Item 1. Financial Statements
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
(unaudited)
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
ASSETS | |
| | |
| |
| |
| | |
| |
Current Assets | |
| | |
| |
Cash and bank balances | |
$ | 16,017,403 | | |
$ | 11,201,612 | |
Restricted cash | |
| - | | |
| - | |
Accounts receivable (net of allowance for doubtful accounts of $61,270 and $69,053 as of September 30, 2022 and December 31, 2021, respectively) | |
| 4,236,299 | | |
| 4,868,934 | |
Inventories | |
| 4,441,390 | | |
| 5,844,895 | |
Prepayments and other current assets | |
| 22,795,907 | | |
| 25,796,640 | |
Due from related parties | |
| 938,803 | | |
| 7,804,068 | |
| |
| | | |
| | |
Total current assets | |
| 48,429,802 | | |
| 55,516,149 | |
| |
| | | |
| | |
Prepayment on property, plant and equipment | |
| 1,266,120 | | |
| 43,446,210 | |
Operating lease right-of-use assets, net | |
| 659,912 | | |
| - | |
Finance lease right-of-use assets, net | |
| 1,940,586 | | |
| 2,286,459 | |
Property, plant, and equipment, net | |
| 149,535,243 | | |
| 126,587,428 | |
Value-added tax recoverable | |
| 2,066,239 | | |
| 2,430,277 | |
Deferred tax asset non-current | |
| 11,239,637 | | |
| 11,268,679 | |
| |
| | | |
| | |
Total Assets | |
$ | 215,137,539 | | |
$ | 241,535,202 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Short-term bank loans | |
$ | 5,632,553 | | |
$ | 5,958,561 | |
Current portion of long-term loans from credit union | |
| 4,175,620 | | |
| 6,838,465 | |
Lease liability | |
| 272,147 | | |
| 210,161 | |
Accounts payable | |
| 144,213 | | |
| 10,255 | |
Advance from customers | |
| 35,646 | | |
| 39,694 | |
Due to related parties | |
| 727,856 | | |
| 727,433 | |
Accrued payroll and employee benefits | |
| 221,530 | | |
| 291,206 | |
Other payables and accrued liabilities | |
| 5,635,813 | | |
| 5,250,539 | |
Income taxes payable | |
| 746,694 | | |
| 1,108,038 | |
| |
| | | |
| | |
Total current liabilities | |
| 17,592,072 | | |
| 20,434,352 | |
| |
| | | |
| | |
Loans from credit union | |
| 4,692,235 | | |
| 2,980,065 | |
Deferred gain on sale-leaseback | |
| 73,311 | | |
| 155,110 | |
Lease liability - non-current | |
| 568,952 | | |
| 152,233 | |
Derivative liability | |
| 1,334,271 | | |
| 2,063,534 | |
| |
| | | |
| | |
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $17,417,813 and $17,924,475 as of September 30, 2022 and December 31, 2021, respectively) | |
| 24,260,841 | | |
| 25,785,294 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Equity | |
| | | |
| | |
Common stock, 50,000,000 shares authorized, $0.001 par value per share, 11,415,920 and 9,915,920 shares issued and outstanding as of September 30, 2022 and December, 31, 2021, respectively. | |
| 11,416 | | |
| 9,916 | |
Additional paid-in capital | |
| 90,575,421 | | |
| 89,016,921 | |
Statutory earnings reserve | |
| 6,080,574 | | |
| 6,080,574 | |
Accumulated other comprehensive (loss) income | |
| (11,273,597 | ) | |
| 10,496,168 | |
Retained earnings | |
| 105,482,884 | | |
| 110,146,329 | |
| |
| | | |
| | |
Total stockholders’ equity | |
| 190,876,698 | | |
| 215,749,908 | |
| |
| | | |
| | |
Total Liabilities and Stockholders’ Equity | |
$ | 215,137,539 | | |
$ | 241,535,202 | |
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, 2022 AND 2021
(Unaudited)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
31,709,214 |
|
|
$ |
45,087,671 |
|
|
$ |
78,979,716 |
|
|
$ |
115,832,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
(28,925,626 |
) |
|
|
(43,266,135 |
) |
|
|
(75,251,646 |
) |
|
|
(109,150,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
2,783,588 |
|
|
|
1,821,536 |
|
|
|
3,728,070 |
|
|
|
6,681,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(3,370,541 |
) |
|
|
(2,019,565 |
) |
|
|
(8,541,224 |
) |
|
|
(7,172,495 |
) |
Gain on acquisition |
|
|
(1,759 |
) |
|
|
- |
|
|
|
30,404 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(588,712 |
) |
|
|
(198,029 |
) |
|
|
(4,782,750 |
) |
|
|
(490,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
7,729 |
|
|
|
12,044 |
|
|
|
16,108 |
|
|
|
28,096 |
|
Subsidy income |
|
|
- |
|
|
|
(30 |
) |
|
|
- |
|
|
|
197,861 |
|
Interest expense |
|
|
(256,678 |
) |
|
|
(281,670 |
) |
|
|
(786,597 |
) |
|
|
(844,470 |
) |
Gain (Loss) on derivative liability |
|
|
(617,370 |
) |
|
|
1,938,873 |
|
|
|
729,263 |
|
|
|
2,810,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Income Taxes |
|
|
(1,455,031 |
) |
|
|
1,471,188 |
|
|
|
(4,823,976 |
) |
|
|
1,701,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
|
(432,287 |
) |
|
|
71,388 |
|
|
|
160,531 |
|
|
|
(4,950,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
|
(1,887,318 |
) |
|
|
1,542,576 |
|
|
|
(4,663,445 |
) |
|
|
(3,249,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss) Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(11,171,156 |
) |
|
|
(819,183 |
) |
|
|
(21,769,765 |
) |
|
|
1,128,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive (Loss) Income |
|
$ |
(13,058,474 |
) |
|
$ |
723,393 |
|
|
$ |
(26,433,210 |
) |
|
$ |
(2,121,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted (Losses) Earnings per Share |
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – Basic and Diluted |
|
|
71,449,208 |
|
|
|
54,196,300 |
|
|
|
71,449,208 |
|
|
|
54,196,300 |
|
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,
2022 AND 2021
(Unaudited)
| |
Nine Months Ended | |
| |
September 30, | |
| |
2022 | |
2021 | |
| |
| |
| |
Cash Flows from Operating Activities: | |
| |
| |
Net income | |
$ | (4,663,445 | ) |
$ | (3,249,528 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
Depreciation and amortization | |
| 11,218,254 | |
| 11,733,664 | |
(Gain) Loss on derivative liability | |
| (729,263 | ) |
| (2,810,913 | ) |
Gain on acquisition | |
| (32,502 | ) |
| - | |
(Recovery from) Allowance for bad debts | |
| (791 | ) |
| 20,118 | |
Share-based compensation and expenses | |
| 1,560,000 | |
| - | |
Deferred tax | |
| (1,197,630 | ) |
| 3,235,556 | |
Changes in operating assets and liabilities: | |
| | |
| | |
Accounts receivable | |
| 146,250 | |
| (1,742,594 | ) |
Prepayments and other current assets | |
| (422,092 | ) |
| (6,918,816 | ) |
Inventories | |
| 863,170 | |
| (6,396,066 | ) |
Accounts payable | |
| 144,331 | |
| (242,357 | ) |
Advance from customers | |
| - | |
| (43,161 | ) |
Related parties | |
| (149,827 | ) |
| (821,943 | ) |
Accrued payroll and employee benefits | |
| (42,738 | ) |
| 92,207 | |
Other payables and accrued liabilities | |
| 1,000,945 | |
| 522,353 | |
Income taxes payable | |
| (265,493 | ) |
| 178,903 | |
Net Cash Provided by (Used in) Operating Activities | |
| 7,429,169 | |
| (6,442,577 | ) |
| |
| | |
| | |
Cash Flows from Investing Activities: | |
| | |
| | |
Purchases of property, plant and equipment | |
| (1,681,979 | ) |
| (12,781,114 | ) |
Acquisition of land | |
| (6,507,431 | ) |
| - | |
| |
| | |
| | |
Net Cash Used in Investing Activities | |
| (8,189,410 | ) |
| (12,781,114 | ) |
| |
| | |
| | |
Cash Flows from Financing Activities: | |
| | |
| | |
Proceeds from issuance of shares and warrants, net | |
| - | |
| 41,837,553 | |
Proceeds from short term bank loans | |
| 602,319 | |
| - | |
Proceeds from long term loans | |
| 60,232 | |
| - | |
Repayment of bank loans | |
| (307,182 | ) |
| (154,579 | ) |
Payment of capital lease obligation | |
| (154,212 | ) |
| (135,611 | ) |
Loan repaid by a related party | |
| 6,638,923 | |
| - | |
| |
| | |
| | |
Net Cash Provided by Financing Activities | |
| 6,840,080 | |
| 41,547,363 | |
| |
| | |
| | |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | |
| (1,264,048 | ) |
| 109,473 | |
| |
| | |
| | |
Net Increase in Cash and Cash Equivalents | |
| 4,815,791 | |
| 22,433,145 | |
| |
| | |
| | |
Cash, Cash Equivalents and Restricted Cash - Beginning of Period | |
| 11,201,612 | |
| 4,142,437 | |
| |
| | |
| | |
Cash, Cash Equivalents and Restricted Cash - End of Period | |
$ | 16,017,403 | |
$ | 26,575,582 | |
| |
| | |
| | |
Supplemental Disclosure of Cash Flow Information: | |
| | |
| | |
Cash paid for interest, net of capitalized interest cost | |
$ | 248,275 | |
$ | 485,075 | |
Cash paid for income taxes | |
$ | 1,287,530 | |
$ | 1,523,555 | |
| |
| | |
| | |
Cash and bank balances | |
| 16,017,403 | |
| 26,575,582 | |
Restricted cash | |
| - | |
| - | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | |
| 16,017,403 | |
| 26,575,582 | |
See accompanying notes to condensed consolidated
financial statements.
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022
AND 2021
(Unaudited)
| |
Common Stock | | |
Additional Paid-in | | |
Statutory Earnings | | |
Accumulated Other Comprehensive | | |
Retained | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Reserve | | |
Income (loss) | | |
Earnings | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at December 31, 2020 | |
| 2,864,512 | | |
$ | 2,865 | | |
$ | 54,015,219 | | |
$ | 6,080,574 | | |
$ | 5,740,722 | | |
$ | 109,240,794 | | |
$ | 175,080,174 | |
Issuance of shares to institutional investors | |
| 2,618,182 | | |
| 2,618 | | |
| 8,026,052 | | |
| - | | |
| - | | |
| - | | |
| 8,028,670 | |
Issuance of shares to public investors | |
| 2,927,786 | | |
| 2,928 | | |
| 15,612,217 | | |
| - | | |
| - | | |
| - | | |
| 15,615,145 | |
Exercise of warrants | |
| 1,505,440 | | |
| 1,505 | | |
| 11,363,433 | | |
| - | | |
| - | | |
| - | | |
| 11,364,938 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,128,207 | | |
| - | | |
| 1,128,207 | |
Net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (3,249,528 | ) | |
| (3,249,528 | ) |
Balance at September 30, 2021 | |
| 9,915,920 | | |
$ | 9,916 | | |
$ | 89,016,921 | | |
$ | 6,080,574 | | |
$ | 6,868,929 | | |
$ | 105,991,266 | | |
$ | 207,967,606 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2021 | |
| 9,915,920 | | |
$ | 9,916 | | |
$ | 89,016,921 | | |
$ | 6,080,574 | | |
$ | 10,496,168 | | |
$ | 110,146,329 | | |
$ | 215,749,908 | |
Issuance of shares to officer and directors | |
| 1,500,000 | | |
| 1,500 | | |
| 1,558,500 | | |
| - | | |
| - | | |
| - | | |
| 1,560,000 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| (21,769,765 | ) | |
| - | | |
| (21,769,765 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,663,445 | ) | |
| (4,663,445 | ) |
Balance at September 30, 2022 | |
| 11,415,920 | | |
$ | 11,416 | | |
$ | 90,575,421 | | |
$ | 6,080,574 | | |
$ | (11,273,597 | ) | |
$ | 105,482,884 | | |
$ | 190,876,698 | |
See accompanying notes to condensed consolidated
financial statements.
