Item 1.
|
Financial Statements
|
ORIENT
PAPER, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,505,284
|
|
|
$
|
2,332,646
|
|
Restricted cash
|
|
|
6,026,910
|
|
|
|
2,162,318
|
|
Accounts receivable (net of allowance for doubtful accounts of $2,672 and $79,478 as of September 30, 2017 and December 31, 2016, respectively)
|
|
|
130,928
|
|
|
|
3,894,436
|
|
Inventories
|
|
|
9,603,313
|
|
|
|
5,632,030
|
|
Prepayments and other current assets
|
|
|
55,899
|
|
|
|
455,892
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,322,334
|
|
|
|
14,477,322
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
190,744,883
|
|
|
|
187,689,880
|
|
Value-added tax recoverable
|
|
|
3,015,460
|
|
|
|
2,945,575
|
|
Deferred tax asset non-current
|
|
|
5,494,443
|
|
|
|
3,264,841
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
221,577,120
|
|
|
$
|
208,377,618
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
10,245,747
|
|
|
$
|
5,045,409
|
|
Current portion of long-term loans from credit union
|
|
|
3,857,222
|
|
|
|
-
|
|
Current obligations under capital lease
|
|
|
-
|
|
|
|
8,786,528
|
|
Accounts payable
|
|
|
11,020
|
|
|
|
559,952
|
|
Advance from customers
|
|
|
-
|
|
|
|
28,831
|
|
Notes payable
|
|
|
6,026,910
|
|
|
|
2,162,318
|
|
Due to a related party
|
|
|
21,775
|
|
|
|
56,872
|
|
Accrued payroll and employee benefits
|
|
|
342,492
|
|
|
|
209,936
|
|
Other payables and accrued liabilities
|
|
|
1,561,476
|
|
|
|
2,424,778
|
|
Income taxes payable
|
|
|
1,260,633
|
|
|
|
1,310,967
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,327,275
|
|
|
|
20,585,591
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
3,616,146
|
|
|
|
4,843,592
|
|
Loans from a related party
|
|
|
10,547,093
|
|
|
|
10,090,817
|
|
Deferred gain on sale-leaseback
|
|
|
-
|
|
|
|
102,232
|
|
|
|
|
|
|
|
|
|
|
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $35,075,274 and $35,618,995 as of September 30, 2017 and December 31, 2016, respectively)
|
|
|
37,490,514
|
|
|
|
35,622,232
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common stock, 500,000,000 shares authorized, $0.001 par value per share, 21,450,316 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
|
|
|
21,450
|
|
|
|
21,450
|
|
Additional paid-in capital
|
|
|
50,635,243
|
|
|
|
50,635,243
|
|
Statutory earnings reserve
|
|
|
6,080,574
|
|
|
|
6,080,574
|
|
Accumulated other comprehensive income
|
|
|
2,593,708
|
|
|
|
(5,441,391
|
)
|
Retained earnings
|
|
|
124,755,631
|
|
|
|
121,459,510
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
184,086,606
|
|
|
|
172,755,386
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
221,577,120
|
|
|
$
|
208,377,618
|
|
See
accompanying notes to condensed consolidated financial statements.
ORIENT
PAPER, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,507,053
|
|
|
$
|
37,462,066
|
|
|
$
|
81,584,395
|
|
|
$
|
103,368,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(26,285,765
|
)
|
|
|
(30,131,223
|
)
|
|
|
(65,244,521
|
)
|
|
|
(85,381,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
7,221,288
|
|
|
|
7,330,843
|
|
|
|
16,339,874
|
|
|
|
17,986,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(2,848,699
|
)
|
|
|
(2,599,698
|
)
|
|
|
(8,319,590
|
)
|
|
|
(9,641,408
|
)
|
Loss from disposal of property, plant and equipment
|
|
|
(1,653,039
|
)
|
|
|
-
|
|
|
|
(1,665,140
|
)
|
|
|
(25,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
2,719,550
|
|
|
|
4,731,145
|
|
|
|
6,355,144
|
|
|
|
8,319,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,503
|
|
|
|
14,832
|
|
|
|
29,259
|
|
|
|
95,226
|
|
Subsidy income
|
|
|
410
|
|
|
|
-
|
|
|
|
41,223
|
|
|
|
-
|
|
Interest expense
|
|
|
(647,963
|
)
|
|
|
(677,576
|
)
|
|
|
(2,023,577
|
)
|
|
|
(2,094,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
2,077,500
|
|
|
|
4,068,401
|
|
|
|
4,402,049
|
|
|
|
6,320,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
(505,165
|
)
|
|
|
(1,033,859
|
)
|
|
|
(1,105,928
|
)
|
|
|
(2,077,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
1,572,335
|
|
|
|
3,034,542
|
|
|
|
3,296,121
|
|
|
|
4,242,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
3,790,338
|
|
|
|
(1,263,906
|
)
|
|
|
8,035,099
|
|
|
|
(5,009,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
$
|
5,362,673
|
|
|
$
|
1,770,636
|
|
|
$
|
11,331,220
|
|
|
$
|
(767,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings per Share
|
|
$
|
0.07
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – Basic and Diluted
|
|
|
21,450,316
|
|
|
|
21,450,316
|
|
|
|
21,450,316
|
|
|
|
21,404,627
|
|
See
accompanying notes to condensed consolidated financial statements.
