UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-34577
IT TECH PACKAGING, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 20-4158835 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | identification No.) |
Science Park, Juli Rd, Xushui District, Baoding City
Hebei Province, The People’s Republic of China 072550
(Address of principal executive offices and Zip Code)
011 - (86) 312-8698215
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 | ITP | NYSE MKT |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
As of May 14, 2020, there were 28,454,816 shares of the registrant’s common stock, par value $0.001, outstanding.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2020 AND DECEMBER 31, 2019
(Unaudited)
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and bank balances | $ | 11,712,152 | $ | 5,837,745 | ||||
| Restricted cash | - | - | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $36,645 and $59,922 as of March 31, 2020 and December 2019, respectively) | 1,795,671 | 3,119,311 | ||||||
| Inventories | 1,951,376 | 1,607,463 | ||||||
| Prepayments and other current assets | 6,054,096 | 11,613,241 | ||||||
| Due from related parties | 120,744 | 1,863,479 | ||||||
| Total current assets | 21,634,039 | 24,041,239 | ||||||
| Prepayment on property, plant and equipment | 1,411,413 | 1,433,445 | ||||||
| Property, plant, and equipment, net | 145,805,724 | 151,616,852 | ||||||
| Value-added tax recoverable | 2,547,211 | 2,621,841 | ||||||
| Deferred tax asset non-current | 10,857,911 | 10,485,053 | ||||||
| Total Assets | $ | 182,256,298 | $ | 190,198,430 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | $ | 6,069,075 | $ | 6,163,814 | ||||
| Current portion of long-term loans from credit union | 1,580,782 | 1,605,459 | ||||||
| Accounts payable | 205,769 | 250,486 | ||||||
| Advance from customers | 151,016 | 98,311 | ||||||
| Notes payable | - | - | ||||||
| Due to related parties | 617,433 | 539,985 | ||||||
| Accrued payroll and employee benefits | 225,993 | 291,924 | ||||||
| Other payables and accrued liabilities | 5,182,548 | 6,503,010 | ||||||
| Income taxes payable | - | 1,382,471 | ||||||
| Total current liabilities | 14,032,616 | 16,835,460 | ||||||
| Loans from credit union | 7,254,661 | 7,367,908 | ||||||
| Loans from a related party | - | - | ||||||
| Other long-term payable | - | - | ||||||
| Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $16,342,512 and $19,460,257 as of March 31, 2020 and December 31, 2019, respectively) | 21,287,277 | 24,203,368 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, 500,000,000 shares authorized, $0.001 par value per share, 22,054,816 shares issued | 22,685 | 22,685 | ||||||
| Additional paid-in capital | 51,154,544 | 51,154,544 | ||||||
| Statutory earnings reserve | 6,080,574 | 6,080,574 | ||||||
| Accumulated other comprehensive loss | (8,647,291 | ) | (6,057,537 | ) | ||||
| Retained earnings | 112,358,509 | 114,794,796 | ||||||
| Total stockholders’ equity | 160,969,021 | 165,995,062 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 182,256,298 | $ | 190,198,430 | ||||
See accompanying notes to condensed consolidated financial statements.
1
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues | $ | 8,743,851 | $ | 17,450,292 | ||||
| Cost of sales | (8,913,570 | ) | (17,642,758 | ) | ||||
| Gross Loss | (169,719 | ) | (192,466 | ) | ||||
| Selling, general and administrative expenses | (2,696,963 | ) | (2,981,473 | ) | ||||
| Loss from Operations | (2,866,682 | ) | (3,173,939 | ) | ||||
| Other Income (Expense): | ||||||||
| Interest income | 5,790 | 58,818 | ||||||
| Subsidy income | 142,998 | - | ||||||
| Interest expense | (244,718 | ) | (255,269 | ) | ||||
| Loss before Income Taxes | (2,962,612 | ) | (3,370,390 | ) | ||||
| Provision for Income Taxes | 526,325 | 647,795 | ||||||
| Net Loss | (2,436,287 | ) | (2,722,595 | ) | ||||
| Other Comprehensive (Loss) Income | ||||||||
| Foreign currency translation adjustment | (2,589,754 | ) | 3,293,680 | |||||
| Total Comprehensive (Loss) Income | $ | (5,026,041 | ) | $ | 571,085 | |||
| Losses Per Share: | ||||||||
| Basic and Diluted Losses per Share | $ | (0.11 | ) | $ | (0.12 | ) | ||
| Outstanding – Basic and Diluted | 22,054,816 | 22,022,316 | ||||||
See accompanying notes to condensed consolidated financial statements.
2
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | (2,436,287 | ) | $ | (2,722,595 | ) | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,774,674 | 3,930,060 | ||||||
| Allowance for bad debts | (22,650 | ) | (10,704 | ) | ||||
| Deferred tax | (541,042 | ) | (647,795 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,315,128 | 535,220 | ||||||
| Prepayments and other current assets | 5,486,216 | 187,711 | ||||||
| Inventories | (373,470 | ) | (1,181,371 | ) | ||||
| Accounts payable | (41,405 | ) | 1,009,834 | |||||
| Advance from customers | 54,930 | - | ||||||
| Notes payable | - | (3,726,504 | ) | |||||
| Related parties | 1,814,228 | 37,265 | ||||||
| Accrued payroll and employee benefits | (62,252 | ) | 87,823 | |||||
| Other payables and accrued liabilities | (728,633 | ) | (326,741 | ) | ||||
| Income taxes payable | (1,379,130 | ) | (224,355 | ) | ||||
| Net Cash Provided by (Used in) Operating Activities | 6,860,307 | (3,052,152 | ) | |||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property, plant and equipment | (756,514 | ) | (1,415,761 | ) | ||||
| Net Cash Used in Investing Activities | (756,514 | ) | (1,415,761 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from short term bank loans | - | 4,024,625 | ||||||
| Repayment of bank loans | - | (9,390,791 | ) | |||||
| Net Cash Used in Financing Activities | - | (5,366,166 | ) | |||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | (229,386 | ) | 341,713 | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 5,874,407 | (9,492,366 | ) | |||||
| Cash, Cash Equivalents and Restricted Cash - Beginning of Period | 5,837,745 | 12,117,425 | ||||||
| Cash, Cash Equivalents and Restricted Cash - End of Period | $ | 11,712,152 | $ | 2,625,059 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest, net of capitalized interest cost | $ | 116,019 | $ | 230,953 | ||||
| Cash paid for income taxes | $ | 1,379,130 | $ | 224,355 | ||||
| Cash and bank balances | 11,712,152 | 2,625,059 | ||||||
| Restricted cash | - | - | ||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | 11,712,152 | 2,625,059 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Statutory | Other | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Earnings | Comprehensive | Retained | ||||||||||||||||||||||||
| Shares | Amount | Capital | Reserve | Income (loss) | Earnings | Total | ||||||||||||||||||||||
| Balance at December 31, 2019 | 22,054,816 | $ | 22,685 | $ | 51,154,544 | $ | 6,080,574 | $ | (6,057,537 | ) | $ | 114,794,796 | $ | 165,995,062 | ||||||||||||||
| Foreign currency translation adjustment | (2,589,754 | ) | (2,589,754 | ) | ||||||||||||||||||||||||
| Net loss | (2,436,287 | ) | (2,436,287 | ) | ||||||||||||||||||||||||
| Balance at March 31, 2020 | 22,054,816 | $ | 22,685 | $ | 51,154,544 | $ | 6,080,574 | $ | (8,647,291 | ) | $ | 112,358,509 | $ | 160,969,021 | ||||||||||||||
4
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Business Background
IT Tech Packaging, Inc. (the “Company”) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding Dongfang Paper Milling Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and effective December 21, 2007, we changed our name to “Orient Paper, Inc.”.