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.
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”.
On June 9, 2022, the Board of Directors of the
Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share
(the “Common Stock”), at a ratio of 1-for-10 (the “Reverse Stock Split”). The Reverse Stock Split become effective
on July 7, 2022 (the “Effective Date”), and the shares began trading on the split-adjusted basis on the NYSE American under
the Company’s existing trading symbol “ITP” at market open on July 8, 2022. The new CUSIP number following the Reverse
Stock Split will be 46527C 209. All references made to share or per share amounts in the accompanying consolidated financial statements
and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
On October 29, 2007, pursuant to an agreement
and plan of merger (the “Merger Agreement”), the Company acquired DongfangZhiye 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. AnDongfang 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 the 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. Full payment of the consideration
in the amount of RMB320 million (approximately $45 million) was made on February 23, 2022.
QianrongQianhui Hebei Technology Co., Ltd, a wholly
owned subsidiary of Shengde holding, was incorporated on July 15, 2021. It is a service provider of high quality material solutions for
textile, cosmetics and paper production.
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 and its subsidiary, 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 and Hebei Tengsheng for the
three months ended September 30, 2022 and 2021 was accounted for 99.83% and 97.01% of the Company’s total revenue, respectively.
The revenue generated from Dongfang Paper and Hebei Tengsheng for the nine months endedSeptember 30, 2022 and 2021 was accounted for 99.75%
and 98.89% of the Company’s total revenue, respectively. Dongfang Paper and Hebei Tengsheng also accounted for 87.51% and 84.13%
of the total assets of the Company as of September 30, 2022 and December 31, 2021, respectively.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2022 and December 31, 2021, details of the Company’s subsidiaries and variable interest entities are as follows:
| |
Date of Incorporation or | |
Place of Incorporation or | |
Percentage of
| | |
|
Name | |
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 |
QianrongQianhuiHeibei | |
July 15, 2021 | |
PRC | |
| 100 | % | |
New material technology service |
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, 2022 and December
31, 2021 are as follows:
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.
| |
September 30,
| | |
December 31,
| |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | |
| |
Current Assets | |
| | |
| |
Cash and bank balances | |
$ | 7,978,632 | | |
$ | 1,921,407 | |
Restricted cash | |
| - | | |
| - | |
Accounts receivable | |
| 4,236,299 | | |
| 4,867,759 | |
Inventories | |
| 4,421,829 | | |
| 5,823,762 | |
Prepayments and other current assets | |
| 15,857,737 | | |
| 19,942,878 | |
Due from related parties | |
| 797,954 | | |
| 888,893 | |
| |
| | | |
| | |
Total current assets | |
| 33,292,451 | | |
| 33,444,699 | |
| |
| | | |
| | |
Prepayment on property, plant and equipment | |
| 1,266,121 | | |
| 41,877,755 | |
Finance lease right-of-use assets, net | |
| 2,600,499 | | |
| 2,286,459 | |
Property, plant, and equipment, net | |
| 141,258,899 | | |
| 116,054,387 | |
Deferred tax asset non-current | |
| 9,841,540 | | |
| 9,547,741 | |
Total Assets | |
$ | 188,259,510 | | |
$ | 203,211,041 | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Short-term bank loans | |
$ | 5,632,553 | | |
$ | 5,958,561 | |
Current portion of long-term loans from credit union | |
| 4,175,621 | | |
| 2,289,945 | |
Lease liability | |
| 272,147 | | |
| 210,161 | |
Accounts payable | |
| 144,213 | | |
| 10,255 | |
Advance from customers | |
| 35,646 | | |
| 39,694 | |
Due to related parties | |
| - | | |
| - | |
Accrued payroll and employee benefits | |
| 210,791 | | |
| 279,513 | |
Other payables and accrued liabilities | |
| 4,950,272 | | |
| 4,740,900 | |
Income taxes payable | |
| 746,694 | | |
| 1,108,038 | |
| |
| | | |
| | |
Total current liabilities | |
| 16,167,937 | | |
| 14,637,067 | |
| |
| | | |
| | |
Loans from credit union | |
| 607,613 | | |
| 2,980,065 | |
Deferred gain on sale-leaseback | |
| 73,311 | | |
| 155,110 | |
Lease liability - non-current | |
| 568,952 | | |
| 152,233 | |
Total liabilities | |
$ | 17,417,813 | | |
$ | 17,924,475 | |
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,
2021 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, 2022 and the results of operations for the nine months ended September 30, 2022 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.
Reverse stock split
On June 9, 2022, the Board of Directors of the
Company approved the Reverse Stock Split, at a ratio of 1-for-10, pursuant to Section 78.207 of the Nevada Revised Statutes (“NRS”).
The Reverse Stock Split was effected by the Company filing of a Certificate of Change Pursuant to NRS 78.209 with the Secretary of State
of the State of Nevada on July 7, 2022. The par value per share of our stock remains unchanged at $0.001 per share after the Reverse Stock
Split. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures
have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
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, 2022 and December 31, 2021, the carrying value of the Company’s short term financial instruments, such as cash
and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related party and obligation
under capital lease, approximate at their fair values because of the short maturity of these instruments; while loans from credit union
and loans from a related party approximate at their fair value as the interest rates thereon are close to the market rates of interest
published by the People’s Bank of China.
Management determined that liabilities created
by beneficial conversion features associated with the issuance of certain warrants (see “Derivative liabilities” under
Note (10)), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities
was determined based on management’s estimate of the expected future cash flows required to settle the liabilities. This valuation
technique involves management’s estimates and judgment based on unobservable inputs and is classified in level 3.
Non-Recurring Fair Value Measurements
The Company reviews long-lived assets for impairment
annually or more frequently if events or changes in circumstances indicate the possibility of impairment. For the continuing operations,
long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at
fair value only when impairment is recognized. For discontinued operations, long-lived assets are measured at the lower of carrying amount
or fair value less cost to sell. The fair value of these assets were determined using models with significant unobservable inputs which
were classified as Level 3 inputs, primarily the discounted future cash flow.
Share-Based Compensation
The Company uses the fair value recognition provision
of ASC Topic 718, Compensation-Stock Compensation, which requires the Company to expense the cost of employee services received
in exchange for an award of equity instruments based on the grant date fair value of such instruments over the vesting period.
The Company also applies the provisions of ASC
Topic 505-50, Equity Based Payments to Non-Employees to account for stock-based compensation awards issued to non-employees for
services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of the instruments
issued in exchange for such services, whichever is more reliably measurable.
(3) Restricted Cash
Restricted cash was nil as of September 30, 2022 and December 31, 2021.
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, 2022 and December 31, 2021:
| |
September 30,
| | |
December 31,
| |
| |
2022 | | |
2021 | |
Raw Materials | |
| | |
| |
Recycled paper board | |
$ | 3,246,847 | | |
$ | 2,097,062 | |
Recycled white scrap paper | |
| 10,603 | | |
| 11,808 | |
Gas | |
| 80,319 | | |
| 32,753 | |
Base paper and other raw materials | |
| 214,370 | | |
| 206,531 | |
| |
| 3,552,139 | | |
| 2,348,154 | |
Semi-finished Goods | |
| 165,707 | | |
| 96,087 | |
Finished Goods | |
| 723,544 | | |
| 3,400,654 | |
Total inventory, gross | |
| 4,441,390 | | |
| 5,844,895 | |
Inventory reserve | |
| - | | |
| - | |
Total inventory, net | |
$ | 4,441,390 | | |
$ | 5,844,895 | |
(5) Prepayments and other current assets
Prepayments and other current assets consisted of the following as
of September 30, 2022 and December 31, 2021:
| |
September 30,
| | |
December 31,
| |
| |
2022 | | |
2021 | |
Prepaid land lease | |
$ | 173,244 | | |
$ | 188,215 | |
Prepayment for purchase of materials | |
| 9,030,641 | | |
| 9,190,527 | |
Prepayment for purchase of equipment | |
| - | | |
| 980,786 | |
Value-added tax recoverable | |
| 13,154,522 | | |
| 14,740,296 | |
Prepaid gas | |
| 26,939 | | |
| - | |
Others | |
| 410,561 | | |
| 696,816 | |
| |
$ | 22,795,907 | | |
$ | 25,796,640 | |
(6) Property, plant and equipment, net
As of September 30, 2022 and December 31, 2021, property, plant and
equipment consisted of the following:
| |
September 30,
| | |
December 31,
| |
| |
2022 | | |
2021 | |
Property, Plant, and Equipment: | |
| | |
| |
Land use rights | |
$ | 56,587,713 | | |
$ | 12,790,062 | |
Building and improvements | |
| 64,597,187 | | |
| 74,609,698 | |
Machinery and equipment | |
| 155,366,410 | | |
| 170,149,367 | |
Vehicles | |
| 713,510 | | |
| 725,838 | |
Construction in progress | |
| 973,922 | | |
| - | |
Totals | |
| 278,238,742 | | |
| 258,274,965 | |
Less: accumulated depreciation and amortization | |
| (128,703,499 | ) | |
| (131,687,537 | ) |
Property, Plant and Equipment, net | |
$ | 149,535,243 | | |
$ | 126,587,428 | |
As of September 30, 2022 and December 31, 2021,
land use rights represented twenty three parcels 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 2068, respectively.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2022 and December 31, 2021,
certain property, plant and equipment of Dongfang Paper with net values of $460,107 and $1,130,333, respectively, have been pledged pursuant
to a long-term loan from credit union of Dongfang Paper. Land use right of Dongfang Paper with net values of $5,289,810 and $6,002,195,
respectively, as of September 30, 2022 and December 31, 2021 was pledged for the bank loan from Industrial & Commercial Bank of China
(“ICBC”). Land use right of Hebei Tengsheng with net value of $5,042,556 and $5,690,261, respectively, as of September 30,
2022 and December 31, 2021 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 $3,899,128 and $4,407,889, respectively, as of September 30, 2022 and December 31, 2021 was pledged for another
long-term loan from credit union of Baoding Shengde. See “Short-term bank loans” under Note (7), Loans Payable, for
details of the transaction and asset collaterals.
Depreciation and amortization of property, plant and equipment was
$3,609,985 and $3,500,145 for the three months ended September 30, 2022 and 2021, respectively. Depreciation and amortization of property,
plant and equipment was $11,168,328 and $11,659,670 for the nine months ended September 30, 2022 and 2021, respectively.
(7) Leases
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$2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the
Leased Equipment to TLCL for 16 million (approximately US$2.5 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 $16) 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 payments due according to
the schedule. The balance of Leased Equipment net of amortization was $1,940,586 and $2,286,459 as of September 30, 2022 and December
31, 2021, respectively. The lease liability was $181,187 and $362,394, and its current portion in the amount of $181,187 and $210,161
as of September 30, 2022 and December 31, 2021, respectively.
