IT TECH PACKAGING, INC. Cautionary Notice Regarding Forward-Looking Statements
The following discussion of the financial condition and results of operations of the Company for the periods endedSeptember 30, 2022 and 2021 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly report.
In this quarterly report, references to "the Company," "we," "our" and "us"
refer to
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 theSecurities 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 theWorld Health Organization declaring the outbreak of COVID-19 as a global pandemic. Substantially all of our revenues and workforce are concentrated inChina . In response to the intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending theChinese New Year holiday, quarantining individuals suspected of having COVID-19, asking residents inChina to stay at home and to avoid public gathering, among other things. It is, however, still unclear how the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues. While we have resumed business operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally. Results of Operations
Comparison of the Three months ended
Revenue for the three months ended
25
Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products
Revenue from sales of offset printing paper, corrugating medium paper ("CMP")
and tissue paper products for the three months ended September 30, 2022 was
$31,652,343 , a decrease of $13,283,137 , or 29.56%, from $44,935,480 for the
third quarter of 2021. Total offset printing paper, CMP and tissue paper
products sold during the three months ended September 30, 2022 amounted to
72,615 tonnes, a decrease of 11,520 tonnes, or 13.69%, compared to 84,135 tonnes
sold in the comparable period in the previous year. Due to the sporadic
situation of COVID-19 in China , our factory facilities were operated in a
limited, transitional basis during the three months ended September 30, 2022 .
The changes in revenue dollar amount and in quantity sold for the three months
ended September 30, 2022 and 2021 are summarized as follows:
Three Months Ended Three Months Ended Percentage
September 30, 2022 September 30, 2021 Change in Change
Quantity Quantity QuantitySales Revenue (Tonne) Amount (Tonne)
Amount (Tonne) Amount Quantity Amount
Regular CMP 59,848$ 26,062,736 61,947 $
31,200,984 (2,099 )
12,507 $ 5,296,450 12,497 $ 6,127,480 10 $ (831,030 ) 0.08 % -13.56 %
Total CMP 72,355 $ 31,359,186 74,444 $ 37,328,464 (2,089 ) $ (5,969,278 ) -2.81 % -15.99 %
Offset Printing
Paper - $ - 7,045 $ 4,795,391 (7,045 ) $ (4,795,391 ) (100.00 )% (100.00 )%
Tissue Paper
Products 260 $ 293,157 2,646 $ 2,811,625 (2,386 ) $ (2,518,468 ) -90.17 % -89.57 %
Total CMP, Offset
Printing Paper and
Tissue Paper Revenue 72,615 $ 31,652,343 84,135 $ 44,935,480 (11,520 ) $ (13,283,137 ) -13.69 % -29.56 %
Monthly sales revenue for the 24 months ended
[[Image Removed]]
The Average Selling Prices (ASPs) for our main products in the three months
ended
Tissue
Offset Paper
Printing Regular Light-Weight Products
Paper ASP CMP ASP CMP ASP ASPThree Months ended September 30, 2021$ 681 $ 504 $ 490$ 1,063 Three Months ended September 30, 2022 $ -$ 435 $ 423$ 1,128 Increase (Decrease) from comparable period in the previous year$ (681 ) $ (69 ) $ (67 )$ 65 Increase (Decrease) by percentage - -13.69 %
-13.67 % 6.11 %
26
The following chart shows the month-by-month ASPs for the 24-month period ended
September 30, 2022 :
[[Image Removed]]
Corrugating Medium Paper
Revenue from CMP amounted to
We sold 72,355 tonnes of CMP in the three months ended
ASP for regular CMP dropped from$504 /tonne for the three months endedSeptember 30, 2021 to$435 /tonne for the three months endedSeptember 30, 2022 , representing a 13.69% decrease. ASP in RMB for regular CMP for the third quarter of 2021 and 2022 wasRMB3,259 andRMB2,980 , respectively, representing a 8.56% decrease. The quantity of regular CMP sold decreased by 2,099 tonnes, from 61,947 tonnes in the third quarter of 2021 to 59,848 tonnes in the third quarter of 2022. ASP for light-weight CMP decreased from$490 /tonne for the three months endedSeptember 30, 2021 to$423 /tonne for the three months endedSeptember 30, 2022 , representing a 13.67% decrease. ASP in RMB for light-weight CMP for the third quarter of 2021 and 2022 wasRMB3,173 andRMB2,892 , respectively, representing a 8.86% decrease. The quantity of light-weight CMP sold increased by 10 tonnes, from 12,497 tonnes in the third quarter of 2021, to 12,507 tonnes in the third quarter of 2022. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes/year. The utilization rates for the third quarter of 2022 and 2021 were 66.82% and 67.42%, respectively, representing a decrease of 0.60%. 27
Quantities sold for regular CMP that was produced by the PM6 production line
from
[[Image Removed]]
Offset printing paper
Revenue from offset printing paper was $nil for the three months ended September
30, 2022 compared to the revenue of $4,795,391 for the three months ended
September 30, 2021 . As required by the government to stem the sporadic spread of
COVID-19, our production of offset printing paper was suspended in the third
quarter of 2022.