Effective on August 1, 2018, we changed our corporate name to IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. In connection with the name change, our common stock began being traded under a new NYSE symbol, “ITP,” and a new CUSIP number, 46527C100, at such time.
On October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang Zhiye Holding Limited (“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British Virgin Islands, and issued the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse stock split effected in November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders of Dongfang Holding in accordance with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement, Dongfang Holding owned all of the issued and outstanding stock and ownership of Dongfang Paper and such shares of Dongfang Paper were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of Dongfang Paper’s shares. As a result of the merger transaction, Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned subsidiary, Dongfang Paper, became an indirectly owned subsidiary of the Company.
Dongfang Holding, as the 100% owner of Dongfang Paper, was unable to complete the registration of Dongfang Paper’s capital under its name within the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions described below, Dongfang Holding directed the trustees to return the shares of Dongfang Paper to their original shareholders, and the original Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”) to transfer the control of Dongfang Paper over to Baoding Shengde.
On June 24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued and outstanding shares of Shengde Holdings Inc, a Nevada corporation. Shengde Holdings Inc was incorporated in the State of Nevada on February 25, 2009. On June 1, 2009, Shengde Holdings Inc incorporated Baoding Shengde, a limited liability company organized under the laws of the PRC. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as a wholly foreign-owned entity under PRC law.
5
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 is 100% owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80% of Dongfang Paper’s total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal amount of $10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each owner’s equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Dongfang Paper or with respect to any equity owner action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as long as Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. An Dongfang Paper Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009, and continued to control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements is considered as a business combination under common control.
On February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through Baoding Shengde instead of Dongfang Paper, the $10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over Dongfang Paper and its businesses in the PRC.
An agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010, reiterating that Baoding Shengde is entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the above mentioned Contractual Agreements. In addition, Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s unappropriated earnings as dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and thereafter.
On June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. Upon full payment of the consideration in the amount of RMB 320 million (approximately $45 million), Hebei Tengsheng will become a wholly owned subsidiary of Dongfang Paper that manufactures and sells tissue paper products.
The Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang Paper being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”). The revenue generated from Dongfang Paper for the three months ended March 31, 2020 and 2019 was accounted for 100% of the Company’s total revenue. Dongfang Paper also accounted for 90.02% and 91.01% of the total assets of the Company as of March 31, 2020 and December 31, 2019, respectively.
6
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 2020 and December 31, 2019, details of the Company’s subsidiaries and variable interest entities are as follows:
| Date of | Place of | |||||||||
| Incorporation | Incorporation or | Percentage of | ||||||||
| Name | or Establishment | Establishment | Ownership | Principal Activity | ||||||
| Subsidiary: | ||||||||||
| Dongfang Holding | November 13, 2006 | BVI | 100 | % | Inactive investment holding | |||||
| Shengde Holdings | February 25, 2009 | State of Nevada | 100 | % | Investment holding | |||||
| Baoding Shengde | June 1, 2009 | PRC | 100 | % | Paper production and distribution | |||||
| Variable interest entity (“VIE”): | ||||||||||
| Dongfang Paper | March 10, 1996 | PRC | Control* | Paper production and distribution | ||||||
| * | Dongfang Paper is treated as a 100% controlled variable interest entity of the Company. |
However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the aforementioned agreements.
In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or being required to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote.
7
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 March 31, 2020 and December 31, 2019 are as follows:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and bank balances | $ | 9,786,499 | $ | 5,675,374 | ||||
| Restricted cash | - | - | ||||||
| Accounts receivable | 1,795,671 | 3,119,312 | ||||||
| Inventories | 1,947,019 | 1,603,038 | ||||||
| Prepayments and other current assets | 6,051,551 | 11,610,576 | ||||||
| Due from related parties | 120,744 | 1,863,479 | ||||||
| Total current assets | 19,701,484 | 23,871,779 | ||||||
| Prepayment on property, plant and equipment | 1,411,413 | 1,433,445 | ||||||
| Property, plant, and equipment, net | 133,697,308 | 138,920,440 | ||||||
| Deferred tax asset non-current | 9,257,440 | 8,869,385 | ||||||
| Total Assets | $ | 164,067,645 | $ | 173,095,049 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | $ | 6,069,075 | $ | 6,163,814 | ||||
| Current portion of long-term loans from credit union | 310,511 | 315,358 | ||||||
| Accounts payable | 205,768 | 250,486 | ||||||
| Due to related parties | 56,552 | |||||||
| Accrued payroll and employee benefits | 224,922 | 287,584 | ||||||
| Other payables and accrued liabilities | 5,100,400 | 6,502,974 | ||||||
| Income taxes payable | - | 1,382,471 | ||||||
| Total current liabilities | 11,910,676 | 14,959,239 | ||||||
| Loans from credit union | 4,431,836 | 4,501,018 | ||||||
| Total liabilities | $ | 16,342,512 | $ | 19,460,257 | ||||
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.
8
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019 of the Company, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “the Company”, “we”, “us” or “our”).
Principles of Consolidation
Our unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of March 31, 2020 and the results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for any future period.
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.
Valuation of long-lived asset
The Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
Fair Value Measurements
The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
9
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 March 31, 2020 and December 31, 2019, the carrying value of the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank of China.
The Company does not have any assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.
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 March 31, 2020 and December 31, 2019.
10
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 March 31, 2020 and December 31, 2019:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Raw Materials | ||||||||
| Recycled paper board | $ | 727,392 | $ | 40,032 | ||||
| Recycled white scrap paper | 10,379 | 10,541 | ||||||
| Coal & gas | 45,691 | 41,675 | ||||||
| Base paper and other raw materials | 235,931 | 293,935 | ||||||
| 1,019,392 | 386,183 | |||||||
| Semi-finished Goods | 145,259 | 83,266 | ||||||
| Finished Goods | 855,431 | 1,212,849 | ||||||
| Total inventory, gross | 2,020,083 | 1,682,298 | ||||||
| Inventory reserve | (68,706 | ) | (74,835 | ) | ||||
| Total inventory, net | $ | 1,951,376 | $ | 1,607,463 | ||||
(5) Prepayments and other current assets
Prepayments and other current assets consisted of the following as of March 31, 2020 and December 31, 2019:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Prepaid land lease | $ | 169,370 | $ | 301,023 | ||||
| Prepayment for purchase of materials | 218,785 | 5,394,297 | ||||||
| Value-added tax recoverable | 5,579,872 | 5,666,975 | ||||||
| Others | 86,069 | 250,946 | ||||||
| $ | 6,054,096 | $ | 11,613,241 | |||||
(6) Property, plant and equipment, net
As of March 31, 2020 and December 31, 2019, property, plant and equipment consisted of the following:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Property, Plant, and Equipment: | ||||||||
| Land use rights | $ | 11,509,449 | $ | 11,689,114 | ||||
| Building and improvements | 69,723,406 | 70,811,803 | ||||||
| Machinery and equipment | 150,603,073 | 152,954,020 | ||||||
| Vehicles | 578,771 | 587,806 | ||||||
| Construction in progress | 6,546,542 | 6,399,986 | ||||||
| Totals | 238,961,241 | 242,442,729 | ||||||
| Less: accumulated depreciation and amortization | (93,155,517 | ) | (90,825,877 | ) | ||||
| Property, Plant and Equipment, net | $ | 145,805,724 | $ | 151,616,852 | ||||
As of March 31, 2020 and December 31, 2019, land use rights represented two parcel of state-owned lands located in Xushui District and Wei County of Hebei Province in China, with lease terms of 50 years expiring in 2061 and 2066, respectively.