Amortization of the Leased Equipment was $38,486
and $41,208 for the three months ended September 30, 2022 and 2021. Amortization of the Leased Equipment was $120,464 and $123,663 for
the nine months ended September 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $8,439 and $17,026 for
the three months ended September 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was $32,808 and $56,376
for the nine months ended September 30, 2022 and 2021.
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.
The future minimum lease payments of the capital
lease as of September 30, 2022 were as follows:
September 30, | |
Amount | |
2023 | |
| 194,372 | |
Less: unearned discount | |
| (13,185 | ) |
| |
| 181,187 | |
Less: Current portion lease liability | |
| (181,187 | ) |
| |
$ | - | |
Operating lease
The Company leases space under non-cancelable operating leases for
office and manufacturing locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement
incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.
The leases include option to renew in condition that it is agreed by
the landlord before expiry. Therefore, the majority of renewals to extend the lease terms are not included in its right-of-use assets
and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluate the renewal options and when they
are reasonably certain of exercise, the Company includes the renewal period in its lease term.
As the Company’s leases do not provide an implicit rate, it uses
its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the
lease payments.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
The components of the Company’s lease expense are as follows:
| |
Nine Months
Ended | |
| |
2022 | |
| |
RMB | |
| |
| |
Operating lease cost | |
| 23,475 | |
Short-term lease cost | |
| - | |
Lease cost | |
| 23,475 | |
Supplemental cash flow information related to its operating leases
was as follows for the period ended September 30, 2022:
| |
Nine Months
Ended | |
| |
2022 | |
| |
RMB | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
Operating cash outflow from operating leases | |
| 140,849 | |
Maturities of its lease liabilities for
all operating leases are as follows as of September 30, 2022:
September 30, | |
Amount | |
2023 | |
| 140,849 | |
2024 | |
| 140,849 | |
2025 | |
| 140,849 | |
2026 | |
| 140,849 | |
2027 | |
| 140,849 | |
Thereafter | |
| 140,849 | |
Total operating lease payments | |
$ | 845,094 | |
Less: Interest | |
| (185,182 | ) |
Present value of lease liabilities | |
| 659,912 | |
Less: current portion, record in current liabilities | |
| (90,960 | ) |
Present value of lease liabilities | |
| 568,952 | |
The weighted average remaining lease terms and discount rates for all
of its operating leases were as follows as of September 30, 2022:
| |
September 30, | |
| |
2022 | |
| |
RMB | |
Remaining lease term and discount rate: | |
| |
Weighted average remaining lease term (years) | |
| 5.9 | |
Weighted average discount rate | |
| 7.56 | % |
(8) Loans Payable
Short-term bank loans
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Industrial and Commercial Bank of China (“ICBC”) Loan 1 | |
$ | 5,069,157 | | |
$ | 5,958,561 | |
ICBC Loan 2 | |
| 422,547 | | |
| - | |
China Construction Bank Loan | |
| 140,849 | | |
| - | |
| |
| | | |
| | |
Total short-term bank loans | |
$ | 5,632,553 | | |
$ | 5,958,561 | |
On November 25, 2021, the Company entered into
a working capital loan agreement with the ICBC, with a balance of $5,069,157 and $5,958,561 as of September 30, 2022 and December 31,
2021, respectively. The working capital loan was secured by the land use right of Dongfang Paper as collateral for the benefit of the
bank and guaranteed by Mr. Liu. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments
by November 17, 2022.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
On June 28, 2022, the Company entered into a working
capital loan agreement with the ICBC, with a balance of $422,547 as of September 30, 2022. The loan bears a fixed interest rate of 4.3%
per annum. The loan will be due by December 25, 2022.
On July 29, 2022, the Company entered into a working capital loan agreement
with the China Construction Bank, with a balance of $140,849 as of September 30, 2022. The loan bears a fixed interest rate of 3.95% per
annum. The loan will be due by July 29, 2023.
As of September 30, 2022, there were guaranteed
short-term borrowings of $5,069,157 and unsecured bank loans of $563,396. As of December 31, 2021, there were guaranteed short-term borrowings
of $5,958,561 and unsecured bank loans of $nil.
The average short-term borrowing rates for the
three months ended September 30, 2022 and 2021 were approximately 4.28% and 4.79%. The average short-term borrowing rates for the nine
months endedSeptember 30, 2022 and 2021 were approximately 4.6% and 4.79%.
Long-term loans from credit union
As of September 30, 2022 and December 31, 2021,
loans payable to Rural Credit Union of Xushui District, amounted to $8,867,855 and $9,818,530, respectively.
| |
September 30,
| | |
December 31,
| |
| |
2022 | | |
2021 | |
Rural Credit Union of Xushui District Loan 1 | |
$ | 1,211,302 | | |
$ | 1,348,871 | |
Rural Credit Union of Xushui District Loan 2 | |
| 3,521,225 | | |
| 3,921,139 | |
Rural Credit Union of Xushui District Loan 3 | |
| 2,253,585 | | |
| 2,509,528 | |
Rural Credit Union of Xushui District Loan 4 | |
| 1,831,037 | | |
| 2,038,992 | |
Jiangna Yu | |
| 50,706 | | |
| - | |
Total | |
| 8,867,855 | | |
| 9,818,530 | |
Less: Current portion of long-term loans from credit union | |
| (4,175,620 | ) | |
| (6,838,465 | ) |
Long-term loans from credit union | |
$ | 4,692,235 | | |
$ | 2,980,065 | |
As of September 30, 2022, the Company’s long-term debt repayments for the next coming years were as follows:
|
Amount | |
Fiscal year |
| |
Remainder of 2022 |
$ | 4,175,620 | |
2023 |
| 4,656,256 | |
2024 & after |
| 35,979 | |
Total |
| 8,867,855 | |
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, 2022 and December 31, 2021, total outstanding loan balance was $1,211,302
and$1,348,871, respectively, Out of the total outstanding loan balance, current portion amounted were $647,906 and $329,376 as of September
30, 2022 and December 31, 2021, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining
balance of $563,396 and $1,019,495 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022
and December 31, 2021, 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 $460,107 and $1,130,333 as of September 30, 2022 and December 31, 2021, respectively. Interest payment is due quarterly
and bears a fixed rate of 0.64% per month. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $3,521,225
and $3,921,139, respectively. Out of the total outstanding loan balance, current portion amounted were $3,521,225 and $1,960,569 as of
September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and
the remaining balance of $nil and $1,960,570 are presented as non-current liabilities in the consolidated balance sheet as of September
30, 2022 and December 31, 2021, respectively.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
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 was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years
in total, which will be due on April 16, 2024 according to the new schedule. 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, 2022 and December 31, 2021, the total outstanding loan balance was $2,253,585 and $2,509,528, respectively. Out of the
total outstanding loan balance, current portion amounted were $nil and $2,509,528 as of September 30, 2022 and December 31, 2021 respectively,
which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,253,585 and $nil are presented
as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, 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 was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years
in total, which will be due on December 11, 2024 according to the new schedule. 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, 2022 and December 31, 2021, the total outstanding loan balance was $1,831,037 and $2,038,992, respectively. Out of the
total outstanding loan balance, current portion amounted were $nil and $2,038,992 as of September 30, 2022 and December 31, 2021 respectively,
which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,831,037 and $nil are presented
as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.
On July 1, 2022, the Company entered into a loan
agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowed RMB 400,000 from Jiangna Yu for a term of
five years. The loan is payable in monthly installment of RMB10,667 from July 2022 to July 2027. As of September 30, 2022, the total outstanding
loan balance was $50,706. Out of the total outstanding loan balance, the current portion amounted $6,489, which is presented as current
liabilities and the remaining balance of $44,217 is presented as non-current liabilities in the consolidated balance sheet as of September
30, 2022.
Total interest expenses for the short-term bank
loans and long-term loans for the three months ended September 30, 2022 and 2021 were $248,239 and $264,644, respectively. Total interest
expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2022 and 2021 were $753,789 and $788,094,
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 $361,044 and $402,047 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, 2022 and December 31, 2021, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided
a loan to the Company, amounted to $8,742,278 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, 2022 and December 31, 2021, approximately $42,255 and $47,054 of interest, respectively 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 $17,201,342 (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 was 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, 2022 and December 31, 2021, the outstanding interest
was $193,579 and $215,565, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities
in the consolidated balance sheet.
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2022 and December 31, 2021,
total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans were $nil for the
three and nine months ended September 30, 2022 and 2021. The accrued interest owing to Mr. Zhenyong Liu was approximately $596,878 and
$664,666, as of September 30, 2022 and December 31, 2021, respectively, which was recorded in other payables and accrued liabilities.
On December 8, 2021, the Company entered an agreement
with Mr. Zhenyong Liu, which allows Mr. Zhenyong Liu to borrow from the Company an amount of $6,507,431 (RMB44,089,085). The loan is unsecured
and carries a fixed interest rate of 3% per annum. The loan was repaid by Mr. Zhenyong Liu in February 2022.
As of September 30, 2022 and December 31, 2021,
amount due to shareholder was $727,433, which represents funds from shareholders to pay for various expenses incurred in the U.S. The
amount is due on demand with interest free.
(10) Other payables and accrued liabilities
Other payables and accrued liabilities consist of the following:
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accrued electricity | |
$ | 143,537 | | |
$ | 135,360 | |
Accrued rental | |
| 20,356 | | |
| 61,879 | |
Value-added tax payable | |
| 398,303 | | |
| - | |
Accrued interest to a related party | |
| 596,878 | | |
| 664,666 | |
Payable for purchase of equipment | |
| 3,019,217 | | |
| 3,379,368 | |
Accrued commission to salesmen | |
| 13,885 | | |
| 15,274 | |
Accrued bank loan interest | |
| 1,395,251 | | |
| 992,989 | |
Others | |
| 48,386 | | |
| 1,003 | |
Totals | |
$ | 5,635,813 | | |
$ | 5,250,539 | |
(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 its 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, 2022.
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, 2022:
| |
| Three months
ended | |
| |
| September 30,
2022 | |
Expected term | |
| 1.55 - 2.75 | |
Expected average volatility | |
| 85% - 207% | |
Expected dividend yield | |
| - | |
Risk-free interest rate | |
| 0.19% - 4.25% | |
The following table summarizes the changes in the derivative liabilities during the three months ended September 30, 2022:
Fair Value Measurements Using Significant Observable Inputs (Level 3)
Balance at December 31, 2021 | |
$ | 2,063,534 | |
Addition of new derivatives recognized as warrant | |
| - | |
Addition of new derivatives recognized as loss on derivatives | |
| - | |
Exercise of warrants | |
| - | |
Change in fair value of derivative liability | |
| (729,263 | ) |
Balance at September 30, 2022 | |
$ | 1,334,271 | |
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
(12) Common Stock
Issuance of common stock to investors
On January 20, 2021, the Company offered and sold
to certain institutional investors an aggregate of 2,618,182 shares of common stock and 2,618,182 warrants to purchase up to 2,618,182
shares of common stock in a best-efforts public offering for gross proceeds of approximately $14.4 million. The purchase price for each
share of common stock and the corresponding warrant was $0.55. The exercise price of the warrant was $0.55 per share.
