Item 1. Financial Statements
Item 1. Financial Statements
IT TECH PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2021 AND
DECEMBER 31, 2020
(Unaudited)
March 31,
December 31,
2021
2020
ASSETS
Current Assets
Cash and bank balances
$
37,440,991
$
4,142,437
Restricted cash
-
-
Accounts receivable (net of allowance for doubtful accounts of $85,637 and $34,391 as of March 31, 2021 and December 2020, respectively)
5,211,806
2,389,057
Inventories
7,431,502
1,233,801
Prepayments and other current assets
10,655,539
7,051,515
Due from related parties
400,650
92,795
Total current assets
61,140,488
14,909,605
Prepayment on property, plant and equipment
21,000,411
21,149,749
Finance lease right-of-use assets, net
2,340,142
2,397,653
Property, plant, and equipment, net
140,109,827
145,142,642
Value-added tax recoverable
2,502,526
2,566,195
Deferred tax asset non-current
14,194,939
13,708,630
Total Assets
$
241,288,333
$
199,874,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term bank loans
$
6,389,908
$
6,435,348
Current portion of long-term loans from credit union
4,960,967
4,996,245
Lease liability
188,723
182,852
Accounts payable
2,355,798
592,391
Advance from customers
82,042
82,625
Due to related parties
727,433
727,433
Accrued payroll and employee benefits
308,838
224,930
Other payables and accrued liabilities
4,715,970
4,838,601
Income taxes payable
482,209
259,649
Total current liabilities
20,211,888
18,340,074
Loans from credit union
4,565,307
4,597,772
Deferred gain on sale-leaseback
347,158
387,087
Lease liability - non-current
301,654
354,107
Derivative liability
11,581,027
1,115,260
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $19,683,842 and $17,950,224 as of March 31, 2021 and December 31, 2020, respectively)
37,007,034
24,794,300
Commitments and Contingencies
Stockholders’ Equity
Common stock, 500,000,000 shares authorized, $0.001 par value per share, 99,049,900 and 28,535,816 shares issued and outstanding as of March 31, 2021 and December, 31,2020, respectively
99,050
28,536
Additional paid-in capital
88,927,786
53,989,548
Statutory earnings reserve
6,080,574
6,080,574
Accumulated other comprehensive income
4,271,952
5,740,722
Retained earnings
104,901,937
109,240,794
Total stockholders’ equity
204,281,299
175,080,174
Total Liabilities and Stockholders’ Equity
$
241,288,333
$
199,874,474
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,
2021 AND 2020
(Unaudited)
Three Months Ended
March 31,
2021
2020
Revenues
$
24,209,427
$
8,743,851
Cost of sales
(22,378,422
)
(8,913,570
)
Gross Profit (Loss)
1,831,005
(169,719)
Selling, general and administrative expenses
(2,555,318
)
(2,696,963
)
Gain on acquisition of a subsidiary
-
-
Loss from Operations
(724,313
)
(2,866,682
)
Other Income (Expense):
Interest income
4,333
5,790
Subsidy income
196,787
142,998
Interest expense
(278,901
)
(244,718
)
Loss on derivative liability
(3,636,967
)
-
Loss before Income Taxes
(4,439,061
)
(2,962,612
)
Provision for Income Taxes
100,205
526,325
Net Loss
(4,338,856)
(2,436,287)
Other Comprehensive Loss
Foreign currency translation adjustment
(1,468,770
)
(2,589,754
)
Total Comprehensive Loss
$
(5,807,626
)
$
(5,026,041
)
Losses Per Share:
Basic and Diluted Losses per Share
$
(0.12
)
$
(0.11
)
Outstanding – Basic and Diluted
36,156,280
22,054,816
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,
2021 AND 2020
(Unaudited)
Three Months Ended
March 31,
2021
2020
Cash Flows from Operating Activities:
Net income
$
(4,338,856
)
$
(2,436,287
)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
4,092,487
3,774,674
Loss on derivative liability
3,636,967
(Recovery from) Allowance for bad debts
52,018
(22,650
)
Deferred tax
(589,094
)
(541,042
)
Changes in operating assets and liabilities:
Accounts receivable
(2,920,798
)
1,315,128
Prepayments and other current assets
(3,645,323
)
5,486,216
Inventories
(6,270,151
)
(373,470
)
Accounts payable
1,785,742
(41,405
)
Advance from customers
-
54,930
Related parties
(311,679
)
1,814,228
Accrued payroll and employee benefits
86,375
(62,252
)
Other payables and accrued liabilities
(84,719
)
(728,633
)
Income taxes payable
226,699
(1,379,130
)
Net Cash (Used in) Provided by Operating Activities
(8,280,332
)
6,860,307
Cash Flows from Investing Activities:
Purchases of property, plant and equipment
(44,599
)
(756,514
)
Net Cash Used in Investing Activities
(44,599
)
(756,514
)
Cash Flows from Financing Activities:
Proceeds from issuance of shares and warrants, net
41,837,553
-
Payment of capital lease obligation
(43,230
)
-
Net Cash Provided by Financing Activities
41,794,323
-
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(170,838
)
(229,386
)
Net Increase in Cash and Cash Equivalents
33,298,554
5,874,407
Cash, Cash Equivalents and Restricted Cash - Beginning of Period
4,142,437
5,837,745
Cash, Cash Equivalents and Restricted Cash - End of Period
$
37,440,991
$
11,712,152
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of capitalized interest cost
$
97,642
$
116,019
Cash paid for income taxes
$
262,191
$
1,379,130
Cash and bank balances
37,440,991
11,712,152
Restricted cash
-
-
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
37,440,991
11,712,152
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,
2021 AND 2020
(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
$
22,055
$
51,155,174
$
6,080,574
$
(6,057,537
)
$
114,794,796
$
165,995,062
Foreign currency translation adjustment
(2,589,754
)
(2,589,754
)
Net income
(2,436,287
)
(2,436,287
)
Balance at March 31, 2020
22,054,816
$
22,055
$
51,155,174
$
6,080,574
$
(8,647,291
)
$
112,358,509
$
160,969,021
Balance at December 31, 2020
28,535,816
$
28,536
$
53,989,548
$
6,080,574
$
5,740,722
$
109,240,794
$
175,080,174
Issuance of shares to institutional investors
26,181,818
26,182
8,002,488
8,028,669
Issuance of shares to public investors
29,277,866
29,278
15,585,867
15,615,144
Exercise of warrants
15,054,400
15,054
11,349,884
11,364,939
Foreign currency translation adjustment
(1,468,769
)
(1,468,769
)
Net income
(4,338,858
)
(4,338,858
)
Balance at March 31, 2021
99,049,900
$
99,050
$
88,927,786
$
6,080,574
$
4,271,952
$
104,901,937
$
204,281,299
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.
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 single-use face masks and is 100% owned by Shengde Holdings. Prior to February 10,
2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides
that Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange
for service fees including a fee equivalent to 80% of Dongfang Paper’s total annual net profits; (ii) Loan Agreement, which
provides that Baoding Shengde will make a loan in the aggregate principal amount of $10,000,000 to Dongfang Paper Equity Owners
in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Dongfang
Paper; (iii) Call Option Agreement, which generally provides, among other things, that Dongfang Paper Equity Owners irrevocably
grant to Baoding Shengde an option to purchase all or part of each owner’s equity interest in Dongfang Paper. The exercise
price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang Paper Equity Owner for all their equity
interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper Equity Owners will pledge all of their
equity interests in Dongfang Paper to Baoding Shengde as security for their obligations under the other agreements described in
this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity interests in the event that Dongfang Paper
Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails to pay the service fees to Baoding Shengde
pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Dongfang
Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the
right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Dongfang Paper
or with respect to any equity owner action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association.
The terms of the agreement are binding on the parties for as long as Dongfang Paper Equity Owners continue to hold any equity interest
in Dongfang Paper. An Dongfang Paper Equity Owner will cease to be a party to the agreement once it transfers its equity interests
with the prior approval of Baoding Shengde. As the Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding
and the trust until June 24, 2009 and continued to control Dongfang Paper through Baoding Shengde and the Contractual Agreements,
the execution of the Contractual Agreements is considered as a business combination under common control.