11
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Construction in progress mainly represents payments for improvement of the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”).
As of March 31, 2020 and December 31, 2019, certain property, plant and equipment of Dongfang Paper with net values of $3,443,097 and $3,935,270, respectively, have been pledged pursuant to a long-term loan from credit union for Dongfang Paper. Land use right of Dongfang Paper with net values of $5,635,572 and $5,757,546 as of March 31, 2020 and December 31, 2019, respectively, was pledged for the bank loan from Industrial & Commercial Bank of China. Land use right of Hebei Tengsheng with net value of $5,120,520 and $5,200,452 as of March 31, 2020 and December 31, 2019, respectively, was pledged for a long-term loan from credit union of Baoding Shengde. In addition, land use right of Hebei Tengsheng with net value of $7,933,093 and $8,056,930 as of March 31, 2020 and December 31, 2019, respectively, was pledged for another long-term loan from credit union of Baoding Shengde. See “Short-term bank loans” and Long-term loans from credit union under Note (7), Loans Payable, for details of the transaction and asset collaterals.
Depreciation and amortization of property, plant and equipment was $3,774,674 and $3,930,060 for the three months ended March 31, 2020 and 2019, respectively.
(7) Loans Payable
Short-term bank loans
| March 31, | December 31, | |||||||||
| 2020 | 2019 | |||||||||
| Industrial and Commercial Bank of China (“ICBC”) Loan 1 | (a) | $ | 6,069,075 | $ | 6,163,814 | |||||
| Total short-term bank loans | $ | 6,069,075 | $ | 6,163,814 | ||||||
On December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,069,075 and $6,163,814 as of March 31, 2020 and December 31, 2019, respectively. The working capital loan was secured by land use right of Hebei Tengsheng as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid by December 23, 2020.
As of March 31, 2020, there were guaranteed short-term borrowings of $6,069,075 and unsecured bank loans of $nil. As of December 31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil.
The average short-term borrowing rates for the three months ended March 31, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.
12
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-term loans from credit union
As of March 31, 2020 and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443 and $8,973,367, respectively.
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Rural Credit Union of Xushui District Loan 1 | $ | 1,213,815 | $ | 1,232,763 | ||||
| Rural Credit Union of Xushui District Loan 2 | 3,528,532 | 3,583,613 | ||||||
| Rural Credit Union of Xushui District Loan 3 | 2,258,260 | 2,293,512 | ||||||
| Rural Credit Union of Xushui District Loan 4 | 1,834,836 | 1,863,479 | ||||||
| Total | 8,835,443 | 8,973,367 | ||||||
| Less: Current portion of long-term loans from credit union | (1,580,782 | ) | (1,605,459 | ) | ||||
| Long-term loans from credit union | $ | 7,254,661 | $ | 7,367,908 | ||||
As of March 31, 2020, the Company’s long-term debt repayments for the next five years were as follows:
| Amount | ||||
| Fiscal year | ||||
| Remainder of 2020 | $ | 1,580,782 | ||
| 2021 | 3,020,423 | |||
| 2022 | 1,552,554 | |||
| 2023 | 2,681,684 | |||
| Total | 8,835,443 | |||
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 March 31, 2020 and December 31, 2019, total outstanding loan balance was $1,213,815 and $1,232,763, respectively. Out of the total outstanding loan balance, current portion amounted were $141,141 and $143,345 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,072,674 and $1,089,418 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $3,443,097 and $3,935,270 as of March 31, 2020 and December 31, 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of March 31, 2020 and December 31, 2019, the total outstanding loan balance was $3,528,532 and $3,583,613, respectively. Out of the total outstanding loan balance, current portion amounted were $169,370 and $172,013 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,359,162 and $3,411,600 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of March 31, 2020 and December 31, 2019, the total outstanding loan balance was $2,258,260 and $2,293,512, respectively. Out of the total outstanding loan balance, current portion amounted were $1,129,130 and $1,146,756 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,129,130 and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
13
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of March 31, 2020 and December 31, 2019, the total outstanding loan balance was $1,834,836 and $1,863,479, respectively. Out of the total outstanding loan balance, current portion amounted were $141,141 and $143,345 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,693,695 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2020 and 2019 were $244,718 and $230,953, respectively.
(8) Related Party Transactions
Mr. Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $361,793 and $367,441 of interest were outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of March 31, 2020 and December 31, 2019, approximately $42,342 and $43,003 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $16,936,952 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the company paid off the remaining balance, together with interest of 94,636. As of March 31, 2020 and December 31, 2019, the outstanding loan balance were $nil and the accrued interest was $193,981 and $197,009, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
As of March 31, 2020 and December 31, 2019, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil and $24,316 for the three months ended March 31, 2020 and 2019, respectively. The accrued interest owed to the CEO was approximately $598,116 and $607,453, as of March 31, 2020 and December 31, 2019, respectively, which was recorded in other payables and accrued liabilities.
As of March 31, 2020 and December 31, 2019, amount due to shareholder are $617,433 and $483,433, respectively, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.
Lease of Headquarters Compound Real Properties from a Related Party
On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million, respectively. Sales of the LUR and the Industrial Buildings were completed in year 2013.
In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $142,998 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same rental payment as original lease agreement.
14
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Other payables and accrued liabilities
Other payables and accrued liabilities consist of the following:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accrued electricity | $ | 79,199 | $ | 129,466 | ||||
| Value-added tax payable | 122,423 | 854,728 | ||||||
| Accrued interest to a related party | 598,116 | 607,453 | ||||||
| Payable for purchase of equipment | 3,373,783 | 3,936,047 | ||||||
| Accrued commission to salesmen | 7,545 | 17,162 | ||||||
| Accrued bank loan interest | 127,027 | - | ||||||
| Others | 874,455 | 958,154 | ||||||
| Totals | $ | 5,182,548 | $ | 6,503,010 | ||||
(10) Common Stock
Issuance of common stock to investors
On August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our common stock (the “Offering”). Each share of common stock and accompanying warrant was sold at a price of $1.60.
Issuance of common stock pursuant to the 2012 Incentive Stock Plan and 2015 Omnibus Equity Incentive
On January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans to nine officers, directors and employees of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416 shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus Equity Incentive. Please see Note (14), Stock Incentive Plans for more details. Total fair value of the stock was calculated at $1,417,395 as of the date of grant.
On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen officers, directors and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance.