On March 1, 2021, the Company offered and sold
to the public investors an aggregate of 2,927,786 shares of common stock and 1,463,893 warrants to purchase up to 1,463,893 shares of
common stock in a firm commitment underwritten public offering for gross proceeds of approximately $21.9 million. The purchase price for
each share of common stock and accompanying warrant was $0.75. The exercise price of the warrant was $0.75 per share.
Reverse stock split
On June 9, 2022, the Board of Directors of the
Company approved the Reverse Stock Split, at a ratio of 1-for-10, pursuant to Section 78.207 of the Nevada Revised Statutes (“NRS”).
The Reverse Stock Split was effected by the Company filing of a Certificate of Change Pursuant to NRS 78.209 with the Secretary of State
of the State of Nevada on July 7, 2022. The par value per share of our stock remains unchanged at $0.001 per share after the Reverse Stock
Split. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures
have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
Issuance of common stock pursuant to the 2021
Incentive Stock Plan
On August 15, 2022, the Company granted an aggregate
of 1,500,000 shares of common stock under its compensatory incentive plans to fifteen employees, as awards under the 2021 Incentive Stock
Plan. Please see Note (16), Stock Incentive Plans for more details. Total fair value of the stock was calculated at $1,560,000 as of the
date of grant.
(13) Warrants
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 440,000 shares of common stock and warrants to purchase up to 440,000
shares of common stock in a concurrent private placement (the “May 2020 Warrants”). The exercise price of the May 2020 Warrant
is $0.7425 per share. These warrants become exercisable on July 23, 2020 and have a term of exercise equal to five years and six months
from the date of issuance till July 23, 2025. 88,000 May 2020 Warrants were exercised in February 2021 at the exercise price of $0.7425
per share and 352,000 May 2020 Warrants were outstanding as of September 30, 2022. The Company classified warrant as liabilities and accounted
for the issuance of the May 2020 Warrants as a derivative.
On January 20, 2021, the Company offered and sold
to certain institutional investors an aggregate of 2,618,182 shares of common stock and 2,618,182 warrants to purchase up to 2,618,182
shares of common stock (the “January 2021 Warrants”). The January 2021 Warrants became exercisable on January 20, 2021 at
an exercise price of $0.55 and will expire on January 20, 2026. 1,410,690 January 2021 Warrants were exercised in January and February
of 2021 at the exercise price of $0.55 per share. 1,207,492 January 2021 Warrants were outstanding as of September 30, 2022.
On March 1, 2021, the Company offered and sold to the public investors
an aggregate of 2,927,786 shares of common stock and 1,463,893 warrants to purchase up to 1,463,893 shares of common stock (the “March
2021 Warrants”). The March 2021 Warrants became exercisable on March 1, 2021 at an exercise price of $0.75 and will expire on March
1, 2026. 6,750 March 2021 Warrants were exercised in January and March 2021 at the exercise price of $0.75 per share and 1,457,143 March
2021 Warrants were outstanding as of September 30, 2022.
The Company classified warrants 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, 2022 | |
| |
| | |
Weight | |
| |
| | |
average | |
| |
Number | | |
exercise price | |
Outstanding and exercisable at beginning of the period | |
| 3,016,635 | | |
$ | 6.6907 | |
Issued during the period | |
| - | | |
| | |
Exercised during the period | |
| - | | |
| | |
Outstanding and exercisable at end of the period | |
| 3,016,635 | | |
$ | 6.6907 | |
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, 2022.
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 | |
| 3,016,635 | |
3.34 | |
$ | 6.6907 | |
| 3,016,635 | | |
$ | 6.6907 | |
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, 2022 for those
warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). The intrinsic value
of the warrants as of September 30, 2022 and December 31, 2021 are nil.
(14) Earnings Per Share
For the three months ended September 30, 2022
and 2021, basic and diluted net income per share are calculated as follows:
| |
Three Months Ended
September 30, | |
| |
2022 | | |
2021 | |
Basic (loss) income per share | |
| | |
| |
Net (loss) income for the period - numerator | |
$ | (1,887,318 | ) | |
$ | 1,542,576 | |
Weighted average common stock outstanding - denominator | |
| 71,449,208 | | |
| 54,196,300 | |
| |
| | | |
| | |
Net (loss) income per share | |
$ | (0.026 | ) | |
$ | 0.03 | |
| |
| | | |
| | |
Diluted income per share | |
| | | |
| | |
Net income for the period- numerator | |
$ | (1,887,318 | ) | |
$ | 1,542,576 | |
Weighted average common stock outstanding - denominator | |
| 71,449,208 | | |
| 54,196,300 | |
| |
| | | |
| | |
Effect of dilution | |
| - | | |
| - | |
Weighted average common stock outstanding - denominator | |
| 71,449,208 | | |
| 54,196,300 | |
| |
| | | |
| | |
Diluted (loss) income per share | |
$ | (0.03 | ) | |
$ | 0.03 | |
For the nine months ended September 30, 2022 and
2021, basic and diluted net income per share are calculated as follows:
| |
Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | |
Basic loss per share | |
| | |
| |
Net loss for the period - numerator | |
$ | (4,663,445 | ) | |
$ | (3,249,528 | ) |
Weighted average common stock outstanding - denominator | |
| 71,449,208 | | |
| 54,196,300 | |
| |
| | | |
| | |
Net loss per share | |
$ | (0.07 | ) | |
$ | (0.06 | ) |
| |
| | | |
| | |
Diluted loss per share | |
| | | |
| | |
Net loss for the period - numerator | |
$ | (4,663,445 | ) | |
$ | (3,249,528 | ) |
Weighted average common stock outstanding - denominator | |
| 71,449,208 | | |
| 54,196,300 | |
| |
| | | |
| | |
Effect of dilution | |
| - | | |
| - | |
Weighted average common stock outstanding - denominator | |
| 71,449,208 | | |
| 54,196,300 | |
| |
| | | |
| | |
Diluted loss per share | |
$ | (0.07 | ) | |
$ | (0.06 | ) |
For the three and nine months ended September 30, 2022 and 2021 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 TCJA”), which significantly changed U.S. tax law. The 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, 2022 and 2021 were as follows:
| |
Three Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Provision for Income Taxes | |
| | |
| |
Current Tax Provision U.S. | |
$ | 15,062 | | |
$ | 14,717 | |
Current Tax Provision PRC | |
| 793,630 | | |
| 443,028 | |
Deferred Tax Provision PRC | |
| (376,405 | ) | |
| (529,133 | ) |
Total Provision for (Deferred tax benefit)/ Income Taxes | |
$ | 432,287 | | |
$ | (71,388 | ) |
The provisions for income taxes for nine months
ended September 30, 2022 and 2021 were as follows:
| |
Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Provision for Income Taxes | |
| | |
| |
Current Tax Provision U.S. | |
$ | 15,062 | | |
$ | 14,717 | |
Current Tax Provision PRC | |
| 1,022,037 | | |
| 1,700,721 | |
Deferred Tax Provision PRC | |
| (1,197,630 | ) | |
| 3,235,556 | |
Total Provision for (Deferred tax benefit)/ Income Taxes | |
$ | (160,531 | ) | |
$ | 4,950,994 | |
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 net operating losses of approximately $776,533 and $882,743 for U.S. income
tax purposes for the years ended December 31, 2021 and 2020, 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 September 30, 2022,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 September 30, 2022, 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, | |
| |
2022 | | |
2021 | |
Deferred tax assets (liabilities) | |
| | |
| |
Depreciation and amortization of property, plant and equipment | |
$ | 14,915,860 | | |
$ | 14,754,456 | |
Impairment of property, plant and equipment | |
| 761,925 | | |
| 783,433 | |
Miscellaneous | |
| 353,366 | | |
| 342,170 | |
Net operating loss carryover of PRC company | |
| 208,486 | | |
| 388,620 | |
Total deferred tax assets | |
| 16,239,637 | | |
| 16,268,679 | |
Less: Valuation allowance | |
| (5,000,000 | ) | |
| (5,000,000 | ) |
Total deferred tax assets, net | |
$ | 11,239,637 | | |
| 11,268,679 | |
| |
Three Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
PRC Statutory rate | |
| 25.0 | % | |
| 25.0 | % |
Effect of different tax jurisdiction | |
| | | |
| | |
Effect of reconciling items in the PRC for tax purposes | |
| (54.7 | )% | |
| (29.9 | )% |
Change in valuation allowance | |
| | | |
| | |
| |
| | | |
| | |
Effective income tax rate | |
| (29.7 | )% | |
| (4.9 | )% |
| |
Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
PRC Statutory rate | |
| 25.0 | % | |
| 25.0 | % |
Effect of different tax jurisdiction | |
| | | |
| | |
Effect of reconciling items in the PRC for tax purposes | |
| (21.7 | )% | |
| (27.9 | )% |
(Over) Under-provision in previous year | |
| | | |
| | |
Change in valuation allowance | |
| - | | |
| 293.9 | % |
| |
| | | |
| | |
Effective income tax rate | |
| 3.3 | % | |
| 291.0 | % |
During the three months ended September 30, 2022
and 2021, the effective income tax rate was estimated by the Company to be 29.7% and 4.9%, respectively.
During the nine months ended September 30, 2022
and 2021, the effective income tax rate was estimated by the Company to be 3.3% and 291%, respectively.
As of September 30, 2022, 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 believe 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 September 30,
2022 and December 31, 2021, 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 three
and nine months ended September 30, 2022 and 2021, 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
2021 Incentive Stock Plan
On November 12, 2021, the Company’s
Annual General Meeting adopted and approved the 2021 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the”2021
Plan”).Under the 2021 ISP, the Company has reserved a total of 1,500,000 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 August 15, 2022,
the Compensation Committee granted common shares of 1,500,000 shares under the 2021 Plan, to fifteen officers. Total fair value of
the stock was calculated at $1,560,000 as of the date of issuance at $1.04 per share.
(17) Commitments and Contingencies
Xushui Land 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 $16,902 (RMB120,000). This lease is renewable at the end of the
30-year term.
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 with an annual rental payment
of approximately $140,849 (RMB1,000,000). The lease was recorded in lease assets and liabilities in the consolidated balance sheet as
of September 30, 2022. See ’Operating lease’ under note (7).
Future minimum lease payments of the land lease
isas follows:
September 30, | |
Amount | |
2023 | |
| 16,902 | |
2024 | |
| 16,902 | |
2025 | |
| 16,902 | |
2026 | |
| 16,902 | |
2027 | |
| 16,902 | |
Thereafter | |
| 71,833 | |
Total operating lease payments | |
$ | 156,342 | |
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capital commitment
As of September 30, 2022, 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 $7,146,745 and $4,700,927 as of September 30, 2022 and December 31,
2021, respectively. The Company expected to pay off all the balances within 1-3 years.
Guarantees and Indemnities
The Company agreed with Baoding Huanrun Trading
Co., a major supplier of raw materials, to guarantee certain obligations of this third party, and as of September 30, 2022 and December
31, 2021, the Company guaranteed its long-term loan from financial institutions amounting to $4,366,320 (RMB31,000,000) and $4,862,211
(RMB31,000,000), respectively, that matured at various times in 2018-2023. If Huanrun Trading Co., 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. 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 basedon gross revenue generated.
The operating segments do share facilities in Xushui County, Baoding City, Hebei Province, China. All sales were sold to customers located
in the PRC.