ORIENT
PAPER, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
3,296,121
|
|
|
$
|
4,242,251
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,928,502
|
|
|
|
11,668,976
|
|
Loss from disposal of property, plant and equipment
|
|
|
1,665,140
|
|
|
|
25,774
|
|
(Recovery from) Allowance for bad debts
|
|
|
(78,562
|
)
|
|
|
20,833
|
|
Share-based compensation expenses
|
|
|
-
|
|
|
|
1,417,395
|
|
Deferred tax
|
|
|
(2,034,373
|
)
|
|
|
(1,515,689
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,928,087
|
|
|
|
(1,041,625
|
)
|
Prepayments and other current assets
|
|
|
472,847
|
|
|
|
1,708,601
|
|
Inventories
|
|
|
(3,631,641
|
)
|
|
|
1,482,013
|
|
Accounts payable
|
|
|
(561,121
|
)
|
|
|
1,064,764
|
|
Advance from customers
|
|
|
(29,446
|
)
|
|
|
-
|
|
Notes payable
|
|
|
3,680,693
|
|
|
|
(11,392,982
|
)
|
Due to a related party
|
|
|
(36,807
|
)
|
|
|
(341,790
|
)
|
Accrued payroll and employee benefits
|
|
|
120,250
|
|
|
|
(252,632
|
)
|
Other payables and accrued liabilities
|
|
|
(771,027
|
)
|
|
|
911,234
|
|
Income taxes payable
|
|
|
(107,105
|
)
|
|
|
632,911
|
|
Net Cash Provided by Operating Activities
|
|
|
16,841,558
|
|
|
|
8,630,034
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(7,628,798
|
)
|
|
|
(7,713,993
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
58,632
|
|
|
|
39,344
|
|
Net Cash Used in Investing Activities
|
|
|
(7,570,166
|
)
|
|
|
(7,674,649
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from related party loans
|
|
|
-
|
|
|
|
14,000
|
|
Repayments of related party loans
|
|
|
-
|
|
|
|
(6,090,257
|
)
|
Proceeds from short term bank loans
|
|
|
10,011,484
|
|
|
|
3,493,848
|
|
Proceeds from Rural Credit Union loans
|
|
|
2,355,643
|
|
|
|
-
|
|
Repayment of bank loans
|
|
|
(5,152,970
|
)
|
|
|
(3,038,129
|
)
|
Payment of capital lease obligation
|
|
|
(8,973,845
|
)
|
|
|
(542,678
|
)
|
(Increase in) Release of restricted cash
|
|
|
(3,680,693
|
)
|
|
|
8,354,853
|
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(5,440,381
|
)
|
|
|
2,191,637
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
341,627
|
|
|
|
(197,154
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
4,172,638
|
|
|
|
2,949,868
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
2,332,646
|
|
|
|
2,641,917
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
6,505,284
|
|
|
$
|
5,591,785
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest cost
|
|
$
|
1,359,343
|
|
|
$
|
1,746,568
|
|
Cash paid for income taxes
|
|
$
|
3,247,406
|
|
|
$
|
2,960,604
|
|
See
accompanying notes to condensed consolidated financial statements.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Organization and Business Background
Orient
Paper, Inc. 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 Orient Paper Milling Company Limited (“Orient
Paper HB”), a producer and distributor of paper products in China, on October 29, 2007, and effective December 21, 2007,
we changed our name to “Orient Paper, Inc.” to more accurately describe our business.
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 Orient Paper HB and such shares of Orient Paper
HB were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders
of Orient Paper HB) to exercise control over the disposition of Dongfang Holding’s shares in Orient Paper HB on Dongfang
Holding’s behalf until Dongfang Holding successfully completed the change in registration of Orient Paper HB’s capital
with the relevant PRC Administration of Industry and Commerce as the 100% owner of Orient Paper HB’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, Orient Paper HB, became an indirectly owned subsidiary of the Company.