On February 10, 2010, Baoding Shengde and
the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentioned $10,000,000 Loan
Agreement. Because of the Company’s decision to fund future business expansions through Baoding Shengde instead of Dongfang
Paper, the $10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination
of the Loan Agreement does not in itself compromise the effective control of the Company over Dongfang Paper and its businesses
in the PRC.
An agreement was also entered into among
Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010, reiterating that Baoding Shengde is
entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the above- mentioned Contractual Agreements. In addition,
Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s unappropriated earnings as
dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and thereafter.
On June 25, 2019, Dongfang Paper entered
into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd. (“Hebei Tengsheng”), a limited liability
company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. Upon full payment of
the consideration in the amount of RMB 320 million (approximately $45 million), Hebei Tengsheng will gain control over substantial
parcels of land that under the possession of Hebei Tengsheng.
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, 2021 and 2020 was accounted for 99.46% and 100% of the Company’s total revenue, respectively. Dongfang
Paper also accounted for 78.02% and 90.70% of the total assets of the Company as of March 31, 2021 and December 31, 2020, respectively.
6
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
As of March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 are as follows:
March 31,
December 31,
2021
2020
ASSETS
Current Assets
Cash and bank balances
$ 5,607,107
$ 3,315,778
Restricted cash
-
-
Accounts receivable
5,200,164
2,389,057
Inventories
7,407,625
1,223,020
Prepayments and other current assets
6,663,371
7,051,381
Due from related parties
400,650
92,795
Total current assets
25,278,917
14,072,031
Prepayment on property, plant and equipment
19,478,642
19,617,159
Finance lease right-of-use assets, net
2,340,142
2,397,653
Property, plant, and equipment, net
128,612,757
133,134,932
Deferred tax asset non-current
12,537,630
12,040,962
Total Assets
$ 188,248,088
$ 181,262,737
LIABILITIES
Current Liabilities
Short-term bank loans
$ 6,389,908
$ 6,435,348
Current portion of long-term loans from credit union
547,837
551,733
Lease liability
188,723
182,852
Accounts payable
2,355,798
592,391
Advance from customers
82,042
82,625
Due to related parties
-
-
Accrued payroll and employee benefits
300,810
221,482
Other payables and accrued liabilities
4,469,554
4,672,265
Income taxes payable
482,209
259,649
Total current liabilities
14,816,881
12,998,345
Loans from credit union
4,565,307
4,597,772
Lease liability - non-current
301,654
354,107
Total liabilities
$ 19,683,842
$ 17,950,224
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-Kfor the year ended December 31, 2020 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, 2021 and the results of operations for the three months ended March 31, 2021 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, 2021 and December 31, 2020, the carrying value of the Company’s short term financial instruments,
such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related
party and obligation under capital lease, approximate at their fair values because of the short maturity of these instruments;
while loans from credit union and loans from a related party approximate at their fair value as the interest rates thereon are
close to the market rates of interest published by the People’s Bank of China.
Management determined that liabilities created by beneficial conversion
features associated with the issuance of certain warrants (see “ Derivative liabilities” under Note (10)), meet the
criteria of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities was determined based
on management’s estimate of the expected future cash flows required to settle the liabilities. This valuation technique involves
management’s estimates and judgment based on unobservable inputs and is classified in level 3.
Non-Recurring Fair Value Measurements
The Company reviews long-lived assets for
impairment annually or more frequently if events or changes in circumstances indicate the possibility of impairment. For the continuing
operations, long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and
they are recorded at fair value only when impairment is recognized. For discontinued operations, long-lived assets are measured
at the lower of carrying amount or fair value less cost to sell. The fair value of these assets were determined using models with
significant unobservable inputs which were classified as Level 3 inputs, primarily the discounted future cash flow.
Share-Based Compensation
The Company uses the fair value recognition
provision of ASC Topic 718, Compensation-Stock Compensation , which requires the Company to expense the cost of employee
services received in exchange for an award of equity instruments based on the grant date fair value of such instruments over the
vesting period.
The Company also applies the provisions
of ASC Topic 505-50, Equity Based Payments to Non-Employees to account for stock-based compensation awards issued to non-employees
for services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of
the instruments issued in exchange for such services, whichever is more reliably measurable.
(3) Restricted Cash
Restricted cash was nil as of March 31, 2021 and December 31,
2020.
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, 2021 and December 31, 2020:
March 31,
December 31,
2021
2020
Raw Materials
Recycled paper board
$ 5,040,597
$ 19,459
Recycled white scrap paper
189,976
11,193
Gas
75,620
55,473
Base paper and other raw materials
389,281
181,426
5,695,474
267,551
Semi-finished Goods
259,758
176,703
Finished Goods
1,476,270
789,547
Total inventory, gross
7,431,502
1,233,801
Inventory reserve
-
-
Total inventory, net
$ 7,431,502
$ 1,233,801
(5) Prepayments and other current assets
Prepayments and other current assets consisted of the following
as of March 31, 2021 and December 31, 2020:
March 31,
December 31,
2021
2020
Prepaid land lease
$ 182,613
$ 183,912
Prepayment for purchase of materials
4,003,350
10,945
Value-added tax recoverable
6,067,438
5,864,989
Others
402,138
991,669
$ 10,655,539
$ 7,051,515
(6) Property, plant and equipment, net
As of March 31, 2021 and December 31, 2020, property, plant
and equipment consisted of the following:
March 31,
December 31,
2021
2020
Property, Plant, and Equipment:
Land use rights
$ 12,409,356
$ 12,497,601
Building and improvements
80,659,574
81,233,162
Machinery and equipment
162,639,111
163,787,807
Vehicles
655,751
628,462
Construction in progress
582,077
586,216
Totals
256,945,869
258,733,248
Less: accumulated depreciation and amortization
(116,836,042 )
(113,590,606 )
Property, Plant and Equipment, net
$ 140,109,827
$ 145,142,642
As of March 31, 2021 and December 31, 2020,
land use rights represented two parcels of state-owned lands located in Xushui District and Wei County of Hebei Province in China,
with lease terms of 50 years expiring in 2061 and 2066, respectively.
Construction in progress mainly represents
payments for paper machine of a new tissue paper production line PM10.
11
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
As of March 31, 2021 and December 31, 2020,
certain property, plant and equipment of Dongfang Paper with net values of $1,882,319 and $2,349,796, respectively, have been pledged
pursuant to a long-term loan from credit union of Dongfang Paper. Land use right of Dongfang Paper with net values of $5,931,823
and $6,010,359, respectively, as of March 31, 2021 and December 31, 2020 was pledged for the bank loan from Industrial & Commercial
Bank of China. Land use right of Hebei Tengsheng with net value of $5,520,886 and $5,560,146, respectively, as of March 31, 2021
and December 31, 2020 was pledged for a long-term loan from credit union of Baoding Shengde. In addition, land use right of Hebei
Tengsheng with net value of $8,553,369 and $8,614,194, respectively, as of March 31, 2021 and December 31, 2020 was pledged for
another long-term loan from credit union of Baoding Shengde. See ” Short-term bank loans ” under Note (7), Loans
Payable, for details of the transaction and asset collaterals.
Depreciation and amortization of property,
plant and equipment was $4,089,067 and $3,774,674 for the three months ended March 31, 2021 and 2020, respectively.
(7) Financing with Sale-Leaseback
The Company entered into a sale-leaseback
arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for
a total financing proceeds in the amount of RMB 16 million (approximately US$2.5 million). Under the sale-leaseback arrangement,
Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment,
Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng
may pay a nominal purchase price of RMB 100 (approximately $15) to TLCL and buy back the Leased Equipment. The Leased Equipment
in amount of $2,349,452 was recorded as right of use assets and the net present value of the minimum lease payments was recorded
as lease liability and calculated with TLCL’s implicit interest rate of15.6% per annum and stated at $567,099 at the inception
of the lease on August 17, 2020.
