,614
|
|
|
$
|
1,244
|
|
|
|
1,352,527
|
|
|
$
|
(204
|
)
|
|
|
23.14
|
%
|
|
|
-16.40
|
%
|
Total
CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
$
|
62,968,256
|
|
|
$
|
n/a
|
|
|
$
|
75,917,762
|
|
|
$
|
n/a
|
|
|
$
|
(12,949,506
|
)
|
|
$
|
n/a
|
|
|
|
-17.06
|
%
|
|
|
n/a
|
%
|
Gross Profit
Gross profit for the
nine months ended September 30, 2020 was $4,956,662 (7.24% of the total revenue), representing a decrease of $3,133,733, or 38.73%,
from the gross profit of $8,090,395 (9.63% of the total revenue) for the nine months ended September 30, 2019. The decrease was
mainly due to (i) the decrease in quantities sold of CMP and offset printing paper and (ii) the decrease of ASP of CMP, offset
printing paper and tissue paper products, partially offset by the decrease of material purchase price of CMP and tissue paper products.
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the nine months ended September 30, 2020 was $4,428,664, a decrease of $3,661,731,
or 45.26%, from the gross profit of $8,090,395 for the nine months ended September 30, 2019. The decrease was mainly the result
of the factors discussed above.
The overall gross
profit margin for offset printing paper, CMP and tissue paper products decreased by 3.06 percentage points, from 9.63% for the
nine months ended September 30, 2019, to 6.57% for the nine months ended September 30, 2020.
Gross profit margin
for regular CMP for the nine months ended September 30, 2020 was 7.27%, or 1.12 percentage points lower, as compared to gross profit
margin of 8.39% for the nine months ended September 30, 2019. Such decrease was primarily due to decrease of decrease in ASPof
regular CMP, partially offset by the decrease in material purchase price.
Gross profit margin
for light-weight CMP for the nine months ended September 30, 2020 was 11.23%, or 4.13 percentage points higher, as compared to
gross profit margin of 7.10% for the nine months ended September 30, 2019.
Gross profit margin
for offset printing paper was 19.70% for the nine months ended September 30, 2020, a decrease of 10.14 percentage points, as compared
to 29.84% for the nine months ended September 30, 2019. Such decrease was mainly due to the decrease in ASP of offset printing
paper.
Gross profit margin
for tissue paper products was -24.82% for the nine months ended September 30, 2020, an increase of 2.22 percentage points, as compared
to -27.04% for the nine months ended September 30, 2019.
Face Masks
Gross profit for face masks for the nine months ended
September 30, 2020 was $527,997, representing a gross margin of 49.5%.
Selling, General and Administrative Expenses
Selling, general and
administrative expenses for the nine months ended September 30, 2020 were $8,445,356, an increase of $1,031,477, or 13.91% from
$7,413,879 for the nine months ended September 30, 2019. The increase was net impact ofthe issuance of 2,000,000 shares of common
stock valued at $1,200,000 to officers, directors and employees andthe issuance of 60,000 shares of common stock valued at $42,000
to a consultant and a decrease in sales commission to staff.
Income (Loss) from Operations
Operating loss for
the nine months ended September 30, 2020 was $3,488,694, a decrease of $4,195,728, or 593.43%, from income from operations of $707,034
for the nine months ended September 30, 2019. The decrease was primarily due to the decrease in gross profit and the increase in
selling, general and administrative expenses.
Other Income and Expenses
Interest expense for
the nine months ended September 30, 2020 increased by $13,565, from $731,027 for the nine months ended September 30, 2019, to $744,592.
The Company had short-term and long-term interest-bearing loans and lease obligation that aggregated $16,060,576 as of September
30, 2020, as compared to $15,495,765 as of September 30, 2019.
Net Loss
As a result of the
above, net loss was $3,937,292 for the nine months ended September 30, 2020, representing a decrease of $4,002,794, or 6110.95%,
from net income of $65,502 for nine months ended September 30, 2019.
Accounts Receivable
Net accounts receivable
increased by $353,063, or 11.32%, to $3,472,374 as of September 30, 2020, as compared with $3,119,311 as of December 31, 2019.