Issuance of common stock to Weitian
On October 15, 2018, the Company entered an agreement with Weitian Group LCC (“Weitian”) and agreed as compensation to issue to Weitian in the aggregate of 70,000 shares of common stock for investor relation consulting service rendered from October 15, 2018 to October 15, 2019. 37,500 shares of common stock were issued to Weitian on November 12, 2018. Total fair value of the shares of common stock granted was calculated at $32,625 at $0.87 per share. 32,500 shares of common stock were issued to Weitian on August 13, 2019. Total fair value of the shares of common stock granted was calculated at $17,550 at $0.54 per share.
15
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) Earnings Per Share
For the three months ended March 31, 2020 and 2019, basic and diluted net income per share are calculated as follows:
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Basic loss per share | ||||||||
| Net loss for the period - numerator | $ | (2,436,287 | ) | $ | (2,722,595 | ) | ||
| Weighted average common stock outstanding - denominator | 22,054,816 | 22,022,316 | ||||||
| Net loss per share | $ | (0.11 | ) | $ | (0.12 | ) | ||
| Diluted income per share | ||||||||
| Net income for the period- numerator | $ | (2,436,287 | ) | $ | (2,722,595 | ) | ||
| Weighted average common stock outstanding - denominator | 22,054,816 | 22,022,316 | ||||||
| Effect of dilution | - | - | ||||||
| Weighted average common stock outstanding - denominator | 22,054,816 | 22,022,316 | ||||||
| Diluted loss per share | $ | (0.11 | ) | $ | (0.12 | ) | ||
For the three months ended March 31, 2020 and 2019 there were no securities with dilutive effect issued and outstanding.
16
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) Income Taxes
United States
The Company and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJAAct”), which significantly changed U.S. tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA.
In connection with the Company’s initial analysis of the impact of the enactment of the 2017 TCJA, the Company recorded a net tax expense of approximately $80,000 in the fourth quarter of 2017. For various reasons that are discussed more fully below, including the issuance of additional technical and interpretive guidance, the Company has not completed its accounting for the income tax effects of certain elements of the 2017 TCJA. However, with respect to the following, the Company was able to make reasonable estimates of the 2017 TCJA’s effects and, as such, recorded provisional amounts:
Transition tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional income tax expense of approximately $80,000 in the fourth quarter of 2017. However, the Company is continuing to gather additional information and will consider additional technical guidance to more precisely compute and account for the amount of the transition tax. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable over eight years beginning in 2018. Hence, the Company only provided $6,528 for the year ended 31 December 2017.
PRC
Dongfang Paper and Baoding Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.
The provisions for income taxes for three months ended March 31, 2020 and 2019 were as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Provision for Income Taxes | ||||||||
| Current Tax Provision U.S. | $ | 14,717 | $ | - | ||||
| Current Tax Provision PRC | - | - | ||||||
| Deferred Tax Provision PRC | (541,042 | ) | (647,795 | ) | ||||
| Total Provision for (Deferred tax benefit)/ Income Taxes | $ | (526,325 | ) | $ | (647,795 | ) | ||
17
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to the reversible future PRC income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset depreciation, the Company was incorporated in the United States and incurred aggregate net operating losses of approximately $nil and $6,710,939 for U.S. income tax purposes for the years ended December 31, 2018 and 2017, respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized, during the period of 2030 through 2035. As of December 31, 2019, management believed that the realization of all the U.S. income tax benefits from these losses, which generally would generate a deferred tax asset if it can be expected to be utilized in the future, appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, As of December 31, 2019, the Company provided a 100% valuation allowance on the U.S. deferred tax asset benefit to reduce the total deferred tax asset to the amount realizable for the PRC income tax purposes. Management reviews this valuation allowance periodically and will make adjustments as warranted. A summary of the otherwise deductible (or taxable) deferred tax items is as follows:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Deferred tax assets (liabilities) | ||||||||
| Depreciation and amortization of property, plant and equipment | $ | 9,699,121 | $ | 9,277,009 | ||||
| Impairment of property, plant and equipment | 509,875 | 521,803 | ||||||
| Miscellaneous | 413,352 | 277,511 | ||||||
| Net operating loss carryover of PRC company | 235,563 | 408,730 | ||||||
| Total deferred tax assets | 10,857,911 | 10,485,053 | ||||||
| Less: Valuation allowance | - | - | ||||||
| Total deferred tax assets, net | $ | 10,857,911 | $ | 10,485,053 | ||||
The following table reconciles the statutory rates to the Company’s effective tax rate for:
| Three Months Ended | ||||||||
| March 31 | ||||||||
| 2020 | 2019 | |||||||
| PRC Statutory rate | 25.0 | % | 25.0 | % | ||||
| Effect of different tax jurisdiction | - | - | ||||||
| Effect of reconciling items in the PRC for tax purposes | (7.2 | ) | 2.2 | |||||
| Change in valuation allowance | - | (8.0 | ) | |||||
| Effective income tax rate | 17.8 | % | 19.2 | % | ||||
During the three months ended March 31, 2020 and 2019, the effective income tax rate was estimated by the Company to be 17.8% and 19.2%, respectively.
As of December 31, 2017, except for the one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated foreign E&Ps, the Company does not believe that its future dividend policy and the available U.S. tax deductions and net operating losses will cause the Company to recognize any other substantial current U.S. federal or state corporate income tax liability in the near future. Nor does it believes that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required.
The Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2019 and 2018, management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial statements for the years ended December 31, 2019 and 2018, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority.
18
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(13) Stock Incentive Plans
Issuance of common stock pursuant to the 2011 Incentive Stock Plan and 2012 Incentive Stock Plan
On August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance.
On September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012 ISP’s administration. On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which 265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $790,020 as of the date of grant.
2015 Incentive Stock Plan
On August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2015 ISP”) as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company may grant an aggregate of 1,500,000 shares of the Company’s common stock to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On January 12, 2016, the Compensation Committee granted restricted common shares of 1,133,916, of which 168,416 shares were granted under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors, employees and a consultant of the Company as compensation for their services in the past years. Total fair value of the stock was calculated at $1,417,395 as of the date of issuance at $1.25 per share.
On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors and employees of the Company, which were granted under the 2015 ISP. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance at $0.88 per share.
2019 Incentive Stock Plan
On October 31, 2019, the shareholders of the Company at the Company’s Annual Shareholders General Meeting adopted and approved the 2019 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2019 ISP”). Under the 2019 ISP, the Company has reserved a total of 2,000,000 shares of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries.
(14) Commitments and Contingencies
Operating Lease
The Company leases 32.95 acres of land from a local government in Xushui District, Baoding City, Hebei, China through a real estate lease with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,160 (RMB 120,000). This operating lease is renewable at the end of the 30-year term.
As mentioned in Note (8) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial Buildings back to the Company at an annual rental of $142,998 (RMB 1,000,000), for a total term of up to five years.
19
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future minimum lease payments of all operating leases are as follows:
| March 31, | Amount | |||
| 2021 | 158,078 | |||
| 2022 | 158,078 | |||
| 2023 | 13,811 | |||
| 2024 | 16,937 | |||
| 2025 | 16,937 | |||
| Thereafter | 114,324 | |||
| Total operating lease payments | $ | 478,166 | ||
Capital commitment
As of March 31, 2020, the Company has signed several contracts for improvement of Industrial Buildings. Total outstanding commitments under these contracts were $882,019 and $1,101,989 as of March 31, 2020 and December 31, 2019, respectively. The Company expected to pay off all the balances within 1 year.