Hebei Tengsheng made payments due according
to the schedule. The balance of Leased Equipment net of amortization was $2,340,142 and $2,397,653 as of March 31, 2021 and December
31, 2020, respectively. The lease liability was $490,377 and $536,959, and its current portion in the amount of $188,723 and $182,852
as of March 31, 2021 and December 31, 2020, respectively.
Amortization of the Leased Equipment was
$40,997 and nil for the three months ended March 31, 2021 and 2020. Total interest expenses for the sale-leaseback arrangement
was $20,418 and nil for the three months ended March 31, 2021 and 2020.
As a result of the sale and leaseback,
a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to
amortization of the Leased Equipment.
The future minimum lease payments of the
capital lease as of March 31, 2021 were as follows:
March 31,
Amount
2022
252,005
2023
252,005
2024
84,002
Less: unearned discount
(97,635 )
490,377
Less: Current portion lease liability
(188,723 )
$ 301,654
(8) Loans Payable
Short-term bank loans
On December 11, 2020, the Company entered
into a working capital loan agreement with the ICBC, with a balance of $ $6,389,908 and $6,435,348 as of March 31, 2021 and December
31, 2020, respectively. The working capital loan was secured by the Land use right of Dongfang Paper as collateral for the benefit
of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments
by December 7, 2021.
As of March 31, 2021, there were guaranteed
short-term borrowings of $6,389,908 and unsecured bank loans of $nil. As of December 31, 2020, there were guaranteed short-term
borrowings of $6,435,348 and unsecured bank loans of $nil.
The average short-term borrowing rates for the three
months ended March 31, 2021 and 2020 were approximately 4.79%.
12
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Long-term loans from credit union
As of March 31, 2021 and December 31, 2020, loans payable
to Rural Credit Union of Xushui District, amounted to $9,526,274 and $9,594,017, respectively.
March 31,
December 31,
2021
2020
Rural
Credit Union of Xushui District Loan 1
$ 1,308,721
$ 1,318,028
Rural
Credit Union of Xushui District Loan 2
3,804,423
3,831,476
Rural
Credit Union of Xushui District Loan 3
2,434,830
2,452,145
Rural
Credit Union of Xushui District Loan 4
1,978,300
1,992,368
Total
9,526,274
9,594,017
Less:
Current portion of long-term loans from credit union
(4,960,967 )
(4,996,245 )
Long-term
loans from credit union
$ 4,565,307
$ 4,597,772
As
of Mar 31, 2021, the Company’s long-term debt repayments for the next coming years were as follows:
Amount
Fiscal
year
Remainder
of 2021
$ 4,960,967
2022
1,673,946
2023
2,891,361
Total
9,526,274
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, 2021 and December 31, 2020,
total outstanding loan balance was $1,308,721 and $1,318,028, respectively, Out of the total outstanding loan balance, current
portion amounted were $213,048 and $214,563 as of March 31, 2021 and December 31, 2020, respectively, which are presented as current
liabilities in the consolidated balance sheet and the remaining balance of $1,095,673 and $11,103,465 are presented as non-current
liabilities in the consolidated balance sheet as of March 31, 2021 and December 31, 2020, 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 $1,882,319 and $2,349,796 as of March 31, 2021 and December 31,
2020, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of March 31, 2021 and December
31, 2020, the total outstanding loan balance was $3,804,423 and $3,831,476, respectively. Out of the total outstanding loan balance,
current portion amounted were $334,789 and $337,169 as of March 31, 2021 and December 31, 2020 respectively, which are presented
as current liabilities in the consolidated balance sheet and the remaining balance of $3,469,633 and $3,494,307 are presented as
non-current liabilities in the consolidated balance sheet as of March 31, 2021 and December 31, 2020, respectively.
On April 17, 2019, the Company entered
into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various
installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral
for the benefit of the credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of March 31,
2021 and December 31, 2020, the total outstanding loan balance was $2,434,830 and $2,452,145, respectively. Out of the total outstanding
loan balance, current portion amounted were $2,434,830 and $2,452,145 as of March 31, 2021 and December 31, 2020, respectively,
which are presented as current liabilities in the consolidated balance sheet as of March 31, 2021 and December 31, 2020, 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 is due and payable in various
installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral
for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of March 31,
2021 and December 31, 2020, the total outstanding loan balance was $1,978,300 and $1,992,368, respectively. Out of the total outstanding
loan balance, current portion amounted were $1,978,300 and $1,992,368 as of March 31, 2021 and December 31, 2020, respectively,
which are presented as current liabilities in the consolidated balance sheet as of March 31, 2021 and December 31, 2020, respectively.
Total interest expenses for the short-term
bank loans and long-term loans for the three months ended March 31, 2021 and 2020 were $258,483 and $244,718, respectively.
(9) Related Party Transactions
Mr. Zhenyong Liu, the Company’s CEO
has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr.
Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to
December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the
period from 2013 to 2015. Approximately $390,081 and $392,855 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,
2021 and December 31, 2020, respectively.
On December 10, 2014, Mr. Zhenyong Liu
provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35%
per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December
10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong
Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of
$20,400. As of March 31, 2021 and December 31, 2020, approximately $45,653 and $45,978 of interest, respectively were outstanding
to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated
balance sheet.
On March 1, 2015, the Company entered an
agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,201,342 (RMB120,000,000)
for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded.
The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank
of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October
14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr.
Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years
and the remaining balance 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, 2021 and December 31, 2020, the outstanding interest was $209,148 and $210,635, 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, 2021 and December 31, 2020,
total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil for
the three months ended March 31, 2021 and 2020. The accrued interest owing to Mr. Zhenyong Liu was approximately $644,882 and $649,468,
as of March 31, 2021 and December 31, 2020, respectively, which was recorded in other payables and accrued liabilities.
As of March 31, 2021 and December 31, 2020,
amount due to shareholder was $727,433, which represents funds from shareholders to pay for various expenses incurred in the U.S.
The amount is due on demand with interest free.
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 $153,740 (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)
(10) Other payables and accrued liabilities
Other payables and accrued liabilities consist of the following:
March 31,
December 31,
2021
2020
Accrued electricity
$ 190,726
$ 14,544
Value-added tax payable
14,664
428,481
Accrued interest to a related party
644,882
649,468
Payable for purchase of equipment
3,234,511
3,262,153
Accrued commission to salesmen
18,487
10,917
Accrued bank loan interest
605,664
429,279
Others
7,036
43,759
Totals
$ 4,715,970
$ 4,838,601
(11) Derivative Liabilities
The Company analyzed the warrant for derivative
accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument
should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit
to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market
value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income
or expense item.
The Company determined our derivative liabilities
to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of March 31, 2021.
The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest
rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these
inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using
the Black-Scholes valuation model. The following weighted-average assumptions were used in the March 31, 2021:
Three months ended
March 31, 2021
Expected term
2.30 - 2.75
Expected average volatility
85% - 105%
Expected dividend yield
-
Risk-free interest rate
0.19% - 0.35%
The following table summarizes the changes
in the derivative liabilities during the three months ended March 31, 2021:
Fair Value Measurements Using Significant Observable Inputs (Level 3)
Balance at December 31, 2020
$ 1,115,260
Addition of new derivatives recognized as warrant
9,730,919
Addition of new derivatives recognized as loss on derivatives
10,813,347
Exercise of warrants
(2,902,119 )
Change in fair value of derivative liability
(7,176,380 )
Balance at March 31, 2021
$ 11,581,027
15
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(12) Common Stock
Issuance of common stock to investors
On August 27, 2014, the Company issued 1,562,500 shares of our
common stock and warrants to purchase up to 781,250 shares of our common stock.Each share of common stock and accompanying warrant
was sold at a price of $1.60.
On April 29, 2020, the Company and certain
institutional investors entered into a securities purchase agreement, as amended on May 4, 2020 (the “2020 Purchase Agreement”),
pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered
direct offering and warrants to purchase up to 4,400,000 shares of the Company’s common stock in a concurrent private placement,
for gross proceeds of approximately $2.55 million (net proceeds of approximately 2.27 million). The purchase price for each share
of Common Stock and the corresponding warrant was $0.58. The exercise price of the warrant was $0.7425 per share.