We usually collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist
of raw materials (accounting for 80.81% of total value of inventory as of September 30, 2020), semi-finished goods and finished
goods. As of September 30, 2020, the recorded value of inventory increased by 433.94% to $8,582,912 from $1,607,463 as of December
31, 2019. As of September 30, 2020, the inventory of recycled paper board, which is the main raw material for the production of
CMP, was $5,512,274, approximately $5,472,242, or 13669.67%, higher than the balance as of December 31, 2019. Due to the volatility
of recycled paper board and recycled white scrap paper prices, a minimum level of inventory was maintained at the end of 2019.
A summary of changes
in major inventory items is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Raw Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
5,512,274
|
|
|
$
|
40,032
|
|
|
|
5,472,242
|
|
|
|
13669.67
|
%
|
Recycled white scrap paper
|
|
|
1,016,905
|
|
|
|
10,541
|
|
|
|
1,006,364
|
|
|
|
9547.14
|
%
|
Tissue base paper
|
|
|
148,573
|
|
|
|
122,648
|
|
|
|
25,925
|
|
|
|
21.14
|
%
|
Gas
|
|
|
46,891
|
|
|
|
41,675
|
|
|
|
5,216
|
|
|
|
12.52
|
%
|
Mask fabric and other raw materials
|
|
|
210,914
|
|
|
|
171,287
|
|
|
|
39,627
|
|
|
|
23.13
|
%
|
Total Raw Materials
|
|
|
6,935,557
|
|
|
|
386,183
|
|
|
|
6,549,374
|
|
|
|
1695.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi-finished Goods
|
|
|
145,069
|
|
|
|
83,266
|
|
|
|
61,803
|
|
|
|
74.22
|
%
|
Finished Goods
|
|
|
1,502,286
|
|
|
|
1,212,849
|
|
|
|
289,437
|
|
|
|
23.86
|
%
|
Total inventory, gross
|
|
|
8,582,912
|
|
|
|
1,682,298
|
|
|
|
6,900,614
|
|
|
|
410.19
|
%
|
Inventory reserve
|
|
|
-
|
|
|
|
(74,835
|
)
|
|
|
74,835
|
|
|
|
-100.00
|
%
|
Total inventory, net
|
|
$
|
8,582,912
|
|
|
$
|
1,607,463
|
|
|
|
6,975,449
|
|
|
|
433.94
|
%
|
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 $143,078 (RMB1,000,000). The lease
agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with
Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as provided for in the original
lease agreement. The accrued rental owed to Hebei Fangsheng was $nil and $56,552 as of September 30, 2020 and December 31, 2019,
respectively, and such amounts were recorded as part of the current liabilities.
Capital Expenditure Commitment as of September 30, 2020
On May 5, 2020, the
Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company signed an agreement
to purchase paper machine with paper machine supplier. The Company expected the new tissue paper production line to be launched
after the completion of trial run.
As of September 30,
2020, we had approximately $4 million in capital expenditure commitments that were mainly related to the purchase of paper machine
of PM10 and the improvement of Industrial Buildings. These commitments are expected to be financed by bank loans and cash flows
generated from our business operations.
Financing with Sale-Leaseback
The Company entered
into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”)
on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.3 million). Under the sale-leaseback
arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.3 million). Concurrent with the
sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease
term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $15) to TLCL and buy back the Leased Equipment.
The Leased Equipment in amount of $2,349,452 was recorded as right-of-use assets and the net present value of the minimum lease
payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated
at $567,099 at the inception of the lease on August 17, 2020.
Hebei Tengsheng made
two payments due according to the schedule. As of September 30, 2020, the balance of Leased Equipment net of amortization was
$2,336,399. The lease liability were $385,650 and its current portion in the amount of $168,546 as of September 30, 2020.
Amortization of the
Leased Equipment was $12,718 for the three and nine months ended September 30, 2020. Total interest expenses for the sale-leaseback
arrangement was $7,172 for the three and nine months ended September 30, 2020.
As a result of the
sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term
and as an offset to amortization of the Leased Equipment.
Cash and Cash Equivalents
Our cash, cash equivalents
and restricted cash as of September 30, 2020 was $8,209,905, an increase of $2,372,160, from $5,837,745 as of December 31, 2019.