Summarized financial information for the three reportable segments
is as follows:
| |
September 30, 2022 | |
| |
Dongfang | | |
Hebei | | |
Baoding | | |
Not Attributable | | |
Elimination of | | |
Enterprise-wide, | |
| |
Paper | | |
Tengsheng | | |
Shengde | | |
to Segments | | |
Inter-segment | | |
consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 31,359,186 | | |
$ | 293,157 | | |
$ | 56,871 | | |
$ | - | | |
$ | - | | |
$ | 31,709,214 | |
Gross profit | |
| 3,524,435 | | |
| (757,695 | ) | |
| 16,848 | | |
| - | | |
| - | | |
| 2,783,588 | |
Depreciation and amortization | |
| 1,168,036 | | |
| 2,054,034 | | |
| 403,865 | | |
| - | | |
| - | | |
| 3,625,935 | |
Interest income | |
| 4,130 | | |
| 416 | | |
| 2,965 | | |
| 217 | | |
| - | | |
| 7,728 | |
Interest expense | |
| 160,740 | | |
| 17,230 | | |
| 78,708 | | |
| - | | |
| - | | |
| 256,678 | |
Income tax expense(benefit) | |
| 740,764 | | |
| (337,791 | ) | |
| 14,252 | | |
| 15,062 | | |
| - | | |
| 432,287 | |
Net income (loss) | |
| 2,100,268 | | |
| (1,871,128 | ) | |
| (12,836 | ) | |
| (2,101,863 | ) | |
| (1,759 | ) | |
| (1,887,318 | ) |
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
Three Months Ended September 30, 2021 | |
| |
Dongfang | | |
Hebei | | |
Baoding | | |
Not Attributable | | |
Elimination of | | |
Enterprise-wide, | |
| |
Paper | | |
Tengsheng | | |
Shengde | | |
to Segments | | |
Inter-segment | | |
consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 42,123,855 | | |
$ | 2,508,611 | | |
$ | 2,789,071 | | |
$ | - | | |
$ | (2,333,866 | ) | |
$ | 45,087,671 | |
Gross profit | |
| 2,026,870 | | |
| (249,996 | ) | |
| 44,662 | | |
| - | | |
| - | | |
| 1,821,536 | |
Depreciation and amortization | |
| 1,215,907 | | |
| 1,918,917 | | |
| 432,437 | | |
| - | | |
| - | | |
| 3,567,261 | |
Interest income | |
| 8,222 | | |
| 370 | | |
| 3,452 | | |
| - | | |
| - | | |
| 12,044 | |
Interest expense | |
| 180,270 | | |
| 17,026 | | |
| 84,374 | | |
| - | | |
| - | | |
| 281,670 | |
Income tax expense(benefit) | |
| 320,249 | | |
| (396,715 | ) | |
| 5,078 | | |
| - | | |
| - | | |
| (71,388 | ) |
Net income (loss) | |
| 956,901 | | |
| (1,258,593 | ) | |
| (56,897 | ) | |
| 1,901,165 | | |
| - | | |
| 1,542,576 | |
| |
Nine Months Ended September 30,
2022 | |
| |
Dongfang | | |
Hebei | | |
Baoding | | |
Not Attributable | | |
Elimination of | | |
Enterprise-wide, | |
| |
Paper | | |
Tengsheng | | |
Shengde | | |
to Segments | | |
Inter-segment | | |
consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 77,675,737 | | |
| 1,102,933 | | |
| 201,046 | | |
| - | | |
| - | | |
| 78,979,716 | |
Gross profit | |
| 5,812,160 | | |
| (2,135,819 | ) | |
| 51,729 | | |
| - | | |
| - | | |
| 3,728,070 | |
Depreciation and amortization | |
| 3,649,174 | | |
| 6,304,944 | | |
| 1,264,136 | | |
| - | | |
| - | | |
| 11,218,254 | |
Interest income | |
| 7,874 | | |
| 812 | | |
| 7,205 | | |
| 217 | | |
| - | | |
| 16,108 | |
Interest expense | |
| 501,360 | | |
| 41,599 | | |
| 243,638 | | |
| - | | |
| - | | |
| 786,597 | |
Income tax expense(benefit) | |
| 795,347 | | |
| (1,128,442 | ) | |
| 157,502 | | |
| 15,062 | | |
| - | | |
| (160,531 | ) |
Net income (loss) | |
| 2,046,362 | | |
| (5,480,223 | ) | |
| (297,484 | ) | |
| (962,504 | ) | |
| 30,404 | | |
| (4,663,445 | ) |
| |
Nine Months Ended September 30, 2021 | |
| |
Dongfang | | |
Hebei | | |
Baoding | | |
Not Attributable | | |
Elimination of | | |
Enterprise-wide, | |
| |
Paper | | |
Tengsheng | | |
Shengde | | |
to Segments | | |
Inter-segment | | |
consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 108,949,261 | | |
| 6,487,027 | | |
| 5,714,288 | | |
| - | | |
| (5,318,563 | ) | |
| 115,832,013 | |
Gross profit (loss) | |
| 7,523,100 | | |
| (938,454 | ) | |
| 96,915 | | |
| - | | |
| - | | |
| 6,681,561 | |
Depreciation and amortization | |
| 3,976,098 | | |
| 6,459,845 | | |
| 1,297,721 | | |
| - | | |
| - | | |
| 11,733,664 | |
Interest income | |
| 19,202 | | |
| 1,176 | | |
| 7,718 | | |
| - | | |
| - | | |
| 28,096 | |
Interest expense | |
| 537,831 | | |
| 56,376 | | |
| 250,263 | | |
| - | | |
| - | | |
| 844,470 | |
Income tax expense(benefit) | |
| 1,355,079 | | |
| 3,582,328 | | |
| (1,130 | ) | |
| 14,717 | | |
| - | | |
| 4,950,994 | |
Net income (loss) | |
| 3,892,107 | | |
| (9,219,504 | ) | |
| (210,718 | ) | |
| 2,288,587 | | |
| - | | |
| (3,249,528 | ) |
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
As of September 30, 2022 | |
| |
Dongfang | | |
Hebei | | |
Baoding | | |
Not Attributable | | |
Elimination of | | |
Enterprise-wide, | |
| |
Paper | | |
Tengsheng | | |
Shengde | | |
to Segments | | |
Inter-segment | | |
consolidated | |
Total assets | |
$ | 63,539,735 | | |
| 124,719,775 | | |
| 21,280,523 | | |
| 5,597,506 | | |
| - | | |
| 215,137,539 | |
| |
As of December 31, 2021 | |
| |
Dongfang | | |
Hebei | | |
Baoding | | |
Not Attributable | | |
Elimination of | | |
Enterprise-wide, | |
| |
Paper | | |
Tengsheng | | |
Shengde | | |
to Segments | | |
Inter-segment | | |
consolidated | |
Total assets | |
$ | 109,369,166 | | |
| 93,841,874 | | |
| 29,181,392 | | |
| 9,142,770 | | |
| - | | |
| 241,535,202 | |
(19) Concentration and Major Customers and Suppliers
For the three months ended September 30, 2022,
the Company had five customers accounted for approximately 12% of total sales. For the three months ended September 30, 2021, the Company
hadno single customer contributed over 10% of total sales.
For the nine months ended September 30,
2022, the Company had no single customer contributed over 10% of total sales. For the nine months ended September 30, 2021, the
Company had no single customer contributed over 10% of total sales.
For the three months ended September 30, 2022,
the Company had three major suppliers accounted for 77%, 14% and 7% of total purchases. For the three months ended September 30, 2021,
the Company had three major suppliers accounted for 74%, 12% and 5% of total purchases.
For the nine months ended September 30,
2022, the Company had three major suppliers accounted for 77%, 15% and 5% of total purchases. For the nine months ended September
30, 2021, the Company had two major suppliers accounted for 78% and 11% of total purchases.
(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 as of September 30, 2022 and December 31, 2021. On May 1,
2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB500,000
($70,425) 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, 2022 and
December 31, 2021, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000
amounted to RMB96,281,183 ($13,561,112) as of September 30, 2022.
(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.
(22) Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.ASU 2016-13 replaced the incurred loss impairment
methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of
reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit
loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after
December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit
Losses (Topic326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting
companies applying the CECL standards. The ASU is effective for reporting periods beginning after December 15, 2022 and interim periods
within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 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, 2022 and 2021 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.
Impact of COVID-19 on Our Operations and Financial Performance
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. Substantially all of our
revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread of COVID-19, the Chinese
government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals suspected of having
COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. It is, however, still unclear how
the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative
impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total
revenues.
While we have resumed business operations, there
remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic. 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.
Results of Operations
Comparison of the Three months ended September 30, 2022 and 2021
Revenue for the three months ended September 30,
2022 was $31,709,214, a decrease of $13,378,457, or 29.67%, from $45,087,671 for the same period in the previous year. This was mainly
due to the decrease in sales of regular corrugating medium paper, offset printing paper and tissue paper products.
Revenue of Offset Printing Paper, Corrugating Medium Paper and
Tissue Paper Products
Revenue from sales of offset printing paper, corrugating
medium paper (“CMP”) and tissue paper products for the three months ended September 30, 2022 was $31,652,343, a decrease of
$13,283,137, or 29.56%, from $44,935,480 for the third quarter of 2021. Total offset printing paper, CMP and tissue paper products sold
during the three months ended September 30, 2022 amounted to 72,615 tonnes, a decrease of 11,520 tonnes, or 13.69%, compared to 84,135
tonnes sold in the comparable period in the previous year. Due to the sporadic situation of COVID-19 in China, our factory facilities
were operated in a limited, transitional basis during the three months ended September 30, 2022. The changes in revenue dollar amount
and in quantity sold for the three months ended September 30, 2022 and 2021 are summarized as follows:
| |
Three Months Ended | | |
Three Months Ended | | |
| | |
| | |
Percentage | |
| |
September 30, 2022 | | |
September 30, 2021 | | |
Change in | | |
Change | |
Sales Revenue | |
Quantity (Tonne) | | |
Amount | | |
Quantity (Tonne) | | |
Amount | | |
Quantity (Tonne) | | |
Amount | | |
Quantity | | |
Amount | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Regular CMP | |
| 59,848 | | |
$ | 26,062,736 | | |
| 61,947 | | |
$ | 31,200,984 | | |
| (2,099 | ) | |
$ | (5,138,248 | ) | |
| -3.39 | % | |
| -16.47 | % |
Light-Weight CMP | |
| 12,507 | | |
$ | 5,296,450 | | |
| 12,497 | | |
$ | 6,127,480 | | |
| 10 | | |
$ | (831,030 | ) | |
| 0.08 | % | |
| -13.56 | % |
Total CMP | |
| 72,355 | | |
$ | 31,359,186 | | |
| 74,444 | | |
$ | 37,328,464 | | |
| (2,089 | ) | |
$ | (5,969,278 | ) | |
| -2.81 | % | |
| -15.99 | % |
Offset Printing Paper | |
| - | | |
$ | - | | |
| 7,045 | | |
$ | 4,795,391 | | |
| (7,045 | ) | |
$ | (4,795,391 | ) | |
| (100.00 | )% | |
| (100.00 | )% |
Tissue Paper Products | |
| 260 | | |
$ | 293,157 | | |
| 2,646 | | |
$ | 2,811,625 | | |
| (2,386 | ) | |
$ | (2,518,468 | ) | |
| -90.17 | % | |
| -89.57 | % |
Total CMP, Offset Printing Paper and Tissue Paper Revenue | |
| 72,615 | | |
$ | 31,652,343 | | |
| 84,135 | | |
$ | 44,935,480 | | |
| (11,520 | ) | |
$ | (13,283,137 | ) | |
| -13.69 | % | |
| -29.56 | % |
Monthly sales revenue for the 24 months ended September 30, 2022, are
summarized below:
The Average Selling Prices (ASPs) for our main products in the three
months ended September 30, 2022 and 2021 are summarized as follows:
| |
Offset
Printing
Paper ASP | | |
Regular
CMP ASP | | |
Light-Weight CMP ASP | | |
Tissue
Paper
Products
ASP | |
Three Months ended September 30, 2021 | |
$ | 681 | | |
$ | 504 | | |
$ | 490 | | |
$ | 1,063 | |
Three Months ended September 30, 2022 | |
$ | - | | |
$ | 435 | | |
$ | 423 | | |
$ | 1,128 | |
Increase (Decrease) from comparable period in the previous year | |
$ | (681 | ) | |
$ | (69 | ) | |
$ | (67 | ) | |
$ | 65 | |
Increase (Decrease) by percentage | |
| - | | |
| -13.69 | % | |
| -13.67 | % | |
| 6.11 | % |
The following chart shows the month-by-month ASPs for the 24-month
period ended September 30, 2022:
Corrugating Medium Paper
Revenue from CMP amounted to $31,359,186 (99.07%
of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September 30, 2022, representing
a decrease of $5,969,278, or 15.99%, from $37,328,464 for the comparable period in 2021.