Tissue Paper Products
Revenue from tissue paper products was$293,157 (0.93% of the total offset printing paper, CMP and tissue paper products revenues) for the three months endedSeptember 30, 2022 , representing a decrease of$2,518,468 , or 89.57%, from$2,811,625 for the three months endedSeptember 30, 2021 . We sold 260 tonnes of tissue paper in the third quarter of 2022, as compared to 2,646 tonnes in the comparable period of 2021, representing a decrease of 2,386 tonnes, or 90.17%. ASP for tissue paper products increased from$1,063 /tonne for the three months endedSeptember 30, 2021 to$1,128 /tonne for the three months endedSeptember 30, 2022 , representing a 6.11% increase. ASP in RMB for tissue paper products for the third quarter of 2021 and 2022 wasRMB6,875 andRMB7,913 , respectively, representing a 15.10% increase. 28 Revenue of Face Mask
Revenue generated from selling face mask were$56,871 and$152,191 for the three months endedSeptember 30, 2022 and 2021, respectively, representing a decrease of$95,320 , or 62.63%. We sold 1,282 thousand pieces of face masks in the third quarter of 2022, as compared to 3,180 thousand pieces in the comparable period of 2021, a decrease of 1,898 thousand pieces, or 59.69%. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter endedSeptember 30, 2022 was$28,885,603 , a decrease of$14,259,449 , or 33.05%, from$43,145,052 for the comparable period in 2021. This was mainly due to the decrease in sales quantity of regular CMP, offset printing paper and tissue paper products, and the decrease in material costs of CMP. Cost of sales for CMP was$27,834,752 for the quarter endedSeptember 30, 2022 , as compared to$36,069,192 for the comparable period in 2021. The decrease in the cost of sales of$8,234,440 for CMP was mainly due to the decrease in sales volume of regular CMP and the decrease in average cost of sales. Average cost of sales per tonne for CMP decreased by 20.62%, from$485 in the third quarter of 2021 to$385 in the third quarter of 2022. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board in the third quarter of 2022 compared to the third quarter of 2021.
Cost of sales for offset printing paper was $nil for the quarter ended
Cost of sales for tissue paper products was$1,050,851 for the quarter endedSeptember 30, 2022 , as compared to$3,057,413 for the comparable period in 2021. The decrease in the cost of sales of$2,006,562 for tissue paper products was mainly due to the decrease in sales volume of tissue paper products, partially offset by the increase in average cost of sales. Average cost of sales per tonne of tissue paper products increased by 249.96%, from$1,155 in the three months endedSeptember 30, 2021 , to$4,042 for the comparable period in 2022. This was mainly due to the increase in cost of tissue base paper and higher manufacturing overhead costs absorbed in the unit cost of sales due to low production yield.
Changes in cost of sales and cost per tonne by product for the quarters ended
Three Months Ended Three Months Ended
September 30, 2022 September 30, 2021 Change in Change in percentage
Cost of Sales Cost per Tonne Cost of Sales Cost per Tonne Cost of Sales Cost per Tonne Cost of Sales Cost per Tone
Regular CMP $ 23,218,241 $ 388 $ 30,284,195 $ 489 $ (7,065,954 ) $ (101 ) -23.33 % -20.65 %
Light-Weight CMP $ 4,616,511 $ 369 $ 5,784,997 $ 463 $ (1,168,486 ) $ (94 ) -20.20 % -20.30 %
Total CMP $ 27,834,752 $ 385 $ 36,069,192 $ 485 $ (8,234,440 ) $ (100 ) -22.83 % -20.62 %
Offset Printing Paper $ - $ - $ 4,018,447 $ 570 $ (4,018,447 ) $ (570 ) -100.00 % -100.00 %
Tissue Paper Products $ 1,050,851 $ 4,042 3,057,413 $ 1,155 $ (2,006,562 ) $ 2,887 -65.63 % 249.96 %
Total CMP, Offset
Printing Paper and
Tissue Paper $ 28,885,603 $ n/a $ 43,145,052 $ n/a $ (14,259,449 ) $ n/a -33.05 % n/a
Our average unit purchase costs (net of applicable value added tax) of recycled
paper board in the three months ended September 30, 2022 were RMB 1,561 /tonne
(approximately $235 /tonne), as compared to RMB 1,966 /tonne (approximately
$304 /tonne) for the three months ended September 30, 2021 . These changes (in US
dollars) represent a year-over-year decrease of 22.70% for the recycled paper
board. We use domestic recycled paper (sourced mainly from the Beijing -Tianjin
metropolitan area) exclusively. Although we do not rely on imported recycled
paper, the pricing of which tends to be more volatile than domestic recycled
paper, our experience suggests that the pricing of domestic recycled paper bears
some correlation to the pricing of imported recycled paper.