On January 20, 2021, the Company offered and sold
to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818warrants to purchase up to 26,181,818
shares of common stock in a best-efforts public offering for gross proceeds of approximately $14.4 million. The purchase price for each
share of common stock and the corresponding warrant was $0.55. The exercise price of the warrant was $0.55 per share.
On March 1, 2021, the Company offered and sold
to the public investors an aggregate of 29,277,866 shares of common stock and 14,638,933 warrants to purchase up to 14,638,933 shares
of common stock in a firm commitment underwritten public offering for gross proceeds of approximately $21.9 million. The purchase price
for each share of common stock and accompanying warrant was $0.75. The exercise price of the warrant was $0.75 per share,
Issuance of common stock pursuant to the 2012 Incentive Stock
Plan, 2015 Omnibus Equity Incentive and 2019 Omnibus Equity Incentive
On January 12, 2016, the Company granted
an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans to nine officers, directors and employees
of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416
shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus
Equity Incentive. Please see Note (14), Stock Incentive Plans for more details. Total fair value of the stock was calculated at
$1,417,395 as of the date of grant.
On September 13, 2018, the compensation
committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen officers, directors and employees
of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock
granted was calculated at $470,360 as of the date of issuance.
On April 2, 2020, the compensation committee
granted an aggregate of 2,000,000 shares of restricted common stock to fifteen officers, directors and employees of the Company,
which were granted under the 2019 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated
at $1,200,000 as of the date of issuance at $0.60 per share.
Issuance of common stock to a consultant
On January 2, 2020, the Company entered
into an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 60,000 shares of
common stock for merger and acquisition consulting service rendered from January 2, 2020 to January 2, 2021. 60,000 shares of common
stock were issued to this consultant on April 28, 2020. Total fair value of the shares of common stock issued was calculated at
$42,000 at $0.70 per share.
Issuance of common stock to a consultant
On November 2, 2020, the Company entered
into an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 21,000 shares of
common stock for investor relations consulting service rendered from November 2, 2020 to November 2, 2021. 21,000 shares of common
stock were issued to this consultant on November 30, 2020. Total fair value of the shares of common stock issued was calculated
at $14,700 at $0.70 per share.
16
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(13) Warrants
Pursuant to the 2020 Purchase Agreement,
the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock and warrants to purchase up to 4,400,000
shares of the Common Stock in a concurrent private placement (the “May 2020 Warrants”).. The exercise price of the
May 2020 Warrant is $0.7425 per share. These warrants are exercisable on July 23, 2020 and have a term of exercise equal to five
years and six months from the date of issuance till July 23, 2025. 880,000 May 2020 Warrants were exercised in February 2021 at
the exercise price of $0.7425 per share and 3,520,000 May 2020 Warrants were outstanding as of March 31, 2021. The Company classified
warrant as liabilities and accounted for the issuance of the Warrants as a derivative.
On January 20, 2021, the Company offered and sold
to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818warrants to purchase up to 26,181,818
shares of common stock (the “January 2021 Warrants”). The January 2021 Warrants are exercisable commencing on January 20,
2021 at an exercise price of $0.55 and will expire on January 20, 2026.14,106,900 January 2021 Warrants were exercised in January and
February of 2021 at the exercise price of $0.55 per share. 12,074,918 January 2021 Warrants were outstanding as of March 31, 2021.
On March 1, 2021, the Company offered and sold
to the public investors an aggregate of 29,277,866 shares of common stock and 14,638,933 warrants to purchase up to 14,638,933 shares
of common stock (the “March 2021 Warrants”). The March 2021Warrants are exercisable commencing on March 1, 2021 at an exercise
price of $0.75 and will expire on March 1, 2026.67,500 March 2021 Warrants were exercised in January and March 2021 at the exercise price
of $0.75 per share and 14,571,433 March 2021 Warrants were outstanding as of March 31, 2021.
The Company classified warrants as liabilities
and accounted for the issuance of the warrants as a derivative.
A summary of stock warrant activities is
as below:
Three months Ended
March 31, 2021
Weight
average
exercise
Number
price
Outstanding and exercisable at beginning of the period
4,400,000
$ 0.7425
Issued during the period
40,820,751
0.622
Exercised during the period
(15,054,400 )
0.5621
Cancelled or expired during the period
-
-
Outstanding and exercisable at end of the period
30,166,351
$
0.6691
17
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The following table summarizes information relating to outstanding
and exercisable warrants as of March 31,2021.
Warrants Outstanding
Warrants Exercisable
Weighted Average
Remaining
Number of
Contractual life
Weighted Average
Number of
Weighted Average
Shares
(in years)
Exercise Price
Shares
Exercise Price
30,166,351
4.84
$ 0.6691
30,166,351
$ 0.6691
Aggregate intrinsic value is the sum of
the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at December
31, 2020 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants).
The intrinsic value of the warrants as of March 31, 2021 is $1,333,071.
(14) Earnings Per Share
For the three months ended March 31, 2021 and 2020, basic and
diluted net income per share are calculated as follows:
Three Months Ended March 31,
2021
2020
Basic loss per share
Net loss for the period - numerator
$ (4,338,856 )
$ (2,436,287 )
Weighted average common stock outstanding - denominator
36,156,280
22,054,816
Net loss per share
$ (0.12 )
$ (0.11 )
Diluted income per share
Net income for the period- numerator
$ (4,338,856 )
$ (2,436,287 )
Weighted average common stock outstanding - denominator
36,156,280
22,054,816
Effect of dilution
-
-
Weighted average common stock outstanding - denominator
36,156,280
22,054,816
Diluted loss per share
$ (0.12 )
$ (0.11 )
For the three months ended March 31, 2021 and 2020 there were
no securities with dilutive effect issued and outstanding.
18
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(15) Income Taxes
United States
The Company and Shengde Holdings are incorporated
in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively. On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJA Act”), which significantly changed U.S.
tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35% to 21%
effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to
pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and
creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides
guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the
2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent
that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate
to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws
that were in effect immediately before the enactment of the 2017 TCJA.
Transition tax: The transition tax is a
tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s non-U.S. subsidiaries.
To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986
E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Further, the transition
tax is based in part on the amount of those earnings held in cash and other specified assets. The Company was able to make a reasonable
estimate of the transition tax and recorded a provisional obligation and additional income tax expense of approximately $80,000
in the fourth quarter of 2017. However, the Company is continuing to gather additional information and will consider additional
technical guidance to more precisely compute and account for the amount of the transition tax. This amount may change when the
Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the
amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable over eight years beginning in 2018.
PRC
Dongfang Paper and Baoding Shengde
are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise
Income Tax is generally imposed at a statutory rate of 25%.
The provisions for income taxes
for three months ended March 31, 2021 and 2020 were as follows:
Three Months Ended
March 31,
2021
2020
Provision for Income Taxes
Current Tax Provision U.S.
$ -
$ 14,717
Current Tax Provision PRC
488,889
-
Deferred Tax Provision PRC
(589,094 )
(541,042 )
Total Provision for (Deferred tax benefit)/ Income Taxes
$ (100,205 )
$ (526,325 )
19
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
In addition to the reversible future PRC
income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset
depreciation, the Company was incorporated in the United States and incurred net operating losses of approximately $2,508,797 and
$0 for U.S. income tax purposes for the years ended December 31, 2020 and 2019, 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 March 31, 2021, 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 March 31, 2021, 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,
2021
2020
Deferred tax assets (liabilities)
Depreciation and amortization of property, plant and equipment
$ 12,879,907
$ 12,397,323
Impairment of property, plant and equipment
697,023
680,800
Miscellaneous
249,188
258,963
Net operating loss carryover of PRC company
368,821
371,544
Total deferred tax assets
14,194,939
13,708,630
Less: Valuation allowance
-
-
Total deferred tax assets, net
$ 14,194,939
13,708,630
The following table reconciles the statutory
rates to the Company’s effective tax rate:
Three Months Ended
March 31,
2021
2020
PRC Statutory rate
Effect of different tax jurisdiction
25.0 %
25.0 %
Effect of reconciling items in the PRC for tax purposes
(22.7 )
(7.2 )
Change in valuation allowance
-
-
Effective income tax rate
-
-
2.3 %
17.8 %
During the three months ended March 31,
2021 and 2020, the effective income tax rate was estimated by the Company to be 2.3% and 17.8%, 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 believe that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will
change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected
to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S.
resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable
future, additional tax provisions would be required.