On June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. The consideration for the acquisition is RMB 320 million (approximately $45 million), of which $1.4 million was paid by the Company, and the balance consideration of $43.6 million is payable by December 31, 2021.
Guarantees and Indemnities
The Company agreed with Baoding Huanrun Trading Co., a major supplier of raw materials, to guarantee certain obligations of this third party, and as of March 31, 2020 and December 31, 2019, the Company guaranteed its long-term loan from financial institutions amounting to $4,375,379 (RMB31,000,000) that matured at various times in 2020-2023. If Huanrun Trading Co., were to become insolvent, the Company could be materially adversely affected.
(15) 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 based on gross revenue generated. The operating segments do share facilities in Xushui District, Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC.
20
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information for the three reportable segments is as follows:
| Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
| Dongfang | Hebei | Baoding | Not Attributable | Elimination of | Enterprise-wide, | |||||||||||||||||||
| Paper | Tengsheng | Shengde | to Segments | Inter-segment | consolidated | |||||||||||||||||||
| Revenues | $ | 7,737,502 | $ | 1,006,349 | $ | - | $ | - | $ | - | $ | 8,743,851 | ||||||||||||
| Gross profit | 542,155 | (711,874 | ) | - | - | - | (169,719 | ) | ||||||||||||||||
| Depreciation and amortization | 1,506,627 | 2,135,371 | 132,676 | - | - | 3,774,674 | ||||||||||||||||||
| Interest income | 5,517 | 83 | 190 | - | - | 5,790 | ||||||||||||||||||
| Interest expense | 167,581 | - | 77,137 | - | - | 244,718 | ||||||||||||||||||
| Income tax expense(benefit) | (8,363 | ) | (522,916 | ) | (9,763 | ) | 14,717 | - | (526,325 | ) | ||||||||||||||
| Net income (loss) | (496,085 | ) | (1,594,938 | ) | (200,397 | ) | (144,867 | ) | - | (2,436,287 | ) | |||||||||||||
| Three Months Ended March 31, 2019 | ||||||||||||||||||||
| Dongfang | Baoding | Not Attributable | Elimination of | Enterprise-wide, | ||||||||||||||||
| Paper | Shengde | to Segments | Inter-segment | consolidated | ||||||||||||||||
| Revenues | $ | 17,450,292 | $ | - | $ | - | $ | - | $ | 17,450,292 | ||||||||||
| Gross profit | (192,466 | ) | - | - | - | (192,466 | ) | |||||||||||||
| Depreciation and amortization | 3,930,054 | 6 | - | - | 3,930,060 | |||||||||||||||
| Interest income | 58,727 | 91 | - | - | 58,818 | |||||||||||||||
| Interest expense | 212,876 | 42,393 | - | - | 255,269 | |||||||||||||||
| Income tax expense(benefit) | (622,304 | ) | (25,491 | ) | - | - | (647,795 | ) | ||||||||||||
| Net income (loss) | (2,440,828 | ) | (38,807 | ) | (242,960 | ) | - | (2,722,595 | ) | |||||||||||
| As of March 31, 2020 | ||||||||||||||||||||||||
| Dongfang | Hebei | Baoding | Not Attributable | Elimination | Enterprise-wide, | |||||||||||||||||||
| Paper | Tengsheng | Shengde | to Segments | of Inter-segment | consolidated | |||||||||||||||||||
| Total assets | $ | 67,512,415 | 96,555,230 | 18,151,252 | 37,401 | - | 182,256,298 | |||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||
| Dongfang | Hebei | Baoding | Not Attributable | Elimination | Enterprise-wide, | |||||||||||||||||||
| Paper | Tengsheng | Shengde | to Segments | of Inter-segment | consolidated | |||||||||||||||||||
| Total assets | $ | 73,347,811 | 99,747,236 | 17,031,392 | 71,991 | - | 190,198,430 | |||||||||||||||||
(16) Concentration and Major Customers and Suppliers
For the three months ended March 31, 2020, the Company had no single customer contributed over 10% of total sales.
For the three months ended March 31, 2019, the Company had no single customer contributed over 10% of total sales.
For the three months ended March 31, 2020, the Company had three major suppliers accounted for 70%, 11% and 9% of total purchases. For the three months ended March 31, 2019, the Company had three major suppliers accounted for 80%, 9% and 4% of total purchases.
21
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(17) 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 March 31, 2020 and December 31, 2019. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB500,000 (US$70,571) 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 March 31, 2020 and December 31, 2019, respectively, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB80,720,243 (US$11,392,957) as of March 31, 2020.
(18) Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various laws and restrictions.
Our business, financial condition and results of operations may be materially adversely affected by global health epidemics, including the recent COVID-19 outbreak.
Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. While the COVID-19 outbreak is still in relatively early stages, international stock markets have begun to reflect the uncertainty associated with the slow-down in the global economy and the reduced levels of international travel experienced since the beginning of January, large declines in oil prices and the significant decline in the Dow Industrial Average at the end of February and beginning of March 2020 was largely attributed to the effects of COVID-19. Any resulting financial impact cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. During the quarter ended March 31, 2020, our revenue was affected by the temporary suspension in production as a result of the pandemic outbreak. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.
(19) Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We do not expect the adoption of ASU 2019-12 to have a material impact on our condensed consolidated financial statements.
(20) Subsequent Event
On April 2, 2020, the compensation committee granted an aggregate of 2,000,000 shares of restricted common stock to fifteen officers, directors and employees of the Company, which were granted under the 2019 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share.
On April 29, 2020, the Company and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020, pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered direct offering and warrants to purchase up to 4,400,000 shares of the Company’s common stock in a concurrent private placement, for gross proceeds of approximately $2.55 million (net proceeds of approximately 2.27 million).
22
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 March 31, 2020 and 2019 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly report.
In this quarterly report, references to “the Company,” “we,” “our” and “us” refer to IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise.
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”, “may”, “should”, “will”, “would”, and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking statements. In evaluating the forward-looking statements contained in this report, you should consider various factors, including, without limitation, the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitably, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities laws.
Results of Operations
Comparison of the Three months ended March 31, 2020 and 2019
Revenue for the three months ended March 31, 2020 was $8,743,851, a decrease of $8,706,441, or 49.89%, from $17,450,292 for the same period in the previous year. This was mainly due to the decrease in sales volume and Average Selling Prices (ASPs) of CMP and tissue paper products.