29
The pricing trends of our major raw materials for the 24-month period from
[[Image Removed]]
Electricity and gas are our two main energy sources. Electricity and gas
accounted for approximately 4% and 11.6% of total sales in the third quarter of
2022, respectively, compared to 4% and 10.8% of total sales in the third quarter
of 2021. The monthly energy cost as a percentage of total monthly sales of our
main paper products for the 24 months ended September 30, 2022 are summarized as
follows:
[[Image Removed]]
Gross Profit
Gross profit for the three months ended September 30, 2022 was $2,783,588 (8.78%
of the total revenue), representing an increase of $962,052 , or 52.82%, from the
gross profit of $1,821,536 (4.04% of the total revenue) for the three months
ended September 30, 2021 , as a result of factors described above.
30
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset printing paper, CMP and tissue paper products for the three months endedSeptember 30, 2022 was$2,766,740 , representing an increase of$976,312 , or 54.53%, from the gross profit of$1,790,428 for the three months endedSeptember 30, 2021 . The increase was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 4.76 percentage points, from 3.98% for the three months endedSeptember 30, 2021 , to 8.74% for the three months endedSeptember 30, 2022 . Gross profit margin for regular CMP for the three months endedSeptember 30, 2022 was 10.91%, or 7.97 percentage points higher, as compared to gross profit margin of 2.94% for the three months endedSeptember 30, 2021 . Such increase was mainly due to the decrease in cost of recycled paper board, partially offset bythe decrease of ASP of regular CMP in the third quarter of 2022. Gross profit margin for light-weight CMP for the three months endedSeptember 30, 2022 was 12.84%, or 7.25 percentage points higher, as compared to gross profit margin of 5.59% for the three months endedSeptember 30, 2021 . The increase was mainly due to the decrease in cost of recycled paper board, partially offset bythe decrease of ASP of light-weight CMP in the third quarter of 2022. Gross profit margin for tissue paper products for the three months endedSeptember 30, 2022 was -258.46%, or 249.72 percentage points lower, as compared to gross profit margin of -8.74% for the three months endedSeptember 30, 2021 . The increase in gross loss was mainly due to the decrease in ASP of tissue paper products and the increase in cost of sales in the third quarter of 2022.
Monthly gross profit margins on the sales of our CMP and offset printing paper
for the 24-month period ended
[[Image Removed]]
31
Face Masks
Gross profit for face masks for the three months ended September 30, 2022 and
2021 were $16,848 and $31,108 , representing a gross margin of 29.62% and 20.44%,
respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months endedSeptember 30, 2022 were$3,370,541 , an increase of$1,350,976 , or 66.89% from$2,019,565 for the three months endedSeptember 30, 2021 . The increase was mainly due to 1,500,000 shares of common stock granted under our compensatory incentive plan inAugust 2022 , value at$1,560,000 . Loss from Operations Operating loss for the quarter endedSeptember 30, 2022 was$588,712 , a decrease of$390,683 , or 197.29%, from$198,029 for the quarter endedSeptember 30, 2021 . The decrease in income from operations was primarily due to the increase in selling, general and administrative expenses, partially offset by the increase in gross profit. Other Income and Expenses
Interest expense for the three months ended
Loss (Gain) on derivative liability
The Company analyzed the warrant for derivative accounting consideration under ASC 815, "Derivatives and Hedging, and hedging," and determined that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The (loss) gain recognized on addition and change in fair value of derivative liability for the three months endedSeptember 30, 2022 and 2021 was a loss of$617,370 and a gain of$1,938,873 , respectively. Net Loss
As a result and the factors discussed above, net loss was
32
Comparison of the nine months ended
Revenue for the nine months endedSeptember 30, 2022 was$78,979,716 , representing a decrease of$36,852,297 , or 31.82%, from$115,832,013 for the same period in the previous year. This was mainly due to the decrease in sales volume of corrugating medium paper ("CMP") and offset printing paper and tissue paper products.
Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products
Revenue from sales of offset printing paper, CMP and tissue paper products for the nine months endedSeptember 30, 2022 was$78,778,671 , a decrease of$36,661,823 , or 31.76%, from$115,440,494 for the nine months endedSeptember 30, 2021 . This was mainly due to the decrease in sales volume of regular CMP, light-weight CMP, offset printing paper and tissue paper products, and the decrease in ASPs of CMP and tissue paper products. Total quantities of offset printing paper, CMP and tissue paper products sold during the nine months endedSeptember 30, 2022 amounted to 168,066 tonnes, a decrease of 48,237 tonnes, or 22.30%, compared to 216,303 tonnes sold during the nine months endedSeptember 30, 2021 . Total quantities of CMP and offset printing paper sold decreased by 43,314 tonnes in the nine months of 2022 as compared to the same period of 2021. We sold 1,040 tonnes of tissue paper products in the nine months of 2022 as opposed to 5,963 tonnes in the same period of 2021. Production of CMP was suspended during January andFebruary 2022 and offset printing paper suspended during the year. Production was restricted during Winter Olympics held inBeijing in 2022 and COVID-19 as required by the government. The changes in revenue and quantity sold for the nine months endedSeptember 30, 2022 and
2021
are summarized as follows:
A summary of the above changes and further analyses of the changes in our sales
revenue are as follows:
Nine Months Ended Nine Months Ended Percentage
September 30, 2022 September 30, 2021 Change in Change
Quantity Quantity Quantity
Sales Revenue (Tonne) Amount (Tonne) Amount (Tonne) Amount Quantity Amount
Regular CMP 139,036 $ 65,015,400 156,080 $
78,417,279 (17,044 )
27,990 $ 12,660,338 33,658 $
16,436,588 (5,668 )
167,026 $ 77,675,738 189,738 $ 94,853,867 (22,712 ) $ (17,178,129 ) -11.97 % -18.11 %
Offset Printing
Paper - $ - 20,602 $ 14,095,393 (20,602 ) $ (14,095,393 ) -100.00 % -100.00 %
Tissue Paper
Products 1,040 $ 1,102,933 5,963 6,491,234 (4,923 ) $ (5,388,301 ) -82.56 % -83.01 %
Total CMP, Offset
Printing Paper and
Tissue Paper Revenue 168,066 $ 78,778,671 216,303 $ 115,440,494 (48,237 ) $ (36,661,823 ) -22.30 % -31.76 %
ASPs for our main products in the nine-month period ended
Offset
Printing Regular Light-Weight Tissue Paper
Paper ASP CMP ASP
CMP ASP Products ASP
Nine Months Ended
488 $ 1089 Nine Months Ended
452 $ 1061
Decrease from comparable period in the
previous year $ -684 $ -34 $ -36 $ -28
Decrease by percentage -100.00 % -6.77 % -7.38 % -2.57 %
Revenue of Face Masks
Revenue generated from selling face masks were $201,045 and $391,519 for the
nine months ended September 30, 2022 and 2021. We sold 4,295 thousand pieces of
face masks for the nine months ended September 30, 2022 , as compared to 9,650
thousand pieces in the comparable period of 2021, a decrease of 5,355 thousand
pieces, or 55.49%.
33
Cost of Sales
Total cost of sales for CMP, offset printing paper and tissue paper products for
the nine months ended September 30, 2022 was $75,102,330 , a decrease of
$33,723,073 , or 30.99%, from $108,825,403 for the nine months ended September
30, 2021 . This was mainly a result of the decrease in sales volume of CMP and
offset printing paper and decrease of material costs of CMP. Cost of sales for
CMP was $71,863,579 for the nine months ended September 30, 2022 , as compared to
$89,766,509 in the same period of 2021.Cost of sales for tissue paper products
was $3,238,751 for the nine months ended September 30, 2022 , as compared to
$7,425,480 in the same period of 2021. Average cost of sales per tonne of tissue
paper products increased by 150.12%, from $1,245 for the nine months ended
September 30, 2021 , to $3,114 for the same period of 2022. The increase in
average cost of sales of tissue paper products was mainly due to the increase in
average cost of tissue base paper.