Dongfang
Holding, as the 100% owner of Orient Paper HB, was unable to complete the registration of Orient Paper HB’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 Orient Paper HB to their original shareholders,
and the original Orient Paper HB shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Orient
Paper Shengde”) to transfer the control of Orient Paper HB over to Orient Paper 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 Orient Paper Shengde, a limited liability company organized
under the laws of the PRC. Because Orient Paper Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as
a wholly foreign-owned entity under PRC law.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
To
ensure proper compliance of the Company’s control over the ownership and operations of Orient Paper HB with certain PRC
regulations, on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”)
with Orient Paper HB and Orient Paper HB Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde
Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Orient Paper 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).
Orient Paper Shengde is mainly engaged in production and distribution of digital photo paper and is 100% owned by Shengde Holdings.
Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement,
which generally provides that Orient Paper Shengde shall provide exclusive technical, business and management consulting services
to Orient Paper HB, in exchange for service fees including a fee equivalent to 80% of Orient Paper HB’s total annual net
profits; (ii) Loan Agreement, which provides that Orient Paper Shengde will make a loan in the aggregate principal amount of $10,000,000
to Orient Paper HB Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan
to the registered capital of Orient Paper HB; (iii) Call Option Agreement, which generally provides, among other things, that
Orient Paper HB Equity Owners irrevocably grant to Orient Paper Shengde an option to purchase all or part of each owner’s
equity interest in Orient Paper HB. The exercise price for the options shall be RMB1 which Orient Paper Shengde should pay to
each of Orient Paper HB Equity Owner for all their equity interests in Orient Paper HB; (iv) Share Pledge Agreement, which provides
that Orient Paper HB Equity Owners will pledge all of their equity interests in Orient Paper HB to Orient Paper Shengde as security
for their obligations under the other agreements described in this section. Specifically, Orient Paper Shengde is entitled to
dispose of the pledged equity interests in the event that Orient Paper HB Equity Owners breach their obligations under the Loan
Agreement or Orient Paper HB fails to pay the service fees to Orient Paper Shengde pursuant to the Exclusive Technical Service
and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Orient Paper HB Equity Owners shall irrevocably
entrust a designee of Orient Paper 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 Orient Paper HB or with respect to any equity owner
action to be taken in accordance with the laws and Orient Paper HB’s Articles of Association. The terms of the agreement
are binding on the parties for as long as Orient Paper HB Equity Owners continue to hold any equity interest in Orient Paper HB.
An Orient Paper HB Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior
approval of Orient Paper Shengde. As the Company had controlled Orient Paper HB since July 16, 2007 through Dongfang Holding and
the trust until June 24, 2009, and continues to control Orient Paper HB through Orient Paper Shengde and the Contractual Agreements,
the execution of the Contractual Agreements is considered as a business combination under common control.
On
February 10, 2010, Orient Paper Shengde and the Orient Paper HB 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 Orient Paper Shengde instead of Orient Paper HB, 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 Orient Paper HB and its businesses in the PRC.
An
agreement was also entered into among Orient Paper Shengde, Orient Paper HB and the Orient Paper HB Equity Owners on December
31, 2010, reiterating that Orient Paper Shengde is entitled to 100% of the distributable profit of Orient Paper HB, pursuant to
the above mentioned Contractual Agreements. In addition, Orient Paper HB and the Orient Paper HB Equity Owners shall not declare
any of Orient Paper HB’s unappropriated earnings as dividend, including the unappropriated earnings of Orient Paper HB from
its establishment to 2010 and thereafter.