23
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 March 31, 2020 was $8,743,851, a decrease of $8,706,441, or 49.89%, from $17,450,292 for the first quarter of 2019. Total offset printing paper, CMP and tissue paper products sold during the three months ended March 31, 2020 amounted to 19,862 tonnes, a decrease of 15,459 tonnes, or 43.77%, compared to 35,321 tonnes sold in the comparable period in the previous year. The decrease was mainly due to production suspension from mid-January 2020 to early March 2020 due to Chinese New Year and the COVID-19 pandemic outbreak. We resumed full capacity of CMP production in May 2020. The changes in revenue dollar amount and in quantity sold for the three months ended March 31, 2020 and 2019 are summarized as follows:
| Three Months Ended | Three Months Ended | Percentage | ||||||||||||||||||||||||||||||
| March 31, 2020 | March 31, 2019 | Change in | Change | |||||||||||||||||||||||||||||
| Sales Revenue | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity (Tonne) | Amount | Quantity | Amount | ||||||||||||||||||||||||
| Regular CMP | 13,788 | $ | 5,721,939 | 26,293 | $ | 12,224,879 | (12,505 | ) | $ | (6,502,940 | ) | -47.56 | % | -53.19 | % | |||||||||||||||||
| Light-Weight CMP | 4,889 | $ | 2,015,563 | 7,425 | $ | 3,365,132 | (2,536 | ) | $ | (1,349,569 | ) | -34.15 | % | -40.10 | % | |||||||||||||||||
| Total CMP | 18,677 | $ | 7,737,502 | 33,718 | $ | 15,590,011 | (15,041 | ) | $ | (7,852,509 | ) | -44.61 | % | -50.37 | % | |||||||||||||||||
| Offset Printing Paper | - | $ | - | - | $ | - | - | $ | - | % | % | |||||||||||||||||||||
| Tissue Paper Products | 1,185 | $ | 1,006,349 | 1,603 | $ | 1,860,281 | (418 | ) | $ | (853,932 | ) | -26.08 | % | -45.90 | % | |||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper Revenue | 19,862 | $ | 8,743,851 | 35,321 | $ | 17,450,292 | (15,459 | ) | $ | (8,706,441 | ) | -43.77 | % | -49.89 | % | |||||||||||||||||
Monthly sales revenue (excluding revenue from digital photo paper and tissue paper products) for the 24 months ended March 31, 2020, are summarized below:
The Average Selling Prices (ASPs) for our main products in the three months ended March 31, 2020 and 2019 are summarized as follows:
| Offset Printing Paper ASP | Regular CMP ASP | Light-Weight CMP ASP | Tissue Paper Products ASP | |||||||||||||
| Three Months ended March 31, 2019 | $ | - | $ | 465 | $ | 453 | $ | 1,160 | ||||||||
| Three Months ended March 31, 2020 | $ | - | $ | 415 | $ | 412 | $ | 849 | ||||||||
| Decrease from comparable period in the previous year | $ | - | $ | -50 | $ | -41 | $ | (311 | ) | |||||||
| Decrease by percentage | % | -10.75 | % | -9.05 | % | -26.81 | % | |||||||||
24
The following chart shows the month-by-month ASPs (excluding the ASPs of the digital photo paper and tissue paper products) for the 24-month period ended March 31, 2020:
Corrugating Medium Paper
Revenue from CMP amounted to $7,737,502 (88.49% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2020, representing a decrease of $7,852,509, or 50.37%, from $15,590,011 for the comparable period in 2019.
We sold 18,677 tonnes of CMP in the three months ended March 31, 2020 as compared to 33,718 tonnes for the same period in 2019, representing a 44.61% decrease in quantity sold.
ASP for regular CMP dropped from $465/tonne for the three months ended March 31, 2019 to $415/tonne for the three months ended March 31, 2020, representing a 10.75% decrease. ASP in RMB for regular CMP for the first quarter of 2019 and 2020 was RMB3,119 and RMB2,902, respectively, representing a 6.96% decrease. The quantity of regular CMP sold decreased by 12,505 tonnes, from 26,293 tonnes in the first quarter of 2019 to 13,788 tonnes in the first quarter of 2020.
ASP for light-weight CMP decreased from $453/tonne for the three months ended March 31, 2019 to $412/tonne for the three months ended March 31, 2020, representing a 9.05% decrease. ASP in RMB for light-weight CMP for the first quarter of 2019 and 2020 was RMB3,041 and RMB2,883, respectively, representing a 5.20% decrease. The quantity of light-weight CMP sold decreased by 2,536 tonnes, from 7,425 tonnes in the first quarter of 2019, to 4,889 tonnes in the first quarter of 2020.
Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the first quarter of 2020 and 2019 were 14.86% and 28.79%, respectively, representing a decrease of 13.93%.
25
Quantities sold for regular CMP that was produced by the PM6 production line from April 2018 to March 2020 are as follows:
Tissue Paper Products
We produce tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the brand “Qingmu”. In December 2018 and November 2019, we completed the construction, installation and test of operation of our PM8 and PM9 production lines. We launched the complete line of processing base tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue paper products with designated capacity of 15,000 tonnes/year.
Revenue from tissue paper products was $1,006,349 (11.51% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2020, representing a decrease of $853,932, or 45.90%, from $1,860,281 for the three months ended March 31, 2019. We sold 1,185 tonnes of tissue paper in the first quarter of 2020, as compared to 1,603 tonnes in the comparable period of 2019, representing a decrease of 418 tonnes, or 26.08%. Tissue paper production was suspended and resumed on February 20, 2020. As a result, the production and sales quantity of tissue paper products decreased in the three months ended March 31, 2020 as compared to the same period of 2019.
ASP for tissue paper products decreased from $1,160/tonne for the three months ended March 31, 2019 to $849/tonne for the three months ended March 31, 2020, representing a 26.81% decrease. ASP in RMB for tissue paper products for the first quarter of 2019 and 2020 was RMB7,786 and RMB5,941, respectively, representing a 23.70% decrease. The quantity of tissue paper products sold decreased by 418 tonnes, from 1,603 tonnes in the first quarter of 2019, to 1,185 tonnes in the first quarter of 2020.
Cost of Sales
Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended March 31, 2020 was $8,913,570, a decrease of $8,729,188, or 49.48%, from $17,642,758 for the comparable period in 2019. This was mainly due to the decrease in sales quantity of CMP, offset printing paper and tissue paper products and decrease in material costs.
Cost of sales for CMP was $7,195,348 for the quarter ended March 31, 2020, as compared to $15,816,086 for the comparable period in 2019. The decrease in the cost of sales of $8,620,739 for CMP was mainly due to the decrease in sales volume of CMP and decrease in average cost of sales. Average cost of sales per tonne for CMP decreased by 17.91%, from $469 in the first quarter of 2019 to $385 in the first quarter of 2020. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board in first quarter of 2020 compared to the first quarter of 2019.
Cost of sales for tissue paper products was $1,718,222 for the quarter ended March 31, 2020, as compared to $1,826,672 for the comparable period in 2019. The decrease in the cost of sales of $108,450 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 27.19%, from $1,140 in the three months ended March 31, 2019, to $1,450 for the comparable period in 2020. This is mainly due to higher average fixed costs per tonne (labor, depreciation and etc.) absorbed owning to low production quantity of PM8 and PM9 in the first quarter of 2020.