Changes in cost of sales and cost per tonne by product for the nine months ended
Nine Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 Change in Change in percentage
Cost per Cost per Cost per
Cost of Sales Tonne Cost of Sales tonne Cost of Sales Tonne Cost of Sales Cost per Tone Regular CMP
$ 60,363,632 $ 434 $ 74,522,911 $ 477 $ (14,159,279 ) $ (43 ) -19.00 % -9.01 % Light-Weight CMP$ 11,499,947 $ 411 $ 15,243,598 $ 453 $ (3,743,651 ) $ (42 ) -24.56 % -9.27 % Total CMP$ 71,863,579 $ 430 $ 89,766,509 $ 473 $ (17,902,930 ) $ (43 ) -19.94 % -9.09 % Offset Printing Paper $ 0 $ -$ 11,633,414 $ 565 $ (11,633,414 ) $ (565 ) -100.00 % -100.00 % Tissue Paper Products$ 3,238,751 $ 3,114 $ 7,425,480 $ 1,245 $ (4,186,729 ) $ 1,869 -56.38 % 150.12 % Total CMP, Offset Printing Paper and Tissue Paper Revenue$ 75,102,330 $ n/a$ 108,825,403 $ n/a$ (33,723,073 ) $ n/a -30.99 % n/a % Gross Profit Gross profit for the nine months endedSeptember 30, 2022 was$3,728,070 (4.72% of the total revenue), representing a decrease of$2,953,491 , or 44.20%, from the gross profit of$6,681,561 (5.77% of the total revenue) for the nine months endedSeptember 30, 2021 . The decrease was mainly due to (i) the decrease in quantities sold of CMP, offset printing paper and tissue paper products, and (ii) the increase in material costs of tissue paper products.
Offset Printing Paper, CMP and Tissue Paper Products
Gross profit for offset printing paper, CMP and tissue paper products for the nine months endedSeptember 30, 2022 was$3,676,341 , a decrease of$2,938,750 , or 44.42%, from the gross profit of$6,615,091 for the nine months endedSeptember 30, 2021 . The increase was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 1.06 percentage points, from 5.73% for the nine months endedSeptember 30, 2021 , to 4.67% for the nine months endedSeptember 30, 2022 . Gross profit margin for regular CMP for the nine months endedSeptember 30, 2022 was 7.15%, or 2.18 percentage points higher, as compared to gross profit margin of 4.97% for the nine months endedSeptember 30, 2021 . Such increase was primarily due to decrease in material costs, partially offset by the decrease in ASP of regular CMP. 34 Gross profit margin for light-weight CMP for the nine months endedSeptember 30, 2022 was 9.17%, or 1.91 percentage points higher, as compared to gross profit margin of 7.26% for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the decrease in material costs, partially offset by the decrease in ASP of light-weight CMP. Gross profit margin for tissue paper products was -193.65% for the nine months endedSeptember 30, 2022 , a decrease of 179.26 percentage points, as compared to -14.39% for the nine months endedSeptember 30, 2021 . The decrease was mainly due to the increase in cost of tissue base paper. Face Masks
Gross profit for face mask for the nine months ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months endedSeptember 30, 2022 were$8,541,224 , an increase of$1,368,729 , or 19.08% from$7,172,495 for the nine months endedSeptember 30, 2021 . The increase was mainly due to 1,500,000 shares of common stock granted under our compensatory incentive plan inAugust 2022 , value at$1,560,000 . Loss from Operations
Operating loss for the nine months ended
Other Income and Expenses
Interest expense for the nine months ended
Gain on derivative liability
The Company analyzed warrants for derivative accounting consideration under ASC 815, "Derivatives and Hedging, and hedging," and determined that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The change in fair value of derivative liability for the nine months endedSeptember 30, 2022 and 2021 were$729,263 and$2,810,913 , respectively. Net Loss
As a result of the above, net loss was
35
Accounts Receivable
Net accounts receivable decreased by$632,635 , or 12.99%, to$4,236,299 as ofSeptember 30, 2022 , as compared with$4,868,934 as ofDecember 31, 2021 . We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories
Inventories consist of raw materials (accounting for 79.98% of total value of inventory as ofSeptember 30, 2022 ), semi-finished goods and finished goods. As ofSeptember 30, 2022 , the recorded value of inventory decreased by 24.01% to$4,441,390 from$5,844,895 as ofDecember 31, 2021 . As ofSeptember 30, 2022 , the inventory of recycled paper board, which is the main raw material for the production of CMP, was$3,246,847 , approximately$1,149,785 , or 54.83%, higher than the balance as ofDecember 31, 2021 . Due to the volatility of recycled paper board price, a minimum level of inventory was maintained at the end of 2021.As a result of better control over stock turnover, finished goods were reduced by 78.72% as atSeptember 30, 2022 as compared to finished goods at
the end of 2021.