We sold 72,355 tonnes of CMP in the three months
ended September 30, 2022 as compared to 74,444 tonnes for the same period in 2021, representing a 2.81% decrease in quantity sold.
ASP for regular CMP dropped from $504/tonne for
the three months ended September 30, 2021 to $435/tonne for the three months ended September 30, 2022, representing a 13.69% decrease.
ASP in RMB for regular CMP for the third quarter of 2021 and 2022 was RMB3,259 and RMB2,980, respectively, representing a 8.56% decrease.
The quantity of regular CMP sold decreased by 2,099 tonnes, from 61,947 tonnes in the third quarter of 2021 to 59,848 tonnes in the third
quarter of 2022.
ASP for light-weight CMP decreased from $490/tonne
for the three months ended September 30, 2021 to $423/tonne for the three months ended September 30, 2022, representing a 13.67% decrease.
ASP in RMB for light-weight CMP for the third quarter of 2021 and 2022 was RMB3,173 and RMB2,892, respectively, representing a 8.86% decrease.
The quantity of light-weight CMP sold increased by 10 tonnes, from 12,497 tonnes in the third quarter of 2021, to 12,507 tonnes in the
third quarter of 2022.
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 2022 and 2021 were 66.82% and 67.42%,
respectively, representing a decrease of 0.60%.
Quantities sold for regular CMP that was produced by the PM6 production
line from October 2020 to September 2022 are as follows:
Offset printing paper
Revenue from offset printing paper was $nil for
the three months ended September 30, 2022 compared to the revenue of $4,795,391 for the three months ended September 30, 2021. As required
by the government to stem the sporadic spread of COVID-19, our production of offset printing paper was suspended in the third quarter
of 2022.
Tissue Paper Products
Revenue from tissue paper products was $293,157
(0.93% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September 30, 2022, representing
a decrease of $2,518,468, or 89.57%, from $2,811,625 for the three months ended September 30, 2021. We sold 260 tonnes of tissue paper
in the third quarter of 2022, as compared to 2,646 tonnes in the comparable period of 2021, representing a decrease of 2,386 tonnes, or
90.17%.
ASP for tissue paper products increased from $1,063/tonne
for the three months ended September 30, 2021 to $1,128/tonne for the three months ended September 30, 2022, representing a 6.11% increase.
ASP in RMB for tissue paper products for the third quarter of 2021 and 2022 was RMB6,875 and RMB7,913, respectively, representing a 15.10%
increase.
Revenue of Face Mask
Revenue generated from selling face mask were
$56,871 and $152,191 for the three months ended September 30, 2022 and 2021, respectively, representing a decrease of $95,320, or 62.63%.
We sold 1,282 thousand pieces of face masks in the third quarter of 2022, as compared to 3,180 thousand pieces in the comparable period
of 2021, a decrease of 1,898 thousand pieces, or 59.69%.
Cost of Sales
Total cost of sales for CMP, offset printing paper
and tissue paper products for the quarter ended September 30, 2022 was $28,885,603, a decrease of $14,259,449, or 33.05%, from $43,145,052
for the comparable period in 2021. This was mainly due to the decrease in sales quantity of regular CMP, offset printing paper and tissue
paper products, and the decrease in material costs of CMP.
Cost of sales for CMP was $27,834,752 for the
quarter ended September 30, 2022, as compared to $36,069,192 for the comparable period in 2021. The decrease in the cost of sales of $8,234,440
for CMP was mainly due to the decrease in sales volume of regular CMP and the decrease in average cost of sales. Average cost of sales
per tonne for CMP decreased by 20.62%, from $485 in the third quarter of 2021 to $385 in the third quarter of 2022. The decrease in average
cost of sales was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board
in the third quarter of 2022 compared to the third quarter of 2021.
Cost of sales for offset printing paper was $nil for the quarter ended
September 30, 2022, as compared to $4,018,447 for the comparable period in 2021.
Cost of sales for tissue paper products was $1,050,851
for the quarter ended September 30, 2022, as compared to $3,057,413 for the comparable period in 2021. The decrease in the cost of sales
of $2,006,562 for tissue paper products was mainly due to the decrease in sales volume of tissue paper products, partially offset by the
increase in average cost of sales. Average cost of sales per tonne of tissue paper products increased by 249.96%, from $1,155 in the three
months ended September 30, 2021, to $4,042 for the comparable period in 2022. This was mainly due to the increase in cost of tissue base
paper and higher manufacturing overhead costs absorbed in the unit cost of sales due to low production yield.
Changes in cost of sales and cost per tonne by product for the quarters
ended September 30, 2022 and 2021 are summarized below:
| |
Three Months Ended | | |
Three Months Ended | | |
| | |
| |
| |
September 30, 2022 | | |
September 30, 2021 | | |
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 | |
$ | 23,218,241 | | |
$ | 388 | | |
$ | 30,284,195 | | |
$ | 489 | | |
$ | (7,065,954 | ) | |
$ | (101 | ) | |
| -23.33 | % | |
| -20.65 | % |
Light-Weight CMP | |
$ | 4,616,511 | | |
$ | 369 | | |
$ | 5,784,997 | | |
$ | 463 | | |
$ | (1,168,486 | ) | |
$ | (94 | ) | |
| -20.20 | % | |
| -20.30 | % |
Total CMP | |
$ | 27,834,752 | | |
$ | 385 | | |
$ | 36,069,192 | | |
$ | 485 | | |
$ | (8,234,440 | ) | |
$ | (100 | ) | |
| -22.83 | % | |
| -20.62 | % |
Offset Printing Paper | |
$ | - | | |
$ | - | | |
$ | 4,018,447 | | |
$ | 570 | | |
$ | (4,018,447 | ) | |
$ | (570 | ) | |
| -100.00 | % | |
| -100.00 | % |
Tissue Paper Products | |
$ | 1,050,851 | | |
$ | 4,042 | | |
| 3,057,413 | | |
$ | 1,155 | | |
$ | (2,006,562 | ) | |
$ | 2,887 | | |
| -65.63 | % | |
| 249.96 | % |
Total CMP, Offset
Printing Paper and Tissue Paper | |
$ | 28,885,603 | | |
$ | n/a | | |
$ | 43,145,052 | | |
$ | n/a | | |
$ | (14,259,449 | ) | |
$ | n/a | | |
| -33.05 | % | |
| n/a | |
Our average unit purchase costs (net of applicable
value added tax) of recycled paper board in the three months ended September 30, 2022 were RMB 1,561/tonne (approximately $235/tonne),
as compared to RMB 1,966/tonne (approximately $304/tonne) for the three months ended September 30, 2021. These changes (in US dollars)
represent a year-over-year decrease of 22.70% 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 2020 to September 2022 are shown below:
Electricity and gas are our two main energy sources.
Electricity and gas accounted for approximately 4% and 11.6% of total sales in the third quarter of 2022, respectively, compared to 4%
and 10.8% of total sales in the third quarter of 2021. The monthly energy cost as a percentage of total monthly sales of our main paper
products for the 24 months ended September 30, 2022 are summarized as follows:
Gross Profit
Gross profit for the three months ended September
30, 2022 was $2,783,588 (8.78% of the total revenue), representing an increase of $962,052, or 52.82%, from the gross profit of $1,821,536
(4.04% of the total revenue) for the three months ended September 30, 2021, 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, 2022 was $2,766,740, representing an increase of $976,312, or 54.53%, from
the gross profit of $1,790,428 for the three months ended September 30, 2021. The increase was mainly the result of the factors discussed
above.
The overall gross profit margin for offset printing
paper, CMP and tissue paper products increased by 4.76 percentage points, from 3.98% for the three months ended September 30, 2021, to
8.74% for the three months ended September 30, 2022.
Gross profit margin for regular CMP for the three
months ended September 30, 2022 was 10.91%, or 7.97 percentage points higher, as compared to gross profit margin of 2.94% for the three
months ended September 30, 2021. Such increase was mainly due to the decrease in cost of recycled paper board, partially offset bythe
decrease of ASP of regular CMP in the third quarter of 2022.
Gross profit margin for light-weight CMP for the
three months ended September 30, 2022 was 12.84%, or 7.25 percentage points higher, as compared to gross profit margin of 5.59% for the
three months ended September 30, 2021. The increase was mainly due to the decrease in cost of recycled paper board, partially offset bythe
decrease of ASP of light-weight CMP in the third quarter of 2022.
Gross profit margin for tissue paper products
for the three months ended September 30, 2022 was -258.46%, or 249.72 percentage points lower, as compared to gross profit margin of -8.74%
for the three months ended September 30, 2021. The increase in gross loss was mainly due to the decrease in ASP of tissue paper products
and the increase in cost of sales in the third quarter of 2022.
Monthly gross profit margins on the sales of our CMP and offset printing
paper for the 24-month period ended September 30, 2022 are as follows:
Face Masks
Gross profit for face masks for the three months
ended September 30, 2022 and 2021 were $16,848 and $31,108, representing a gross margin of 29.62% and 20.44%, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for
the three months ended September 30, 2022 were $3,370,541, an increase of $1,350,976, or 66.89% from $2,019,565 for the three months ended
September 30, 2021. The increase was mainly due to 1,500,000 shares of common stock granted under our compensatory incentive plan in August
2022, value at $1,560,000.
Loss from Operations
Operating loss for the quarter ended September
30, 2022 was $588,712, a decrease of $390,683, or 197.29%, from $198,029 for the quarter ended September 30, 2021. The decrease in income
from operations was primarily due to the increase in selling, general and administrative expenses, partially offset by the increase in
gross profit.
Other Income and Expenses
Interest expense for the three months ended September
30, 2022 decreased by $24,992, from $281,670 in the three months ended September 30, 2021, to $256,678. The Company had short-term and
long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,681,595 as of September 30, 2022, as
compared to $16,377,758 as of September 30, 2021.
Loss (Gain) on derivative liability
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. 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 (loss) gain
recognized on addition and change in fair value of derivative liability for the three months ended September 30, 2022 and 2021 was a
loss of $617,370 and a gain of $1,938,873, respectively.
Net Loss
As a result and the factors discussed above, net
loss was $1,887,318 for the quarter ended September 30, 2022, representing a decrease of $3,429,894, or 222.35%, from net income of $1,542,576
for the quarter ended September 30, 2021.