20
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company has adopted ASC Topic 740-10-05,
Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of
operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the
liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities.
Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion
of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s
liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly
or annual period based, in part, upon the results of operations for the given period. As of March 31, 2021 and December 31, 2020,
management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results
of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest
costs and penalties provided in the Company’s consolidated financial statements for the three months ended March 31, 2021
and 2020, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant
tax authorities and the major one is the China Tax Authority.
(16) Stock Incentive Plans
2015 Incentive Stock Plan
On August 29, 2015, the Company’s
Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2015 ISP”)
as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company may grant an aggregate of 1,500,000
shares of the Company’s common stock to the directors, officers, employees and/or consultants of the Company and its subsidiaries.
On January 12, 2016, the Compensation Committee granted restricted common shares of 1,133,916, of which 168,416 shares were granted
under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors, employees and a consultant of the Company
as compensation for their services in the past years. Total fair value of the stock was calculated at $1,417,395 as of the date
of issuance at $1.25 per share.
On September 13, 2018, the compensation
committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors and employees of the Company, which
were granted under the 2015 ISP. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date
of issuance at $0.88 per share.
2019 Incentive Stock Plan
On October 31, 2019, the shareholders of
the Company at the Company’s Annual Shareholders General Meeting adopted and approved the 2019 Omnibus Equity Incentive Plan
of IT Tech Packaging, Inc. (the “2019 ISP”). Under the 2019 ISP, the Company has reserved a total of 2,000,000 shares
of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company
and its subsidiaries. On April 2, 2020, 2,000,000 shares of common stock were granted under the 2019 ISP. Total fair value of the
shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share.
21
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(17) Commitments and Contingencies
Operating Lease
The Company leases 32.95 acres of land from
a local government in Xushui District, Baoding City, Hebei, China through a real estate lease with a 30-year term, which expires
on December 31, 2031. The lease requires an annual rental payment of approximately $18,449 (RMB120,000). This operating lease is
renewable at the end of the 30-year term.
As mentioned in Note (8) Related Party Transactions,
in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial Buildings
back to the Company at an annual rental of $153,740 (RMB1,000,000), for a total term of up to five years.
Future minimum lease payments of all operating
leases are as follows:
March 31,
Amount
2022
116,342
2023
68,987
2024
18,261
2025
18,261
2026
18,261
Thereafter
105,002
Total operating lease payments
$ 345,115
Capital commitment
As of December 31, 2020, the Company has
entered into several contracts for the purchase of paper machine of a new tissue paper production line PM10 and the improvement
of Industrial Buildings. Total outstanding commitments under these contracts were $4,528,844 and $4,570,331 as of March 31, 2021
and December 31, 2020, respectively. The Company expected to pay off all the balances within 1-3 years.
On June 25, 2019, Dongfang Paper entered
into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd. (“Hebei Tengsheng”), a limited liability
company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. The consideration for
the acquisition is RMB320 million (approximately $49 million), of which $20 million was paid by the Company, and the balance consideration
of $29 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, 2021
and December 31, 2020, the Company guaranteed its long-term loan from financial institutions amounting to $4,717,484 (RMB31,000,000)
and $4,751,031 (RMB31,000,000), respectively, that matured at various times in 2018-2023. If Huanrun Trading Co., were to become
insolvent, the Company could be materially adversely affected.
(18) Segment Reporting
Since March 10, 2010, Baoding Shengde started
its operations and thereafter the Company manages its operations through two business operating segments: Dongfang Paper, which
produces offset printing paper and corrugating medium paper, and Baoding Shengde, which produces digital photo paper. They are
managed separately because each business requires different technology and marketing strategies.
The Company evaluates performance of its
operating segments based on net income. Administrative functions such as finance, treasury, and information systems are centralized.
However, where applicable, portions of the administrative function expenses are allocated between the operating segments based
on gross revenue generated. The operating segments do share facilities in Xushui County, Baoding City, Hebei Province, China. All
sales were sold to customers located in the PRC.
22
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, 2021
Dongfang
Hebei
Baoding
Not Attributable
Elimination of
Enterprise-wide,
Paper
Tengsheng
Shengde
to Segments
Inter-segment
consolidated
Revenues
$ 22,827,553
$ 1,251,416
$ 130,458
$ -
$ -
$ 24,209,427
Gross profit
2,262,681
(456,207 )
24,531
-
-
1,831,005
Depreciation and amortization
1,833,101
2,257,067
2,319
-
-
4,092,487
Interest income
2,366
206
1,761
-
-
4,333
Interest expense
176,386
20,418
82,097
-
-
278,901
Income tax expense(benefit)
416,855
(515,629 )
(1,431 )
-
-
(100,205 )
Net income (loss)
1,087,209
(1,478,604 )
(68,045 )
(3,879,416 )
-
(4,338,856 )
As
of March 31, 2021
Dongfang
Hebei
Baoding
Not Attributable
Elimination
Enterprise-wide,
Paper
Tengsheng
Shengde
to Segments
of Inter-segment
consolidated
Total assets
$ 88,412,001
99,836,087
24,493,355
28,546,890
-
241,288,333
23
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 )
As of December 31, 2020
Dongfang
Hebei
Baoding
Not Attributable
Elimination of
Enterprise-wide,
Paper
Tengsheng
Shengde
to Segments
Inter-segment
consolidated
Total assets
$ 79,206,447
102,056,291
18,589,570
199,874,474
(19) Concentration and Major Customers and Suppliers
For the three months ended March 31, 2021, the Company had no
single customer contributed over 10% of total sales.
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, 2021, the
Company had two major suppliers accounted for 81% and 10% of total purchases.
For the three months ended March 31, 2020, the
Company had three major suppliers accounted for 70%, 11% and 9% of total purchases.
24
IT TECH PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(20) Concentration of Credit Risk
Financial instruments for which the Company
is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial
institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind
all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection
provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of as of March 31, 2021 and
December 31, 2020. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum
protection would be up to RMB500,000 (US$ 76,088) 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, 2021 and December 31, 2020, respectively, while for the cash placed in financial institutions
in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB55,707,023 (US$8,477,322) as of March 31,
2021.
(21) Risks and Uncertainties
The Company is subject to substantial risks
from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity
requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various
laws and restrictions.
(22) Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the
incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking
expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal
years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial
Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits,
and smaller reporting companies applying the CECL standards. The ASU is effective for reporting periods beginning after December
15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of
the adoption of ASU 2016-13 on our condensed consolidated financial statements.
(23) Subsequent Event
None.
25
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, 2021 and 2020 should be read
in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly
report.
In this quarterly
report, references to “the Company,” “we,” “our” and “us” refer to IT Tech Packaging,
Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise.
We make certain forward-looking
statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic
performance (including growth and earnings), demand for our products, and other statements of our plans, beliefs, or expectations,
including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements. In some cases
these statements are identifiable through the use of words such as “anticipate”, “believe”, “estimate”,
“expect”, “intend”, “plan”, “project”, “target”, “can”,
“could”, “may”, “should”, “will”, “would”, and similar expressions.
We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject
to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these
forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially
from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions may prove
to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements
and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks
and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities
and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking statements. In evaluating the
forward-looking statements contained in this report, you should consider various factors, including, without limitation, the following:
(a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth
efficiently and operate profitably, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and
grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash. We assume no obligation
to update forward-looking statements, except as otherwise required under federal securities laws.