A summary of changes in major inventory items is as follows:
September 30, December 31,
2022 2021 $ Change % Change
Raw Materials
Recycled paper board $ 3,246,847 $ 2,097,062 1,149,785 54.83 %
Recycled white scrap paper 10,603 11,808 -1,205 -10.20 %
Tissue base paper 59,505 38,745 20,760 53.58 %
Gas 80,319 32,753 47,566 145.23 %
Mask fabric and other raw materials 154,865 167,786 -12,921 -7.70 %
Total Raw Materials 3,552,139 2,348,154 1,203,985 51.27 %
Semi-finished Goods 165,707 96,087 69,620 72.46 %
Finished Goods 723,544 3,400,654 -2,677,110 -78.72 %
Total inventory, gross 4,441,390 5,844,895 -1,403,505 -24.01 %
Inventory reserve - - -
Total inventory, net $ 4,441,390 $ 5,844,895 (1,403,505 ) -24.01 %
36
Renewal of operating lease
OnAugust 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") toHebei Fangsheng for cash prices of approximately$2.77 million ,$1.15 million , and$4.31 million respectively. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately$140,849 (RMB1,000,000 ). The lease agreement was renewed inAugust 2022 with a term of six years with the same rental payments as provided for in the original lease agreement.
Capital Expenditure Commitment as of
OnMay 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 ofSeptember 30, 2022 , we had approximately$7.1 million in capital expenditure commitments that were mainly related to the purchase of paper machine of PM10. The infrastructure work of PM10 has been completed and the associated ancillary facilities are working in progress. These commitments are expected to be financed by bank loans and cash flows generated from our business operations. Financing with Sale-Leaseback
The Company entered into a sale-leaseback arrangement (the "Lease Financing Agreement") withTAC Leasing Co., Ltd. ("TLCL") onAugust 6, 2020 , for a total financing proceeds in the amount ofRMB 16 million (approximatelyUS$2.5 million ). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximatelyUS$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 ofRMB 100 (approximately$16 ) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of$2,349,452 was recorded as right of use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL's implicit interest rate of 15.6% per annum and stated at$567,099 at the inception of
the lease onAugust 17, 2020 .
Hebei Tengsheng made payments due according to the schedule. The balance of Leased Equipment net of amortization was$1,940,586 and$2,286,459 as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The lease liability was$181,187 and$362,394 , and its current portion in the amount of$181,187 and$210,161 as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Amortization of the Leased Equipment was$38,486 and$41,208 for the three months endedSeptember 30, 2022 and 2021. Amortization of the Leased Equipment was$120,464 and$123,663 for the nine months endedSeptember 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was$8,439 and$17,026 for the three months endedSeptember 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was$32,808 and$56,376 for the nine months endedSeptember 30, 2022 and 2021.
As a result of the sale and leaseback, a deferred gain in the amount of
Cash and Cash Equivalents
Our cash, cash equivalents and restricted cash as of
i. Net cash provided by (used in) operating activities
Net cash provided by operating activities was$7,429,169 for the nine months endedSeptember 30, 2022 . The balance represented an increase of cash of$13,871,746 , or 215.31%, from$6,442,577 used in operating activities for the nine months endedSeptember 30, 2021 . Net loss for the nine months endedSeptember 30, 2022 was$4,663,445 , representing an increase of loss of$1,413,917 , or 43.51%, from a net loss of$3,249,528 for the nine months endedSeptember 30, 2021 . Changes in various asset and liability account balances throughout the nine months endedSeptember 30, 2022 also contributed to the net change in cash from operating activities in nine months endedSeptember 30, 2022 . Chief among such changes is the decrease of accounts receivable in the amount of$146,250 during the nine months of 2022. There was also a decrease of$863,170 in the ending inventory balance as ofSeptember 30, 2022 (an increase to net cash for the nine months endedSeptember 30, 2022 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of$11,218,254 . The Company also had a net increase of$422,092 in prepayment and other current assets (a decrease to net cash) and a net increase of$808,380 in other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable of$265,493 (a decrease to net cash) during the nine months ended September
30,
2022.
37
ii. Net cash used in investing activities
We incurred$8,189,410 in net cash expenditures for investing activities during the nine months endedSeptember 30, 2022 , as compared to$12,781,114 for the same period of 2021. Payments in 2022 were mainly for the last installments for the Tengsheng land acquisition.
iii. Net cash provided by financing activities
Net cash provided by financing activities was$6,840,080 for the nine months endedSeptember 30, 2022 , as compared to net cash provided by financing activities in the amount of$41,547,363 for the nine months endedSeptember 30, 2021 . A$6.6 million loan was repaid by a related party during the period.