Comparison of the nine months ended September 30, 2022 and
2021
Revenue for the nine months ended September
30, 2022 was $78,979,716, representing a decrease of $36,852,297, or 31.82%, from $115,832,013 for the same period in the previous
year. This was mainly due to the decrease in sales volume of corrugating medium paper (“CMP”) and offset printing paper
and tissue paper products.
Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue
Paper Products
Revenue from sales of offset printing paper,
CMP and tissue paper products for the nine months ended September 30, 2022 was $78,778,671, a decrease of $36,661,823, or 31.76%,
from $115,440,494 for the nine months ended September 30, 2021. This was mainly due to the decrease in sales volume of regular CMP,
light-weight CMP, offset printing paper and tissue paper products, and the decrease in ASPs of CMP and tissue paper products. Total
quantities of offset printing paper, CMP and tissue paper products sold during the nine months ended September 30, 2022 amounted to
168,066 tonnes, a decrease of 48,237 tonnes, or 22.30%, compared to 216,303 tonnes sold during the nine months ended September 30,
2021. Total quantities of CMP and offset printing paper sold decreased by 43,314 tonnes in the nine months of 2022 as compared to
the same period of 2021. We sold 1,040 tonnes of tissue paper products in the nine months of 2022 as opposed to 5,963 tonnes in the
same period of 2021. Production of CMP was suspended during January and February 2022 and offset printing paper suspended during the
year. Production was restricted during Winter Olympics held in Beijing in 2022 and COVID-19 as required by the government. The
changes in revenue and quantity sold for the nine months ended September 30, 2022 and 2021 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, 2022 | | |
September 30, 2021 | | |
Change in | | |
Change | |
Sales Revenue | |
Quantity (Tonne) | | |
Amount | | |
Quantity (Tonne) | | |
Amount | | |
Quantity (Tonne) | | |
Amount | | |
Quantity | | |
Amount | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Regular CMP | |
| 139,036 | | |
$ | 65,015,400 | | |
| 156,080 | | |
$ | 78,417,279 | | |
| (17,044 | ) | |
$ | (13,401,879 | ) | |
| -10.92 | % | |
| -17.09 | % |
Light-Weight CMP | |
| 27,990 | | |
$ | 12,660,338 | | |
| 33,658 | | |
$ | 16,436,588 | | |
| (5,668 | ) | |
$ | (3,776,250 | ) | |
| -16.84 | % | |
| -22.97 | % |
Total CMP | |
| 167,026 | | |
$ | 77,675,738 | | |
| 189,738 | | |
$ | 94,853,867 | | |
| (22,712 | ) | |
$ | (17,178,129 | ) | |
| -11.97 | % | |
| -18.11 | % |
Offset Printing Paper | |
| - | | |
$ | - | | |
| 20,602 | | |
$ | 14,095,393 | | |
| (20,602 | ) | |
$ | (14,095,393 | ) | |
| -100.00 | % | |
| -100.00 | % |
Tissue Paper Products | |
| 1,040 | | |
$ | 1,102,933 | | |
| 5,963 | | |
| 6,491,234 | | |
| (4,923 | ) | |
$ | (5,388,301 | ) | |
| -82.56 | % | |
| -83.01 | % |
Total CMP, Offset Printing Paper and Tissue Paper Revenue | |
| 168,066 | | |
$ | 78,778,671 | | |
| 216,303 | | |
$ | 115,440,494 | | |
| (48,237 | ) | |
$ | (36,661,823 | ) | |
| -22.30 | % | |
| -31.76 | % |
ASPs for our main products in the nine-month period ended September
30, 2022 and 2021 are summarized as follows:
| |
Offset Printing Paper ASP | | |
Regular
CMP ASP | | |
Light-Weight CMP ASP | | |
Tissue Paper Products ASP | |
Nine Months Ended September 30, 2021 | |
$ | 684 | | |
$ | 502 | | |
$ | 488 | | |
$ | 1089 | |
Nine Months Ended September 30, 2022 | |
$ | 0 | | |
$ | 468 | | |
$ | 452 | | |
$ | 1061 | |
Decrease from comparable period in the previous year | |
$ | -684 | | |
$ | -34 | | |
$ | -36 | | |
$ | -28 | |
Decrease by percentage | |
| -100.00 | % | |
| -6.77 | % | |
| -7.38 | % | |
| -2.57 | % |
Revenue of Face Masks
Revenue generated from selling face masks were
$201,045 and $391,519 for the nine months ended September 30, 2022 and 2021. We sold 4,295 thousand pieces of face masks for the nine
months ended September 30, 2022, as compared to 9,650 thousand pieces in the comparable period of 2021, a decrease of 5,355 thousand pieces,
or 55.49%.
Cost of Sales
Total cost of sales for CMP, offset printing
paper and tissue paper products for the nine months ended September 30, 2022 was $75,102,330, a decrease of $33,723,073, or 30.99%,
from $108,825,403 for the nine months ended September 30, 2021. This was mainly a result of the decrease in sales volume of CMP and
offset printing paper and decrease of material costs of CMP. Cost of sales for CMP was $71,863,579 for the nine months ended
September 30, 2022, as compared to $89,766,509 in the same period of 2021.Cost of sales for tissue paper products was $3,238,751 for
the nine months ended September 30, 2022, as compared to $7,425,480 in the same period of 2021. Average cost of sales per tonne of
tissue paper products increased by 150.12%, from $1,245 for the nine months ended September 30, 2021, to $3,114 for the same period
of 2022. The increase in average cost of sales of tissue paper products was mainly due to the increase in average cost of tissue
base paper.
Changes in cost of sales and cost per tonne by product for the nine
months ended September 30, 2022 and 2021 are summarized below:
| |
Nine Months Ended | | |
Nine Months Ended | | |
| | |
| |
| |
September 30, 2022 | | |
September 30, 2021 | | |
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 | |
$ | 60,363,632 | | |
$ | 434 | | |
$ | 74,522,911 | | |
$ | 477 | | |
$ | (14,159,279 | ) | |
$ | (43 | ) | |
| -19.00 | % | |
| -9.01 | % |
Light-Weight CMP | |
$ | 11,499,947 | | |
$ | 411 | | |
$ | 15,243,598 | | |
$ | 453 | | |
$ | (3,743,651 | ) | |
$ | (42 | ) | |
| -24.56 | % | |
| -9.27 | % |
Total CMP | |
$ | 71,863,579 | | |
$ | 430 | | |
$ | 89,766,509 | | |
$ | 473 | | |
$ | (17,902,930 | ) | |
$ | (43 | ) | |
| -19.94 | % | |
| -9.09 | % |
Offset Printing Paper | |
$ | 0 | | |
$ | - | | |
$ | 11,633,414 | | |
$ | 565 | | |
$ | (11,633,414 | ) | |
$ | (565 | ) | |
| -100.00 | % | |
| -100.00 | % |
Tissue Paper Products | |
$ | 3,238,751 | | |
$ | 3,114 | | |
$ | 7,425,480 | | |
$ | 1,245 | | |
$ | (4,186,729 | ) | |
$ | 1,869 | | |
| -56.38 | % | |
| 150.12 | % |
Total CMP, Offset Printing Paper and Tissue Paper Revenue | |
$ | 75,102,330 | | |
$ | n/a | | |
$ | 108,825,403 | | |
$ | n/a | | |
$ | (33,723,073 | ) | |
$ | n/a | | |
| -30.99 | % | |
| n/a | % |
Gross Profit
Gross profit for the nine months ended September
30, 2022 was $3,728,070 (4.72% of the total revenue), representing a decrease of $2,953,491, or 44.20%, from the gross profit of $6,681,561
(5.77% of the total revenue) for the nine months ended September 30, 2021. The decrease was mainly due to (i) the decrease in quantities
sold of CMP, offset printing paper and tissue paper products, and (ii) the increase in material costs of 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, 2022 was $3,676,341, a decrease of $2,938,750, or 44.42%, from the gross
profit of $6,615,091 for the nine months ended September 30, 2021. The increase 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 1.06 percentage points, from 5.73% for the nine months ended September 30, 2021, to
4.67% for the nine months ended September 30, 2022.
Gross profit margin for regular CMP for the
nine months ended September 30, 2022 was 7.15%, or 2.18 percentage points higher, as compared to gross profit margin of 4.97% for
the nine months ended September 30, 2021. Such increase was primarily due to decrease in material costs, partially offset by the
decrease in ASP of regular CMP.
Gross profit margin for light-weight CMP for the
nine months ended September 30, 2022 was 9.17%, or 1.91 percentage points higher, as compared to gross profit margin of 7.26% for the
nine months ended September 30, 2021. Such increase was primarily due to the decrease in material costs, partially offset by the decrease
in ASP of light-weight CMP.
Gross profit margin for tissue paper
products was -193.65% for the nine months ended September 30, 2022, a decrease of 179.26 percentage points, as compared to -14.39%
for the nine months ended September 30, 2021. The decrease was mainly due to the increase in cost of tissue base paper.
Face Masks
Gross profit for face mask for the nine months
ended September 30, 2022 was $51,729, representing a gross margin of 25.73% compared with a gross profit of $66,469, representing a gross
margin of 16.98%, for the nine months ended September 30, 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
for the nine months ended September 30, 2022 were $8,541,224, an increase of $1,368,729, or 19.08% from $7,172,495 for the nine months
ended September 30, 2021. The increase was mainly due to 1,500,000 shares of common stock granted under our compensatory incentive plan
in August 2022, value at $1,560,000.
Loss from Operations
Operating loss for the nine months ended September
30, 2022 was $4,782,750, a decrease of $4,291,816, or 874.21%, from $490,934 for the nine months ended September 30, 2021. The decrease
was primarily due to the decrease in gross profit and increase in selling, general and administrative expenses.
Other Income and Expenses
Interest expense for the nine months ended September
30, 2022 decreased by $57,873, from $844,470 for the nine months ended September 30, 2021, to $786,597. The Company had short-term and
long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,681,595 as of September 30, 2022, as
compared to $16,377,758 as of September 30, 2021.
Gain on derivative liability
The Company analyzed warrants for derivative accounting
consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified
as a liability. 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 change in fair value of derivative liability for the nine months
ended September 30, 2022 and 2021 were $729,263 and $2,810,913, respectively.
Net Loss
As a result of the above, net loss was $4,663,445 for the nine
months ended September 30, 2022, representing a decrease of $1,413,917, or 43.51%, from $3,249,528 for nine months ended September 30,
2021.
Accounts Receivable
Net accounts receivable decreased by $632,635, or 12.99%, to $4,236,299
as of September 30, 2022, as compared with $4,868,934 as of December 31, 2021. We usually collect accounts receivable within 30 days of
delivery and completion of sales.
Inventories
Inventories consist of raw materials (accounting
for 79.98% of total value of inventory as of September 30, 2022), semi-finished goods and finished goods. As of September 30, 2022, the
recorded value of inventory decreased by 24.01% to $4,441,390 from $5,844,895 as of December 31, 2021. As of September 30, 2022, the inventory
of recycled paper board, which is the main raw material for the production of CMP, was $3,246,847, approximately $1,149,785, or 54.83%,
higher than the balance as of December 31, 2021. Due to the volatility of recycled paper board price, a minimum level of inventory was
maintained at the end of 2021.As a result of better control over stock turnover, finished goods were reduced by 78.72% as at September
30, 2022 as compared to finished goods at the end of 2021.