The increase of cash and cash equivalents for the nine months ended September 30, 2020 was attributable to a number of factors:
i. Net cash provided by operating activities
Net cash provided by operating activities was $2,369,487
for the nine months ended September 30, 2020. The balance represented a decrease of cash of $2,229,547, or 48.48%, from $4,599,034
provided for the nine months ended September 30, 2019. Net loss for the nine months ended September 30, 2020 was $3,937,292, representing
a decrease of $4,002,794, or 6110.95%, from a net income of $65,502 for the nine months ended September 30, 2019. Changes in various
asset and liability account balances throughout the nine months ended September 30, 2020 also contributed to the net change in
cash from operating activities in nine months ended September 30, 2020. Chief among such changes is the increase of accounts receivable
in the amount of $272,857 during the nine months of 2020. There was also an increase of $6,758,500 in the ending inventory balance
as of September 30, 2020 (a decrease to net cash for the nine months ended September 30, 2020 cash flow purposes). In addition,
the Company had non-cash expenses relating to depreciation and amortization in the amount of $11,301,703. The Company also had
a net decrease of $2,099,669 in prepayment and other current assets (an increase to net cash) and a net decrease of $432,206 in
other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable
of $795,487 (a decrease to net cash) during the nine months ended September 30, 2020.
ii. Net cash used in investing activities
We incurred $2,571,949
in net cash expenditures for investing activities during the nine months ended September 30, 2020, as compared to $6,449,181 for
the same period of 2019. Payments in the nine months ended September 30, 2020 were for the payment of Heibei Tengsheng acquisition,
PM10 paper machine and expenditures on improvement of Industrial Buildings.
iii. Net cash provided by financing activities
Net cash provided
by financing activities was proceeds from issuance of shares and warrants and repayment of lease liability of $2,241,043 for the
nine months ended September 30, 2020, as compared to net cash used in financing activities in the amount of $5,224,295 for the
nine months ended September 30, 2019.
Short-term bank loans
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
$
|
6,314,151
|
|
|
$
|
6,163,814
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
$
|
6,314,151
|
|
|
$
|
6,163,814
|
|
On December 20, 2019, the Company entered
into a working capital loan agreement with the ICBC, with a balance of $6,314,151 and $6,163,814 as of September 30, 2020 and December
31, 2019, respectively. The working capital loan was secured by the Land use right of Dongfang Paper as collateral for the benefit
of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid by December 23, 2020.
As of September 30, 2020, there were guaranteed
short-term borrowings of $6,314,151 and unsecured bank loans of $nil. As of December 31, 2019, there were guaranteed short-term
borrowings of $6,163,814 and unsecured bank loans of $nil.
The average short-term borrowing rates
for the three months ended September 30, 2020 and 2019 were approximately 4.79% and 4.77%, respectively. The average short-term
borrowing rates for the nine months ended September 30, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.
Long-term loans from credit union
As of September 30,
2020 and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $9,192,229 and $8,973,367, respectively.
On April 16, 2014,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally
due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest
payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years
and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of September 30, 2020 and December
31, 2019, total outstanding loan balance was $1,262,830 and $1,232,763, respectively. Out of the total outstanding loan balance,
current portion amounted were $176,209 and $143,345 as of September 30, 2020 and December 31, 2019, respectively, which are presented
as current liabilities in the consolidated balance sheet and the remaining balance of $1,086,621 and $1,089,418 are presented as
non-current liabilities in the consolidated balance sheet as of September 30, 2020 and December 31, 2019, respectively.
On July 15, 2013,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally
due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional
5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain
of the Company’s manufacturing equipment with net book value of $2,690,540 and $3,935,270 as of September 30, 2020 and December
31, 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of September 30, 2020 and
December 31, 2019, the total outstanding loan balance was $3,671,018 and $3,583,613, respectively. Out of the total outstanding
loan balance, current portion amounted were $249,629 and $172,013 as of September 30, 2020 and December 31, 2019, respectively,
which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,421,389 and $3,411,600
are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2020 and December 31, 2019, respectively.