Short-term bank loans
September 30, December 31,
2022 2021
Industrial and Commercial Bank of China ("ICBC") Loan 1 $ 5,069,157 $ 5,958,561
ICBC Loan 2 422,547 -
China Construction Bank Loan 140,849 -
Total short-term bank loans $ 5,632,553 $ 5,958,561
On November 25, 2021 , the Company entered into a working capital loan agreement
with the ICBC for a loan, with a balance of $5,069,157 and $5,958,561 as of
September 30, 2022 and December 31, 2021 , respectively. The working capital loan
was secured by the land use right of Dongfang Paper as collateral for the
benefit of the bank and guaranteed by Mr. Liu . The loan bears a fixed interest
rate of 4.785% per annum. The loan will be due and repaid at various
installments by November 17, 2022 .
On June 28, 2022 , the Company entered into a working capital loan agreement with
the ICBC for a loan, with a balance of $422,547 as of September 30, 2022 . The
loan bears a fixed interest rate of 4.3% per annum. The loan will be due by
December 25, 2022 .
On July 29, 2022 , the Company entered into a working capital loan agreement with
the China Construction Bank for a loan, with a balance of $140,849 as of
September 30, 2022 . The loan bears a fixed interest rate of 3.95% per annum. The
loan will be due by July 29, 2023 .
As of September 30, 2022 , there were guaranteed short-term borrowings of
$5,069,157 and unsecured bank loans of $563,396 . As of December 31, 2021 , there
were guaranteed short-term borrowings of $5,958,561 and unsecured bank loans of
$nil.
The average short-term borrowing rates for the three months ended
Long-term loans from credit union
As of
38
OnApril 16, 2014 , the Company entered into a loan agreement with theRural Credit Union of Xushui District for a loan with a term of 5 years, which was originally due in various installments fromJune 21, 2014 toNovember 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. OnNovember 6, 2018 , the loan was renewed for additional 5 years and will be due and payable in various installments fromDecember 21, 2018 toNovember 5, 2023 . As ofSeptember 30, 2022 andDecember 31, 2021 , total outstanding loan balance was$1,211,302 and$1,348,871, respectively, Out of the total outstanding loan balance, current portion amounted were$647,906 and$329,376 as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of$563,396 and$1,019,495 are presented as non-current liabilities in the consolidated balance sheet as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. OnJuly 15, 2013 , the Company entered into a loan agreement with theRural Credit Union of Xushui District for a loan with a term of 5 years, which was originally due and payable in various installments fromDecember 21, 2013 toJuly 26, 2018 . OnJune 21, 2018 , the loan was extended for additional 5 years and will be due and payable in various installments fromDecember 21, 2018 toJune 20, 2023 . The loan is secured by certain of the Company's manufacturing equipment with net book value of$460,107 and$1,130,333 as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As ofSeptember 30, 2022 andDecember 31, 2021 , the total outstanding loan balance was$3,521,225 and$3,921,139 , respectively. Out of the total outstanding loan balance, the current portion amounted$3,521,225 and$1,960,569 as ofSeptember 30, 2022 andDecember 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and$1,960,570 are presented as non-current liabilities in the consolidated balance sheet as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. OnApril 17, 2019 , the Company entered into a loan agreement with theRural Credit Union of Xushui District for a loan with a term of 2 years, which was due and payable in various installments fromAugust 21, 2019 toApril 16, 2021 . The loan was renewed onMarch 22, 2021 andDecember 24, 2021 and extended for additional 3 years in total, which will be due onApril 16, 2024 according to the new schedule. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As ofSeptember 30, 2022 andDecember 31, 2021 , the total outstanding loan balance was$2,253,585 and$2,509,528 , respectively. Out of the total outstanding loan balance, current portion amounted were $nil and$2,509,528 as ofSeptember 30, 2022 andDecember 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of$2,253,585 and $nil are presented as non-current liabilities in the consolidated balance sheet as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. OnDecember 12, 2019 , the Company entered into a loan agreement with theRural Credit Union of Xushui District for a loan with a term of 2 years, which is due and payable in various installments fromJune 21, 2020 toDecember 11, 2021 . The loan was renewed onMarch 22, 2021 andDecember 24, 2021 and extended for additional 3 years in total, which will be due onDecember 11, 2024 according to the new schedule. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As ofSeptember 30, 2022 andDecember 31, 2021 , the total outstanding loan balance was$1,831,037 and$2,038,992 , respectively. Out of the total outstanding loan balance, current portion amounted were $nil and$2,038,992 as ofSeptember 30, 2022 andDecember 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of$1,831,037 and $nil are presented as non-current liabilities in the consolidated balance sheet as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. OnJuly 1, 2022 , the Company entered into a loan agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowedRMB 400,000 from the customer for a term of five years, which is payable in monthly installment ofRMB10667 fromJuly 2022 toJuly 2027 . As ofSeptember 30, 2022 , the total outstanding loan balance was$50,706 . Out of the total outstanding loan balance, current portion amounted was$6,489 , which is presented as current liabilities and the remaining balance of$44,217 is presented as non-current liabilities in the consolidated balance sheet as ofSeptember 30, 2022 . Total interest expenses for the short-term bank loans and long-term loans for the three months endedSeptember 30, 2022 and 2021 were$248,239 and$264,644 , respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months endedSeptember 30, 2022 and 2021 were$753,789 and$788,094 , respectively. 39 Shareholder Loans
