UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number: 001-34577

 

IT TECH PACKAGING, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		20-4158835
(State or other jurisdiction of incorporation or organization)		(IRS Employer identification No.)

 

Science Park, Juli Rd, Xushui District, Baoding City

Hebei Province, The People’s Republic of China 072550

(Address of principal executive offices and Zip Code)

 

011 - (86) 312-8698215

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001		ITP		NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

 

As of November 12, 2020, there were 28,514,816 shares of the registrant’s common stock, par value $0.001, outstanding.

 

  

TABLE OF CONTENTS

 

Part I. - FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	42
Part II. - OTHER INFORMATION	43
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6. Exhibits	43
SIGNATURES	44

 

PART I - FINANCIAL INFORMATION

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Foreign Exchange Risk

 

While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risks as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

Inflation

 

Although we are generally able to pass along minor incremental cost inflation to our customers, inflation such as increases in the costs of our products and overhead costs may adversely affect our operating results. We do not believe that inflation in China has had a material impact on our financial position or results of operations to date, however, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase in line with the increased costs.

 

Item 4. Controls and Procedures.

 

As required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Securities Act”), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, which were designed to provide reasonable assurance of achieving their objectives. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the quarterly period ended September 30, 2020.

 

  

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None..

 

Item 6. Exhibits.

 

(a) Exhibits

 

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

IT TECH PACKAGING, INC.

 

Date: November 12, 2020	/s/ Zhenyong Liu
	Name:	Zhenyong Liu
	Title:	Chief Executive Officer
		(Principal Executive Officer)
Date: November 12, 2020	/s/ Jing Hao
	Name:	Jing Hao
	Title:	Chief Financial Officer
		(Principal Financial Officer)

 

 

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