Impact of COVID-19 on Our Operations
and Financial Performance
Outbreaks of epidemic,
pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results
of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as
a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts
to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year
holiday, quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering,
among other things. During the early part of 2020, COVID-19 caused temporary closure of our CMP production, and as a result,
our revenue of CMP decreased by 49.89 % in the first quarter of 2020. It is, however, still unclear how the pandemic will evolve
going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on
our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues.
While we have resumed
business operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development
as a global pandemic. Hence, the extent of the business disruption and the related impact on our financial results and outlook
for the rest of 2021 cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts our results will
depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning
the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing
insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing
our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no
assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences,
including downturns in business sentiment generally.
Recent Development
In November 2020, we completed inviting bids for the 75 tonne per hour biomass boiler procurement for our biomass
cogeneration project (the “Cogeneration Project”). Multiple well-known enterprises in the biomass industry participated in
tendering opening bids. In February 2021, we completed evaluation on the bidding proposals and announced that Tai Shan Group Co., Ltd.,
a top manufacturer in the biomass industry in China, has won the bid. Installation of the boilers is expected to commence in the near
future. We expect to participate in the bidding process for urban central heating projects. In April 2021 ,
the Company obtained qualification to supply central heating in industrial parks after month-long review process for the Cogeneration
Project.
On April 2021, the Company announced it has completed
fundamental constructions on its new tissue paper production line (the “PM10”) and is working on the installation of accessory
equipment.
Results of Operations
Comparison of the Three months ended March 31, 2021 and
2020
Revenue for the three
months ended March 31, 2021 was $24,209,427, an increase of $15,465,576, or 176.87%, from $8,743,851 for the same period in the
previous year. This was mainly due to the increase in sales volume of corrugating medium paper (“CMP”) and offset printing
paper and increase in Average Selling Prices (ASPs) of CMP and tissue paper products.
26
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, 2021 was $24,078,969, an increase of $15,335,118, or 175.38%, from $8,743,851 for the first quarter of 2020. Total offset printing
paper, CMP and tissue paper products sold during the three months ended March 31, 2021 amounted to 45,558 tonnes, an increase of
25,696 tonnes, or 129.37%, compared to 19,862 tonnes sold in the comparable period in the previous year. The increase was mainly
due to the production suspension in the first quarter of 2020 due to Chines New Year and COVID-19. Full capacity of CMP production
was resumed in May 2020 and the production and sales of offset printing paper in June 2020. The changes in revenue dollar amount
and in quantity sold for the three months ended March 31, 2021 and 2020 are summarized as follows:
Three Months Ended
Three Months Ended
Percentage
March 31, 2021
March 31, 2020
Change in
Change
Sales Revenue
Quantity
(Tonne)
Amount
Quantity
(Tonne)
Amount
Quantity
(Tonne)
Amount
Quantity
Amount
Regular CMP
33,626
$
16,964,038
13,788
$
5,721,939
19,838
$
11,242,099
143.88
%
196.47
%
Light-Weight CMP
7,670
$
3,747,733
4,889
$
2,015,563
2,781
$
1,732,170
56.88
%
85.94
%
Total CMP
41,296
$
20,711,771
18,677
$
7,737,502
22,619
$
12,974,269
121.11
%
167.68
%
Offset Printing Paper
3,142
$
2,115,782
-
$
-
3,142
$
2,115,782
%
%
Tissue Paper Products
1,120
$
1,251,416
1,185
$
1,006,349
(65)
$
245,067
-5.49
%
24.35
%
Total CMP, Offset Printing Paper and Tissue Paper Revenue
45,558
$
24,078,969
19,862
$
8,743,851
25,696
$
15,335,118
129.37
%
175.38
%
Monthly sales revenue for the 24 months ended March
31, 2021, are summarized below:
The Average Selling Prices (ASPs) for our main products
in the three months ended March 31, 2021 and 2020 are summarized as follows:
Offset
Printing
Paper ASP
Regular
CMP ASP
Light-Weight
CMP ASP
Tissue
Paper
Products ASP
Three Months ended March 31, 2020
$
-
$
415
$
412
$
849
Three Months ended March 31, 2021
$
673
$
504
$
489
$
1,117
Increase from comparable period in the previous year
$
673
$
89
$
77
$
268
Increase by percentage
-
21.45
%
18.69
%
31.57
%
27
The following chart shows the month-by-month ASPs for
the 24-month period ended March 31, 2021:
Corrugating Medium Paper
Revenue from
CMP amounted to $20,711,771 (86.02% of the total offset printing paper, CMP and tissue paper products revenues) for the three months
ended March 31, 2021, representing an increase of $12,974,269, or 167.68%, from $7,737,502 for the comparable period in 2020.
We sold 41,296
tonnes of CMP in the three months ended March 31, 2021 as compared to 18,677 tonnes for the same period in 2020, representing a
121.11% increase in quantity sold.
ASP for regular CMP
increased from $415/tonne for the three months ended March 31, 2020 to $504/tonne for the three months ended March 31, 2021, representing
a 21.45% increase. ASP in RMB for regular CMP for the first quarter of 2020 and 2021 was RMB2,902 and RMB3,282, respectively, representing
a 13.09% increase. The quantity of regular CMP sold increased by 19,838 tonnes, from 13,788 tonnes in the first quarter of 2020
to 33,626 tonnes in the first quarter of 2021.
ASP for light-weight
CMP increased from $412/tonne for the three months ended March 31, 2020 to $489/tonne for the three months ended March 31, 2021,
representing a 18.69% increase. ASP in RMB for light-weight CMP for the first quarter of 2020 and 2021 was RMB2,883 and RMB3,178,
respectively, representing a 10.23% increase. The quantity of light-weight CMP sold increased by 2,781 tonnes, from 4,889 tonnes
in the first quarter of 2020, to 7,670 tonnes in the first quarter of 2021.
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 2021 and 2020 were 38.42% and 14.86%, respectively, representing an increase of 23.56%.
28
Quantities sold for regular CMP that was produced by
the PM6 production line from April 2019 to March 2021 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 $1,251,416 (5.20% of the total offset printing paper, CMP and tissue paper products revenues) for the three
months ended March 31, 2021, representing an increase of $245,067, or 24.35%, from $1,006,349 for the three months ended March
31, 2020. We sold 1,120 tonnes of tissue paper in the first quarter of 2021, as compared to 1,185 tonnes in the comparable period
of 2020, representing a decrease of 65 tonnes, or 5.49%.
ASP for tissue paper
products increased from $849/tonne for the three months ended March 31, 2020 to $1,117/tonne for the three months ended March 31,
2021, representing a 31.57% increase. ASP in RMB for tissue paper products for the first quarter of 2020 and 2021 was RMB5,941
and RMB7,267, respectively, representing a 22.32% increase.
Offset printing paper
Revenue from offset
printing paper was $2,115,782 (8.79% of the total offset printing paper, CMP and tissue paper products revenues) for the three
months ended March 31, 2021, representing an increase of $2,115,782 from $nil for the three months ended March 31, 2020. We sold
3,142 tonnes of offset printing paper in the first quarter of 2021, as compared to 0 tonne in the comparable period of 2020. ASP
for offset printing paper for the first quarter of 2021 was $673 and ASP in RMB for offset printing paper for the first quarter
of 2021 was RMB4,381.
29
Revenue of Face Mask
On April 29, 2020,
we launched production line of non-medical single-use face masks, following completion of raw materials preparation, trial run
of the equipment and the sample products inspection. Revenue generated from selling face mask were $130,458 for the three months
ended March 31, 2021. We sold 3,836 thousand pieces of face masks in the first quarter of 2021.
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products for the quarter ended March 31, 2021 was $22,272,495, an increase of $13,358,925,
or 149.87%, from $8,913,570 for the comparable period in 2020. This was mainly due to the increase in sales quantity of CMP and
offset printing paper and the increase in material costs.