Mr.Zhenyong Liu , the Company's CEO has loaned money toDongfang Paper for working capital purposes over a period of time. OnJanuary 1, 2013 ,Dongfang Paper and Mr.Zhenyong Liu renewed the three-year term loan previously entered onJanuary 1, 2010 , and extended the maturity date further toDecember 31, 2015 . OnDecember 31, 2015 , the Company paid off the loan of$2,249,279 , together with interest of$391,374 for the period from 2013 to 2015. Approximately$361,044 and$402,047 of interest were outstanding to Mr.Zhenyong Liu , which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. OnDecember 10, 2014 , Mr.Zhenyong Liu provided a loan to the Company, amounted to$8,742,278 toDongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate ofPeople's Bank of China . The unsecured loan was provided onDecember 10, 2014 , and would be originally due onDecember 10, 2017 . During the year of 2016, the Company repaid$6,012,416 to Mr.Zhenyong Liu , together with interest of$288,596 . InFebruary 2018 , the company paid off the remaining balance, together with interest of$20,400 . As ofSeptember 30, 2022 andDecember 31, 2021 , approximately$42,255 and$47,054 of interest, respectively were outstanding to Mr.Zhenyong Liu , which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. OnMarch 1, 2015 , the Company entered an agreement with Mr.Zhenyong Liu which allowsDongfang 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 thePeople's Bank of China at the time of the borrowing. OnJuly 13, 2015 , an unsecured amount of$4,324,636 was drawn from the facility. OnOctober 14, 2016 an unsecured amount of$2,883,091 was drawn from the facility. InFebruary 2018 , the company repaid$1,507,432 to Mr.Zhenyong Liu . The loan would be originally due onJuly 12, 2018 . Mr.Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance was due onJuly 12, 2021 . OnNovember 23, 2018 , the Company repaid$3,768,579 to Mr.Zhenyong Liu , together with interest of$158,651 . InDecember 2019 , the Company paid off the remaining balance, together with interest of 94,636. As ofSeptember 30, 2022 andDecember 31, 2021 , the outstanding interest was$193,579 and$215,565 , respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. As ofSeptember 30, 2022 andDecember 31, 2021 , total amount of loans due to Mr.Zhenyong Liu were $nil. The interest expense incurred for such related party loans were $nil for the three and nine months endedSeptember 30, 2022 and 2021. The accrued interest owing to Mr.Zhenyong Liu was approximately$596,878 and$664,666 , as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, which was recorded in other payables and accrued liabilities. OnDecember 8, 2021 , the Company entered an agreement with Mr.Zhenyong Liu , which allows Mr.Zhenyong Liu to borrow from the Company an amount of$6,507,431 (RMB44,089,085 ). The loan is unsecured and carries a fixed interest rate of 3% per annum. The loan was repaid by Mr.Zhenyong Liu inFebruary 2022 . As ofSeptember 30, 2022 andDecember 31, 2021 , amount due to shareholder was$727,433 , which represents funds from shareholders to pay for various expenses incurred in theU.S. The amount is due on demand with interest free. 40
Critical Accounting Policies and Estimates
The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe 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 endedSeptember 30, 2022 and 2021, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record such impairment in the future. Foreign Currency Translation The functional currency ofDongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi ("RMB"). Under ASC Topic 830-30, all assets and liabilities are translated intoUnited States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as ofSeptember 30, 2022 andDecember 31, 2021 to translate the Chinese RMB to theU.S. Dollars are 7.0998:1 and 6.3757:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.6410:1 and 6.4682:1 for the three months endedSeptember 30, 2022 and 2021, respectively. Translation adjustments are included in other comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor forBaoding Huanrun Trading Co. , for its long-term bank loans in an amount of$4,366,320 (RMB31,000,000 ), which matures at various times in 2023.Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. IfHuanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions. 41
Recent Accounting Pronouncements
InJune 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 afterDecember 15, 2019 , with early adoption permitted. InOctober 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 afterDecember 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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