A summary of changes in major inventory items
is as follows:
| |
September 30, | | |
December 31, | | |
| | |
| |
| |
2022 | | |
2021 | | |
$ Change | | |
% Change | |
Raw Materials | |
| | |
| | |
| | |
| |
Recycled paper board | |
$ | 3,246,847 | | |
$ | 2,097,062 | | |
| 1,149,785 | | |
| 54.83 | % |
Recycled white scrap paper | |
| 10,603 | | |
| 11,808 | | |
| -1,205 | | |
| -10.20 | % |
Tissue base paper | |
| 59,505 | | |
| 38,745 | | |
| 20,760 | | |
| 53.58 | % |
Gas | |
| 80,319 | | |
| 32,753 | | |
| 47,566 | | |
| 145.23 | % |
Mask fabric and other raw materials | |
| 154,865 | | |
| 167,786 | | |
| -12,921 | | |
| -7.70 | % |
Total Raw Materials | |
| 3,552,139 | | |
| 2,348,154 | | |
| 1,203,985 | | |
| 51.27 | % |
| |
| | | |
| | | |
| | | |
| | |
Semi-finished Goods | |
| 165,707 | | |
| 96,087 | | |
| 69,620 | | |
| 72.46 | % |
Finished Goods | |
| 723,544 | | |
| 3,400,654 | | |
| -2,677,110 | | |
| -78.72 | % |
Total inventory, gross | |
| 4,441,390 | | |
| 5,844,895 | | |
| -1,403,505 | | |
| -24.01 | % |
Inventory reserve | |
| - | | |
| - | | |
| - | | |
| | |
Total inventory, net | |
$ | 4,441,390 | | |
$ | 5,844,895 | | |
| (1,403,505 | ) | |
| -24.01 | % |
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 $140,849 (RMB1,000,000). The lease agreement was renewed in August 2022 with a term of six years with the same
rental payments as provided for in the original lease agreement.
Capital Expenditure Commitment as of September 30, 2022
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, 2022, we had approximately
$7.1 million in capital expenditure commitments that were mainly related to the purchase of paper machine of PM10. The infrastructure
work of PM10 has been completed and the associated ancillary facilities are working in progress. 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$2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the
Leased Equipment to TLCL for 16 million (approximately US$2.5 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 $16) 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 payments due according to
the schedule. The balance of Leased Equipment net of amortization was $1,940,586 and $2,286,459 as of September 30, 2022 and December
31, 2021, respectively. The lease liability was $181,187 and $362,394, and its current portion in the amount of $181,187 and $210,161
as of September 30, 2022 and December 31, 2021, respectively.
Amortization of the Leased Equipment was $38,486
and $41,208 for the three months ended September 30, 2022 and 2021. Amortization of the Leased Equipment was $120,464 and $123,663 for
the nine months ended September 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $8,439 and $17,026 for
the three months ended September 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was $32,808 and $56,376
for the nine months ended September 30, 2022 and 2021.
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, 2022 was $16,017,403, an increase of $4,815,791, from $11,201,791 as of December 31, 2021. The increase of cash and cash
equivalents for the nine months ended September 30, 2022 was attributable to a number of factors including:
i. Net cash provided by (used in) operating activities
Net cash provided by operating activities was
$7,429,169 for the nine months ended September 30, 2022. The balance represented an increase of cash of $13,871,746, or 215.31%, from
$6,442,577 used in operating activities for the nine months ended September 30, 2021. Net loss for the nine months ended September 30,
2022 was $4,663,445, representing an increase of loss of $1,413,917, or 43.51%, from a net loss of $3,249,528 for the nine months ended
September 30, 2021. Changes in various asset and liability account balances throughout the nine months ended September 30, 2022 also contributed
to the net change in cash from operating activities in nine months ended September 30, 2022. Chief among such changes is the decrease
of accounts receivable in the amount of $146,250 during the nine months of 2022. There was also a decrease of $863,170 in the ending inventory
balance as of September 30, 2022 (an increase to net cash for the nine months ended September 30, 2022 cash flow purposes). In addition,
the Company had non-cash expenses relating to depreciation and amortization in the amount of $11,218,254. The Company also had a net increase
of $422,092 in prepayment and other current assets (a decrease to net cash) and a net increase of $808,380 in other payables and accrued
liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable of $265,493 (a decrease to net
cash) during the nine months ended September 30, 2022.
ii. Net cash used in investing activities
We incurred $8,189,410 in net cash
expenditures for investing activities during the nine months ended September 30, 2022, as compared to $12,781,114 for the same
period of 2021. Payments in 2022 were mainly for the last installments for the Tengsheng land acquisition.
iii. Net cash provided by financing activities
Net cash provided by financing activities
was $6,840,080 for the nine months ended September 30, 2022, as compared to net cash provided by financing activities in the amount
of $41,547,363 for the nine months ended September 30, 2021. A $6.6 million loan was repaid by a related party during the
period.
Short-term bank loans
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Industrial and Commercial Bank of China (“ICBC”) Loan 1 | |
$ | 5,069,157 | | |
$ | 5,958,561 | |
ICBC Loan 2 | |
| 422,547 | | |
| - | |
China Construction Bank Loan | |
| 140,849 | | |
| - | |
| |
| | | |
| | |
Total short-term bank loans | |
$ | 5,632,553 | | |
$ | 5,958,561 | |
On November 25, 2021, the Company entered into a working capital loan
agreement with the ICBC for a loan, with a balance of $5,069,157 and $5,958,561 as of September 30, 2022 and December 31, 2021, respectively.
The working capital loan was secured by the land use right of Dongfang Paper as collateral for the benefit of the bank and guaranteed
by Mr. Liu. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by November
17, 2022.
On June 28, 2022, the Company entered into a working
capital loan agreement with the ICBC for a loan, with a balance of $422,547 as of September 30, 2022. The loan bears a fixed interest
rate of 4.3% per annum. The loan will be due by December 25, 2022.
On July 29, 2022, the Company entered into a working capital loan agreement
with the China Construction Bank for a loan, with a balance of $140,849 as of September 30, 2022. The loan bears a fixed interest rate
of 3.95% per annum. The loan will be due by July 29, 2023.
As of September 30, 2022, there were guaranteed
short-term borrowings of $5,069,157 and unsecured bank loans of $563,396. As of December 31, 2021, there were guaranteed short-term borrowings
of $5,958,561 and unsecured bank loans of $nil.
The average short-term borrowing rates for the
three months ended September 30, 2022 and 2021 were approximately 4.28% and 4.79%. The average short-term borrowing rates for the nine
months ended September 30, 2022 and 2021 were approximately 4.6% and 4.79%.
Long-term loans from credit union
As of September 30, 2022 and December
31, 2021, loans payable to Rural Credit Union of Xushui District, amounted to $8,867,855 and $9,818,530, respectively.
On April 16, 2014, the Company entered into a
loan agreement with the Rural Credit Union of Xushui District for a loan with 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, 2022 and December 31, 2021, total outstanding loan balance was $1,211,302
and$1,348,871, respectively, Out of the total outstanding loan balance, current portion amounted were $647,906 and $329,376 as of September
30, 2022 and December 31, 2021, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining
balance of $563,396 and $1,019,495 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022
and December 31, 2021, respectively.
On July 15, 2013, the Company entered into a loan
agreement with the Rural Credit Union of Xushui District for a loan with 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 $460,107 and $1,130,333 as of September 30, 2022 and December 31, 2021, respectively. Interest payment
is due quarterly and bears a fixed rate of 0.64% per month. As of September 30, 2022 and December 31, 2021, the total outstanding loan
balance was $3,521,225 and $3,921,139, respectively. Out of the total outstanding loan balance, the current portion amounted $3,521,225
and $1,960,569 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated
balance sheet and the remaining balance of $nil and $1,960,570 are presented as non-current liabilities in the consolidated balance sheet
as of September 30, 2022 and December 31, 2021, respectively.
On April 17, 2019, the Company entered into a
loan agreement with the Rural Credit Union of Xushui District for a loan with a term of 2 years, which was due and payable in various
installments from August 21, 2019 to April 16, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional
3 years in total, which will be due on April 16, 2024 according to the new schedule. 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, 2022 and December 31, 2021, the total outstanding loan balance was $2,253,585 and $2,509,528, respectively. Out of
the total outstanding loan balance, current portion amounted were $nil and $2,509,528 as of September 30, 2022 and December 31, 2021 respectively,
which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,253,585 and $nil are presented
as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.
On December 12, 2019, the Company entered into
a loan agreement with the Rural Credit Union of Xushui District for a loan with a term of 2 years, which is due and payable in various
installments from June 21, 2020 to December 11, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional
3 years in total, which will be due on December 11, 2024 according to the new schedule. 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, 2022 and December 31, 2021, the total outstanding loan balance was $1,831,037 and $2,038,992, respectively.
Out of the total outstanding loan balance, current portion amounted were $nil and $2,038,992 as of September 30, 2022 and December 31,
2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,831,037
and $nil are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.
On July 1, 2022, the Company entered into a loan
agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowed RMB 400,000 from the customer for a term
of five years, which is payable in monthly installment of RMB10667 from July 2022 to July 2027. As of September 30, 2022, the total outstanding
loan balance was $50,706. Out of the total outstanding loan balance, current portion amounted was $6,489, which is presented as current
liabilities and the remaining balance of $44,217 is presented as non-current liabilities in the consolidated balance sheet as of September
30, 2022.
Total interest expenses for the short-term bank
loans and long-term loans for the three months ended September 30, 2022 and 2021 were $248,239 and $264,644, respectively. Total interest
expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2022 and 2021 were $753,789 and $788,094,
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 $361,044 and $402,047 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, 2022 and December 31, 2021, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided
a loan to the Company, amounted to $8,742,278 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, 2022 and December 31, 2021, approximately $42,255 and $47,054 of interest, respectively 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 $17,201,342 (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 was 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, 2022 and December 31, 2021, the outstanding interest
was $193,579 and $215,565, 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, 2022 and December 31, 2021,
total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans were $nil for the
three and nine months ended September 30, 2022 and 2021. The accrued interest owing to Mr. Zhenyong Liu was approximately $596,878 and
$664,666, as of September 30, 2022 and December 31, 2021, respectively, which was recorded in other payables and accrued liabilities.
On December 8, 2021, the Company entered an agreement
with Mr. Zhenyong Liu, which allows Mr. Zhenyong Liu to borrow from the Company an amount of $6,507,431 (RMB44,089,085). The loan is unsecured
and carries a fixed interest rate of 3% per annum. The loan was repaid by Mr. Zhenyong Liu in February 2022.
As of September 30, 2022 and December 31, 2021,
amount due to shareholder was $727,433, 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, 2022 and 2021,
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, 2022 and December 31, 2021 to translate the Chinese RMB to the U.S. Dollars are 7.0998:1 and 6.3757:1, respectively.
Revenues and expenses are translated using the prevailing average exchange rates at 6.6410:1 and 6.4682:1 for the three months ended September
30, 2022 and 2021, respectively. Translation adjustments are included in other comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor for Baoding Huanrun
Trading Co., for its long-term bank loans in an amount of $4,366,320 (RMB31,000,000), which matures at various times in 2023. Baoding
Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and
negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially
adversely affected. Except as aforesaid, we have no material off-balance sheet transactions.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment
methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of
reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit
loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after
December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit
Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller
reporting companies applying the CECL standards. The ASU is effective for reporting periods beginning after December 15, 2022 and interim
periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13
on our condensed consolidated financial statements.