26
Changes in cost of sales and cost per tonne by product for the quarters ended March 31, 2020 and 2019 are summarized below:
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
| March 31, 2020 | March 31, 2019 | Change in | Change in percentage | |||||||||||||||||||||||||||||
| Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tonne | Cost of Sales | Cost per Tone | |||||||||||||||||||||||||
| Regular CMP | $ | 5,439,510 | $ | 395 | $ | 12,271,075 | $ | 467 | $ | (6,831,565 | ) | $ | (72 | ) | -55.67 | % | -15.42 | % | ||||||||||||||
| Light-Weight CMP | $ | 1,755,837 | $ | 359 | $ | 3,545,011 | $ | 477 | $ | (1,789,174 | ) | $ | (118 | ) | -50.47 | % | -24.74 | % | ||||||||||||||
| Total CMP | $ | 7,195,348 | $ | 385 | $ | 15,816,086 | $ | 469 | $ | (8,620,739 | ) | $ | (84 | ) | -54.51 | % | -17.91 | % | ||||||||||||||
| Offset Printing Paper | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | % | % | ||||||||||||||||||
| Tissue Paper Products | $ | 1,718,222 | $ | 1,450 | 1,826,672 | $ | 1,140 | $ | (108,450 | ) | $ | 310 | -5.94 | % | 27.19 | % | ||||||||||||||||
| Total CMP, Offset Printing Paper and Tissue Paper | $ | 8,913,570 | $ | n/a | $ | 17,642,758 | $ | n/a | $ | (8,729,188 | ) | $ | n/a | -49.48 | % | n/a | ||||||||||||||||
Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended March 31, 2020 were RMB1,388/tonne (approximately $198/tonne), as compared to RMB1,625/tonne (approximately $242/tonne) for the three months ended March 31, 2019. 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 April 2018 to March 2020 are shown below:
27
Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 8.7% of total sales in first quarter of 2020, respectively, compared to 9% and 10.2% of total sales in first quarter of 2019. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended March 31, 2020 are summarized as follows:
Gross Profit
Gross loss for the three months ended March 31, 2020 was $169,719 (1.94% of the total revenue), representing an increase of $22,747, or 11.82%, from the gross loss of $192,466 (1.10% of the total revenue) for the three months ended March 31, 2019, as a result of factors described above.
Offset Printing Paper, CMP and Tissue Paper Products
Gross loss for offset printing paper, CMP and tissue paper products for the three months ended March 31, 2020 was $169,719, an increase of $22,747, or 11.82%, from the gross loss of $192,466 for the three months ended March 31, 2019. 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 0.84 percentage points, from -1.10% for the three months ended March 31, 2019, to -1.94% for the three months ended March 31, 2020.
Gross profit margin for regular CMP for the three months ended March 31, 2020 was 4.94%, or 5.32 percentage points higher, as compared to gross profit margin of -0.38% for the three months ended March 31, 2019. Such increase was mainly due to the decrease in cost of recycled paper board, partially offset by the decrease in ASP of regular CMP in the first quarter of 2020.
Gross profit margin for light-weight CMP for the three months ended March 31, 2020 was 12.89%, or 18.24 percentage points higher, as compared to gross profit margin of -5.35% for the three months ended March 31, 2019. The increase was mainly due to decrease in cost of recycled paper board, partially offset by the decrease in ASP of light-weight CMP in the first quarter of 2020.
Gross profit margin for tissue paper products for the three months ended March 31, 2020 was -70.74%, or 72.55 percentage points lower, as compared to gross profit margin of 1.81% for the three months ended March 31, 2019. The decrease was mainly due to higher unit fixed cost absorbed as a result of lower volume of tissue paper produced in the first quarter of 2020.
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Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended March 31, 2020 are as follows:
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2020 were $2,696,963, a decrease of $284,510, or 9.54% from $2,981,473 for the three months ended March 31, 2019. The decrease was mainly due to a decrease in commission to sales staff and a depreciation of RMB against USD.
Income (Loss) from Operations
Operating loss for the quarter ended March 31, 2020 was $2,866,682, an increase of $307,257, or 9.68%, from $3,173,939 for the quarter ended March 31, 2019.
Other Income and Expenses
Interest expense for the three months ended March 31, 2020 decreased by $10,551, from $255,269 in the three months ended March 31, 2019, to $244,718. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,904,518 as of March 31, 2020, as compared to $16,247,123 as of March 31, 2019.
Subsidy income of $142,998 for the three month ended March 31, 2020 represents funding by the government to finance various expenditures during the COVID-19 pandemic period.
Net Income (Loss)
As a result and the factors discussed above, net loss was $2,436,287 for the quarter ended March 31, 2020, representing an increase of $286,308, or 10.52%, from net loss of $2,722,595 for the quarter ended March 31, 2019.
Accounts Receivable
Net accounts receivable decreased by $1,323,640, or 42.43%, to $1,795,671 as of March 31, 2020, as compared with $3,119,311 as of December 31, 2019. We usually collect accounts receivable within 30 days of delivery and completion of sales.
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Inventories
Inventories consist of raw materials (accounting for 50.46% of total value of inventory as of March 31, 2020), semi-finished goods and finished goods. As of March 31, 2020, the recorded value of inventory increased by 20.08% to $2,020,083 from $1,682,298 as of December 31, 2019. As of March 31, 2020, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $727,392, approximately $687,360, or 1717.03%, higher than the balance as of December 31, 2019. Due to the volatility of recycled paper board price, a minimum level of inventory was maintained at the end of 2019.
A summary of changes in major inventory items is as follows:
| March 31, | December 31, | |||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| Raw Materials | ||||||||||||||||
| Recycled paper board | $ | 727,392 | $ | 40,032 | 687,360 | 1717.03 | % | |||||||||
| Recycled white scrap paper | 10,379 | 10,541 | -162 | -1.54 | % | |||||||||||
| Tissue base paper | 72,675 | 122,648 | -49,973 | -40.75 | % | |||||||||||
| Coal & gas | 45,691 | 41,675 | 4,016 | 9.64 | % | |||||||||||
| Digital photo base paper and other raw materials | 163,256 | 171,287 | -8,031 | -4.69 | % | |||||||||||
| Total Raw Materials | 1,019,392 | 386,183 | 633,209 | 163.97 | % | |||||||||||
| Semi-finished Goods | 145,259 | 83,266 | 61,993 | 74.45 | % | |||||||||||
| Finished Goods | 855,431 | 1,212,849 | -357,418 | -29.47 | % | |||||||||||
| Total inventory, gross | 2,020,083 | 1,682,298 | 337,785 | 20.08 | % | |||||||||||
| Inventory reserve | (68,706 | ) | (74,835 | ) | 6,129 | -8.19 | % | |||||||||
| Total inventory, net | $ | 1,951,376 | $ | 1,607,463 | 343,913 | 21.39 | % | |||||||||
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Renewal of operating lease
On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $142,998 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as provided for in the original lease agreement. The accrued rental owed to Hebei Fangsheng was $nil and $56,552 as of March 31, 2020 and December 31, 2019, respectively, and such amounts were recorded as part of the current liabilities.
Capital Expenditure Commitment as of March 31, 2020
We finance our daily operations mainly by cash flows generated from our business operations. As of March 31, 2020, we had approximately $0.9 million in capital expenditure commitments that were mainly related to improvement of Industrial Buildings. These commitments are expected to be financed by bank loans and cash flows generated from our business operations.