Cost of sales for
CMP was $18,858,935 for the quarter ended March 31, 2021, as compared to $7,195,348 for the comparable period in 2020. The increase
in the cost of sales of $11,663,587 for CMP was mainly due to the increase in sales volume of regular CMP and light-Weight CMP
and the increase in average cost of sales. Average cost of sales per tonne for CMP increased by 18.70%, from $385 in the first
quarter of 2020 to $457 in the first quarter of 2021. The increase in average cost of sales was mainly attributable to the higher
average unit purchase costs (net of applicable value added tax) of recycled paper board in first quarter of 2021 compared to the
first quarter of 2020.
Cost of sales for
offset printing paper was $1,705,938 for the quarter ended March 31, 2021 and average cost of sales per tonne of offset printing
paper was $543 in the first quarter of 2021.
Cost of sales for
tissue paper products was $1,707,622 for the quarter ended March 31, 2021, as compared to $1,718,222 for the comparable period
in 2020. Average cost of sales per tonne of tissue paper products increased by 5.17%, from $1,450 in the three months ended March
31, 2020, to $1,525 for the comparable period in 2021. This is mainly due to the decrease in cost of tissue base paper.
Changes in cost of sales and cost per tonne by product
for the quarters ended March 31, 2021 and 2020 are summarized below:
Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
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
$ 15,521,382
$ 462
$ 5,439,510
$ 395
$ 10,081,872
$ 67
185.35 %
16.96 %
Light-Weight CMP
$ 3,337,553
$ 435
$ 1,755,838
$ 359
$ 1,581,715
$ 76
90.08 %
21.17 %
Total CMP
$ 18,858,935
$ 457
$ 7,195,348
$ 385
$ 11,663,587
$ 72
162.10 %
18.70 %
Offset Printing Paper
$ 1,705,938
$ 543
$ -
$ -
$ 1,705,938
$ 543
n/a
n/a
Tissue Paper Products
$ 1,707,622
$ 1,525
1,718,222
$ 1,450
$ (10,600 )
$ 75
-0.62 %
5.17 %
Total CMP, Offset Printing Paper and Tissue Paper
$ 22,272,495
$ n/a
$ 8,913,570
$ n/a
$ 13,358,925
$ n/a
149.87 %
n/a
Our average unit purchase
costs (net of applicable value added tax) of recycled paper board in the three months ended March 31, 2021 was RMB 1,878/tonne
(approximately $289/tonne) as compared to RMB 1,388/tonne (approximately $198/tonne) for the three months ended March 31, 2020.
These changes (in US dollars) represent a year-over-year increase of 45.96% for the recycled paper board. We use domestic recycled
paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely on imported recycled paper,
the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests that the pricing of domestic
recycled paper bears some correlation to the pricing of imported recycled paper.
30
The pricing trends of our major raw materials for the
24-month period from April 2019 to March 2021 are shown below:
Electricity and gas
are our two main energy sources. Electricity and gas accounted for approximately 4% and 9.7% of total sales in the first quarter
of 2021, respectively, compared to 4% and 8.7% of total sales in the first quarter of 2020. The monthly energy cost as a percentage
of total monthly sales of our main paper products for the 24 months ended March 31, 2021 are summarized as follows:
Gross Profit
Gross profit for the
three months ended March 31, 2021 was $1,831,005 (7.56% of the total revenue), representing an increase of $2,000,724, or 1178.84%,
from the gross loss of $169,719 (1.94% of the total revenue) for the three months ended March 31, 2020, as a result of factors
described above.
31
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the three months ended March 31, 2021 was $1,806,474, an increase of $1,976,193,
or 1164.39%, from the gross loss of $169,719 for the three months ended March 31, 2020. The increase was mainly the result of the
factors discussed above.
The overall gross
profit margin for offset printing paper, CMP and tissue paper products increased by 9.44 percentage points, from -1.94% for the
three months ended March 31, 2020, to 7.50% for the three months ended March 31, 2021.
Gross profit margin
for regular CMP for the three months ended March 31, 2021 was 8.50%, or 3.56 percentage points higher, as compared to gross profit
margin of 4.94% for the three months ended March 31, 2020. Such increase was mainly due to the increase in ASP of regular CMP in
the first quarter of 2021.
Gross profit margin
for light-weight CMP for the three months ended March 31, 2021 was 10.94%, or 1.95 percentage points lower, as compared to gross
profit margin of 12.89% for the three months ended March 31, 2020. The decrease was mainly due to increase in cost of recycled
paper board, partially offset by the increase in ASP of light-weight CMP in the first quarter of 2021.
Gross profit margin
for offset printing paper was 19.37% for the three months ended March 31, 2021.
Gross profit margin
for tissue paper products for the three months ended March 31, 2021 was -36.46%, or 34.28 percentage points higher, as compared
to gross profit margin of -70.74% for the three months ended March 31, 2020. The increase was mainly due to the increase in ASP
of tissue paper products and decrease in cost of base paper in the first quarter of 2021.
32
Monthly gross profit margins on the sales of our CMP
and offset printing paper for the 24-month period ended March 31, 2021 are as follows:
Face Masks
Gross profit for face masks for the three months ended
March 31, 2021 was $24,531, representing a gross margin of 18.8%.
Selling, General and Administrative Expenses
Selling, general and
administrative expenses for the three months ended March 31, 2021 were $2,555,318, a decrease of $141,645, or 5.25% from $2,696,963
for the three months ended March 31, 2020.
Loss from Operations
Operating loss for
the quarter ended March 31, 2021 was $724,313, an increase of $2,142,369, or 74.73%, from $2,866,682 for the quarter ended March
31, 2020. The increase in income from operations was primarily due to the increase in gross profit.
Other Income and Expenses
Interest expense for
the three months ended March 31, 2021 increased by $34,183, from $244,718 in the three months ended March 31, 2020, to $278,901.
The Company had short-term and long-term interest-bearing loans and leasing obligations that aggregated $16,406,559 as of March
31, 2021, as compared to $14,904,518 as of March 31, 2020.
Loss on derivative liability
The Company analyzed
the warrant for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined
that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability
at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The loss
recognized on addition and change in fair value of derivative liability for the three months ended March 2021 was $3,636,967.
Net Loss
As a result
and the factors discussed above, net loss was $4,338,856 for the quarter ended March 31, 2021, representing a decrease of income
of $1,902,569, or 78.09%, from $2,436,287 for the quarter ended March 31, 2020.
33
Accounts Receivable
Net accounts
receivable increased by $2,822,749, or 118.15%, to $5,211,806 as of March 31, 2021, as compared with $2,389,057 as of December
31, 2020. We usually collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist
of raw materials (accounting for 76.64% of total value of inventory as of March 31, 2021), semi-finished goods and finished goods.
As of March 31, 2021, the recorded value of inventory increased by 502.33% to $7,431,502 from $1,233,801 as of December 31, 2020.
As of March 31, 2021, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $5,040,597,
approximately $5,021,138, or 25803.68%, higher than the balance as of December 31, 2020. Due to the volatility of recycled paper
board price, a minimum level of inventory was maintained at the end of 2020.
A summary of changes
in major inventory items is as follows:
March 31,
2021
December 31,
2020
$ Change
% Change
Raw Materials
Recycled paper board
$ 5,040,597
$ 19,459
5,021,138
25803.20 %
Recycled white scrap paper
189,976
11,193
178,783
1597.24 %
Tissue base paper
205,718
14,027
191,691
1366.59 %
Gas
75,620
55,473
20,147
36.32 %
Mask fabric and other raw materials
183,563
167,399
16,164
9.66 %
Total Raw Materials
5,695,474
267,551
5,427,923
2028.74 %
Semi-finished Goods
259,758
176,703
83,055
47.00 %
Finished Goods
1,476,270
789,547
686,723
86.98 %
Total inventory, gross
7,431,502
1,233,801
6,197,701
502.33 %
Inventory reserve
-
-
-
Total inventory, net
$ 7,431,502
$ 1,233,801
6,197,701
502.33 %
34
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 $153,740 (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 original lease agreement.