On April 17, 2019,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and
payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use
right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As
of September 30, 2020 and December 31, 2019, the total outstanding loan balance was $2,349,452 and $2,293,512, respectively. Out
of the total outstanding loan balance, current portion amounted were $2,349,452 and $1,146,756 as of September 30, 2020 and December
31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $nil and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2020 and
December 31, 2019, respectively.
On December 12, 2019,
the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and
payable in various installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng with its land use
right as collateral for the benefit of the bank. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As
of September 30, 2020 and December 31, 2019, the total outstanding loan balance was $1,908,929 and $1,863,479, respectively. Out
of the total outstanding loan balance, current portion amounted were $1,027,885 and $143,345 as of September 30, 2020 and December
31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $881,044 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2020
and December 31, 2019, respectively.
Total interest expenses
for the short-term bank loans and long-term loans for the three months ended September 30, 2020 and 2019 were $251,266 and $214,907,
respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30,
2020 and 2019 were $737,420 and $659,613, respectively.
Shareholder Loans
Mr. Zhenyong Liu,
the Company’s CEO, has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013,
Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity
date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of
$391,374 for the period from 2013 to 2015. Approximately $376,403 and $367,441 of interest were outstanding to Mr. Zhenyong Liu,
which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet
as of September 30, 2020 and December 31, 2019, respectively.
On December 10, 2014,
Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083 to Dongfang Paper for working capital purpose with an interest
rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided
on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416
to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the Company paid off the remaining balance, together
with interest of $20,400. As of September 30, 2020 and December 31, 2019, approximately $44,052 and $43,003 of interest were outstanding
to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated
balance sheet.
On March 1, 2015,
the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,620,887
(RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each
amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the
People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the
facility. On October 14, 2016, an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the Company repaid
$1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for
additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the Company repaid $3,768,579
to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the Company paid off the remaining balance, together
with interest of $94,636. As of September 30, 2020 and December 31, 2019, the outstanding loan balance were $nil and the accrued
interest was $201,814 and $197,009, respectively, which was recorded in other payables and accrued liabilities as part of the current
liabilities in the consolidated balance sheet.
As of September 30,
2020 and December 31, 2019, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related
party loans are $nil and $23,234 for the three months ended September 30, 2020 and 2019, respectively. The interest expenses incurred
for such related party loans are $nil and $71,415 for the nine months ended September 30, 2020 and 2019, respectively. The accrued
interest owed to Mr. Zhenyong Liu was approximately $622,269 and $607,453, as of September 30, 2020 and December 31, 2019, respectively,
which was recorded in other payables and accrued liabilities.
As of September 30,
2020 and December 31, 2019, amount due to shareholder are $657,433 and $483,433, respectively, which represents funds from shareholders
to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.
Critical Accounting Policies and
Estimates
The Company’s
financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require
us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual
results could differ materially from those estimates. The most critical accounting policies are listed below:
Revenue Recognition Policy
The Company recognizes
revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed,
no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered
when the customer’s truck picks up goods at our finished goods inventory warehouse.
Long-Lived Assets
The Company evaluates
the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management
to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated
fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational
performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry.
For the three months ended September 30, 2020 and 2019, no events or circumstances occurred for which an evaluation of the recoverability
of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record
such impairment in the future.
Foreign Currency Translation
The functional currency
of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and
liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current
exchange rates used by the Company as of September 30, 2020 and December 31, 2019 to translate the Chinese RMB to the U.S. Dollars
are 6.8101:1 and 6.9762:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.9892:1,
and 6.7087:1 for the nine months ended September 30, 2020 and 2019, respectively. Translation adjustments are included in other
comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor
for Baoding Huanrun Trading Co., Ltd.(“Baoding Huanrun”) for its long-term bank loans in an amount of $4,552,062 (RMB31,000,000),
which matures at various times in 2020 -2023. Baoding Huanrun is one of our major suppliers of raw materials. This arrangement
helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Baoding
Huanrun were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material
off-balance sheet transactions.
Recent Accounting Pronouncements
In December 2019,
the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update
related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis
for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries
should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning
of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied
on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment
to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective
basis. We do not expect the adoption of ASU 2019-12 to have a material impact on our condensed consolidated financial statements.