Cash and Cash Equivalents
Our cash, cash equivalents and restricted cash as of March 31, 2020 was $11,712,152, an increase of $5,874,407, from $5,837,745 as of December 31, 2019. The increase of cash and cash equivalents for the three months ended March 31, 2020 was attributable to a number of factors:
i. Net cash provided by operating activities
Net cash provided by operating activities was $6,860,307 for the three months ended March 31, 2020. The balance represented an increase of cash of $9,912,459, or 324.77%, from $3,052,152 used in operating activities for the three months ended March 31, 2019. Net loss for the three months ended March 31, 2020 was $2,436,287, representing an increase of $286,308, or 10.52%, from a net loss of $2,722,595 for the three months ended March 31, 2019. Changes in various asset and liability account balances throughout the three months ended March 31, 2020 also contributed to the net change in cash from operating activities in three months ended March 31, 2020. Chief among such changes is the decrease of accounts receivable in the amount of $1,315,128 during the three months of 2020 (an increase to net cash). There was also an increase of $373,470 in the ending inventory balance as of March 31, 2020 (a decrease to net cash for the three months ended March 31, 2020 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $3,774,674. The Company also had a net decrease of $5,486,216 in prepayment and other current assets (an increase to net cash) and a net decrease of $1,023,343 in other payables and accrued liabilities and related party balances (an increase to net cash), as well as a decrease in income tax payable of $1,379,130 (a decrease to net cash) during the three months ended March 31, 2020.
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ii. Net cash used in investing activities
We incurred $756,514 in net cash expenditures for investing activities during the first three months of 2020, as compared to $1,415,761 for the same period of 2019. Payments in the three months ended March 31, 2020 were for the expenditures on improvement of industrial buildings.
iii. Net cash provided by financing activities
Net cash used in financing activities was $nil for the three months ended March 31, 2020, as compared to net cash used in financing activities in the amount of $5,366,166 for the three months ended March 31, 2019.
On April 29, 2020, the Company and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020, pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered direct offering and warrants to purchase up to 4,400,000 shares of the Company’s common stock in a concurrent private placement, for gross proceeds of approximately $2.55 million. The Company plans to raise additional capital through sales of the Company’s capital stock if necessary.
Short-term bank loans
| March 31, | December 31, | |||||||||||
| 2020 | 2019 | |||||||||||
| Industrial and Commercial Bank of China (“ICBC”) Loan 1 | (a) | $ | 6,069,075 | $ | 6,163,814 | |||||||
| Total short-term bank loans | $ | 6,069,075 | $ | 6,163,814 | ||||||||
On December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,069,075 and $6,163,814 as of March 31, 2020 and December 31, 2019, respectively. The working capital loan was secured by the land use right of Hebei Tengsheng as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid by December 23, 2020.
As of March 31, 2020, there were guaranteed short-term borrowings of $6,069,075 and unsecured bank loans of $nil. As of December 31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil.
The average short-term borrowing rates for the three months ended March 31, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.
Long-term loans from credit union
As of March 31, 2020 and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443 and $8,973,367, respectively.
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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 March 31, 2020 and December 31, 2019, total outstanding loan balance was $1,213,815 and $1,232,763, respectively. Out of the total outstanding loan balance, current portion amounted were $141,141 and $143,345 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,072,674 and $1,089,418 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $3,443,097 and $3,935,270 as of March 31, 2020 and December 31, 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of March 31, 2020 and December 31, 2019, the total outstanding loan balance was $3,528,532 and $3,583,613, respectively. Out of the total outstanding loan balance, current portion amounted were $169,370 and $172,013 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,359,162 and $3,411,600 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of March 31, 2020 and December 31, 2019, the total outstanding loan balance was $2,258,260 and $2,293,512, respectively. Out of the total outstanding loan balance, current portion amounted were $1,129,130 and $1,146,756 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,129,130 and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of March 31, 2020 and December 31, 2019, the total outstanding loan balance was $1,834,836 and $1,863,479, respectively. Out of the total outstanding loan balance, current portion amounted were $141,141 and $143,345 as of March 31, 2020 and December 31, 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,693,695 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2020 and 2019 were $244,718 and $230,953, 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 $361,793 and $367,441 of interest were outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.
On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of March 31, 2020 and December 31, 2019, approximately $42,342 and $43,003 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
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On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $16,936,952 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the company paid off the remaining balance, together with interest of 94,636. As of March 31, 2020 and December 31, 2019, the outstanding loan balance were $nil and the accrued interest was $193,981 and $197,009, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.
As of March 31, 2020 and December 31, 2019, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil and $24,316 for the three months ended March 31, 2020 and 2019, respectively. The accrued interest owed to the CEO was approximately $598,116 and $607,453, as of March 31, 2020 and December 31, 2019, respectively, which was recorded in other payables and accrued liabilities.
As of March 31, 2020 and December 31, 2019, amount due to shareholder are $617,433 and $483,433, respectively, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.
Critical Accounting Policies and Estimates
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates. The most critical accounting policies are listed below:
Revenue Recognition Policy
The Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered when the customer’s truck picks up goods at our finished goods inventory warehouse.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry. For the three months ended March 31, 2020 and 2019, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record such impairment in the future.
Foreign Currency Translation
The functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of March 31, 2020 and December 31, 2019 to translate the Chinese RMB to the U.S. Dollars are 7.0851:1 and 6.9762:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.9931:1, and 6.7087:1 for the three months ended March 31, 2020 and 2019, respectively. Translation adjustments are included in other comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor for Baoding Huanrun Trading Co., for its long-term bank loans in an amount of $4,375,379 (RMB31,000,000), which matures at various times in 2020 -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 August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We do not expect the adoption of ASU 2019-12 to have a material impact on our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Exchange Risk
While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risks as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Inflation
Although we are generally able to pass along minor incremental cost inflation to our customers, inflation such as increases in the costs of our products and overhead costs may adversely affect our operating results. We do not believe that inflation in China has had a material impact on our financial position or results of operations to date, however, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase in line with the increased costs.
Item 4. Controls and Procedures.
As required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Securities Act”), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, which were designed to provide reasonable assurance of achieving their objectives. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of March 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the quarterly period ended March 31, 2020.
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None.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
2020 Annual Meeting of Stockholders; Date for Submission of Stockholder Proposals
The Company currently intends to hold its annual meeting of stockholders on July 23, 2020 (the “2020 Annual Meeting”). The exact time and location of the 2020 Annual Meeting will be specified in the Company’s proxy statement for the 2020 Annual Meeting.
Because the expected date of the 2020 Annual Meeting represents a change of more than 30 calendar days from the date of the anniversary of the Company’s 2019 annual meeting of stockholders, the Company is affirming the deadline for receipt of stockholder proposals submitted pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for inclusion in the Company’s proxy materials for the 2020 Annual Meeting. In order to be considered timely, such proposals must be received in writing by the Company’s Corporate Secretary at the Company’s principal executive offices at Science Park, Juli Rd, Xushui District, Baoding City, Hebei Province, The People’s Republic of China 072550 by the close of business on May 20, 2020. Such proposals also must comply with the applicable requirements of Rule 14a-8 of the Exchange Act regarding the inclusion of stockholder proposals in company-sponsored proxy materials and other applicable laws.
(a) Exhibits
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| IT TECH PACKAGING, INC. | ||
| Date: May 14, 2020 | /s/ Zhenyong Liu | |
| Name: | Zhenyong Liu | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: May 14, 2020 | /s/ Jing Hao | |
| Name: | Jing Hao | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) | ||
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