Capital Expenditure Commitment as of March 31, 2021
On May 5, 2020, the
Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company signed an agreement
to purchase paper machine with paper machine supplier. The Company expected the new tissue paper production line to be launched
after the completion of trial run.
As of March 31, 2021,
we had approximately $4.5 million in capital expenditure commitments that were mainly related to the purchase of paper machine
of PM10. The infrastructure work of PM10 has been completed and the associated ancillary facilities are working in the progress.
These commitments are expected to be financed by bank loans and cash flows generated from our business operations.
Financing with Sale-Leaseback
The Company entered
into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”)
on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.4 million). Under the sale-leaseback
arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.4 million). Concurrent with the
sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease
term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $15) to TLCL and buy back the Leased Equipment.
The Leased Equipment in amount of $2,349,452 was recorded as right-of-use assets and the net present value of the minimum lease
payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated
at $567,099 at the inception of the lease on August 17, 2020.
Hebei Tengsheng made
payments due according to the schedule. The balance of Leased Equipment net of amortization was $2,340,142 and $2,397,653 as of
March 31, 2021 and December 31, 2020, respectively. The lease liability was $490,377 and $536,959, and its current portion in the
amount of $188,723 and $182,852 as of March 31, 2021 and December 31, 2020, respectively.
Amortization of the
Leased Equipment was $40,997 and nil for the three months ended March 31, 2021 and 2020. Total interest expenses for the sale-leaseback
arrangement was $20,418 and nil for the three months ended March 31, 2021 and 2020.
As a result of the
sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term
and as an offset to amortization of the Leased Equipment.
Cash and Cash Equivalents
Our cash, cash equivalents and restricted
cash as of March 31, 2021 was $37,440,991, an increase of $33,298,554, from $4,142,437 as of December 31, 2020. The increase of
cash and cash equivalents for the three months ended March 31, 2021 was attributable to a number of factors:
i. Net cash provided by (used in) operating activities
Net cash used in operating
activities was $8,280,332 for the three months ended March 31, 2021. The balance represented a decrease of cash of $15,140,639,
or 220.70%, from $6,860,307 provided for the three months ended March 31, 2020. Net loss for the three months ended March 31, 2021
was $4,338,856, representing a decrease of income of $1,902,569, or -78.09%, from a net loss of $2,436,287 for the three months
ended March 31, 2020. Changes in various asset and liability account balances throughout the three months ended March 31, 2021
also contributed to the net change in cash from operating activities in three months ended March 31, 2021. Chief among such changes
is the increase of accounts receivable in the amount of $2,920,798 during the first three months of 2021. There was also an increase
of $6,270,151 in the ending inventory balance as of March 31, 2021 (a decrease to net cash for the three months ended March 31,
2021 cash flow purposes). An increase of $1,785,742 in accounts payable (an increase to net cash) in the three months ended March
2021. In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $4,092,487 and
loss on derivative liability of $3,636,967. The Company also had a net increase of $3,645,323 in prepayment and other current assets
(a decrease to net cash) and a net decrease of $310,023 in other payables and accrued liabilities and related parties (a decrease
to net cash), as well as an increase in income tax payable of $226,699 (an increase to net cash) during the three months ended
March 31, 2021.
35
ii. Net cash used in investing activities
We incurred $44,599
in net cash expenditures for investing activities during the three months ended March 31, 2021, as compared to $756,514 for the
same period of 2020. Payments in the three months ended March 31, 2021 were for the payments for purchase of vehicles.
iii. Net cash provided by financing activities
Net cash provided
by financing activities was proceeds from issuance of shares and warrants and repayment of lease liability of $41,794,323 for the
three months ended March 31, 2021, as compared to net cash provided by financing activities in the amount of $nil for the three
months ended March 31, 2020.
Short-term bank loans
March 31,
December 31,
2021
2020
Industrial and Commercial Bank of China (“ICBC”)
$
6,389,908
$
6,435,348
On December 11, 2020,
the Company entered into a working capital loan agreement with the ICBC, with a balance of $ $6,389,908 and $6,435,348 as of March
31, 2021 and December 31, 2020, respectively. The working capital loan was secured by the Land use right of Dongfang Paper as collateral
for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various
installments by December 7, 2021.
As of March 31, 2021,
there were guaranteed short-term borrowings of $6,389,908 and unsecured bank loans of $nil. As of December 31, 2020, there were
guaranteed short-term borrowings of $6,435,348 and unsecured bank loans of $nil.
The average short-term
borrowing rates for the three months ended March 31, 2021 and 2020 were approximately 4.79%.
Long-term loans from credit union
As of March
31, 2021 and December 31, 2020, loans payable to Rural Credit Union of Xushui District, amounted to $9,526,274 and $9,594,017,
respectively.
36
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, 2021 and December
31, 2020, total outstanding loan balance was $1,308,721 and $1,318,028, respectively, Out of the total outstanding loan balance,
current portion amounted were $213,048 and $214,563 as of March 31, 2021 and December 31, 2020, respectively, which are presented
as current liabilities in the consolidated balance sheet and the remaining balance of $1,095,673 and $11,103,465 are presented
as non-current liabilities in the consolidated balance sheet as of March 31, 2021 and December 31, 2020, 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 $1,882,319 and $2,349,796 as of March 31, 2021 and December
31, 2020, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of March 31, 2021 and
December 31, 2020, the total outstanding loan balance was $3,804,423 and $3,831,476, respectively. Out of the total outstanding
loan balance, current portion amounted were $334,789 and $337,169 as of March 31, 2021 and December 31, 2020 respectively, which
are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,469,633 and $3,494,307
are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2021 and December 31, 2020, respectively.
On April 17, 2019, the
Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and
payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use
right as collateral for the benefit of the credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per
month. As of March 31, 2021 and December 31, 2020, the total outstanding loan balance was $2,434,830 and $2,452,145, respectively.
Out of the total outstanding loan balance, current portion amounted were $2,434,830 and $2,452,145 as of March 31, 2021 and December
31, 2020, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2021 and
December 31, 2020, respectively.
On December 12, 2019, the
Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable
in various installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng with its land use right
as collateral for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum.
As of March 31, 2021 and December 31, 2020, the total outstanding loan balance was $1,978,300 and $1,992,368, respectively. Out
of the total outstanding loan balance, current portion amounted were $1,978,300 and $1,992,368 as of March 31, 2021 and December
31, 2020, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2021 and
December 31, 2020, respectively.
Total interest expenses
for the short-term bank loans and long-term loans for the three months ended March 31, 2021 and 2020 were $258,483 and $244,718,
respectively.
37
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 $390,081 and $392,855 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, 2021 and December 31, 2020, respectively.
On December 10,
2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with
an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured
loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company
repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining
balance, together with interest of $20,400. As of March 31, 2021 and December 31, 2020, approximately $45,653 and $45,978 of interest
were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities
in the consolidated balance sheet.
On March 1, 2015,
the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,201,342
(RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each
amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the
People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from
the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company
repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the
loan for additional 3 years and the remaining balance 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, 2021 and December 31, 2020, the outstanding interest was $209,148 and $210,635, 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,
2021 and December 31, 2020, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related
party loans are $nil for the three months ended March 31, 2021 and 2020. The accrued interest owing to the CEO was approximately
$644,882 and $649,468, as of March 31, 2021 and December 31, 2020, respectively, which was recorded in other payables and accrued
liabilities.
As of March 31,
2021 and December 31, 2020, amount due to shareholder was $727,433, which represents funds from shareholders to pay for various
expenses incurred in the U.S. The amount is due on demand with interest free.
38
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, 2021 and 2020, 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, 2021 and December 31, 2020 to translate the Chinese RMB to the U.S. Dollars
are 6.5713:1 and 6.5249:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.5045:1
and 6.9931:1 for the three months ended March 31, 2021 and 2020, 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 $4,717,484 (RMB31,000,000), which matures at various
times in 2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship
with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the
Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions.
39
Recent Accounting Pronouncements
In June 2016, the FASB
issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU
2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial
instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October
2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize
the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the CECL standards.
The ASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early
adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial
statements.
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