Orient
Paper has no direct equity interest in Orient Paper HB. However, through the Contractual Agreements described above Orient Paper
is found to be the primary beneficiary (the “Primary Beneficiary”) of Orient Paper HB and is deemed to have the effective
control over Orient Paper HB’s activities that most significantly affect its economic performance, resulting in Orient Paper
HB being treated as a controlled variable interest entity of Orient Paper 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 Orient Paper HB for the three months ended September 30, 2017 and 2016 was accounted for 100% and 99.83%,
respectively, of the Company’s total revenue for the same periods. The revenue of the Company generated from Orient Paper
HB for the nine months ended September 30, 2017 and 2016 were 100% and 99.36%, respectively. Orient Paper HB also accounted for
86.24% and 86.23% of the total assets of the Company as of September 30, 2017 and December 31, 2016, respectively.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of September 30, 2017 and December 31, 2016, details of the Company’s subsidiaries and variable interest entities are as
follows:
|
|
Date of Incorporation
|
|
Place of 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
|
Orient Paper Shengde
|
|
June 1, 2009
|
|
PRC
|
|
|
100
|
%
|
|
Paper Production and distribution
|
Variable interest entity (“VIE”):
|
|
|
|
|
|
|
|
|
|
|
Orient Paper HB
|
|
March 10, 1996
|
|
PRC
|
|
|
Control
|
*
|
|
Paper Production and distribution
|
*
Orient Paper HB 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.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company has aggregated the financial information of Orient Paper HB in the table below. The aggregate carrying value of Orient
Paper HB’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed
consolidated balance sheets as of September 30, 2017 and December 31, 2016 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,953,938
|
|
|
$
|
2,005,288
|
|
Restricted cash
|
|
|
6,026,910
|
|
|
|
2,162,318
|
|
Accounts receivable
|
|
|
130,928
|
|
|
|
3,894,435
|
|
Inventories
|
|
|
9,561,773
|
|
|
|
5,592,230
|
|
Prepayments and other current assets
|
|
|
51,229
|
|
|
|
451,349
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,724,778
|
|
|
|
14,105,620
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
166,662,735
|
|
|
|
162,779,492
|
|
Deferred tax asset non-current
|
|
|
4,709,214
|
|
|
|
2,804,019
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
191,096,727
|
|
|
$
|
179,689,131
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
10,245,747
|
|
|
$
|
5,045,409
|
|
Current portion of long-term loans from credit union
|
|
|
3,766,819
|
|
|
|
-
|
|
Current obligations under capital lease
|
|
|
|
|
|
|
8,786,528
|
|
Accounts payable
|
|
|
11,020
|
|
|
|
559,952
|
|
Advance from customers
|
|
|
|
|
|
|
28,831
|
|
Notes payable
|
|
|
6,026,910
|
|
|
|
2,162,318
|
|
Due to a related party
|
|
|
21,775
|
|
|
|
56,872
|
|
Accrued payroll and employee benefits
|
|
|
337,957
|
|
|
|
206,642
|
|
Other payables and accrued liabilities
|
|
|
1,561,446
|
|
|
|
2,424,751
|
|
Income taxes payable
|
|
|
1,260,721
|
|
|
|
1,311,051
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,232,395
|
|
|
|
20,582,354
|
|
|
|
|
|
|
|
|
|
|
Loans from credit union
|
|
|
1,295,786
|
|
|
|
4,843,592
|
|
Loans from a related party
|
|
|
10,547,093
|
|
|
|
10,090,817
|
|
Deferred gain on sale-leaseback
|
|
|
-
|
|
|
|
102,232
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
35,075,274
|
|
|
$
|
35,618,995
|
|
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.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2)
Basis of Presentation and Significant Accounting Policies
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and
notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial
statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016 of Orient Paper, Inc. a Nevada
corporation, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “Orient Paper”,
“we”, “us” or “our”).
Principles
of Consolidation
Our
unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary
for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature,
unless otherwise noted. The balance sheet as of September 30, 2017 and the results of operations for the three and nine months
ended September 30, 2017 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.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The
Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable
judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that
the Company could realize in a current market exchange. As of September 30, 2017 and December 31, 2016, the carrying value of
the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes
payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values
because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at
their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank
of China.
The
Company does not have any assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December
31, 2016.
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 of $6,026,910 as of September 30, 2017 was presented for the cash deposited at the Bank of Cangzhou for purpose of securing
the bank acceptance notes from the bank (see Note (9)). The restriction will be lifted upon the maturity of the notes payable
on January 5, 2018.
Restricted
cash of $2,162,318 as of December 31, 2016 was presented for the cash deposited at the Bank of Hebei for purpose of securing the
bank acceptance notes from these banks. The restriction has been lifted upon the maturity of the notes payable on February 1,
2017.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4)
Inventories
Raw
materials inventory includes mainly recycled paper and coal. Finished goods include mainly products of corrugating medium
paper, offset printing paper and tissue paper products. Inventories consisted of the following as of September 30, 2017 and
December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw Materials
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
6,711,977
|
|
|
$
|
3,337,649
|
|
Recycled white scrap paper
|
|
|
838,086
|
|
|
|
-
|
|
Recycled scrap binding margin
|
|
|
831,968
|
|
|
|
547,803
|
|
Coal & gas
|
|
|
85,950
|
|
|
|
242,307
|
|
Base paper and other raw materials
|
|
|
222,062
|
|
|
|
265,464
|
|
|
|
|
8,690,043
|
|
|
|
4,393,223
|
|
Finished Goods
|
|
|
913,270
|
|
|
|
1,238,807
|
|
Totals
|
|
$
|
9,603,313
|
|
|
$
|
5,632,030
|
|
(5)
Prepayments and other current assets
Prepayments
and other current assets consisted of the following as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid land lease
|
|
$
|
49,722
|
|
|
$
|
432,464
|
|
Others
|
|
|
6,177
|
|
|
|
23,428
|
|
|
|
$
|
55,899
|
|
|
$
|
455,892
|
|
(6)
Property, plant and equipment, net
As
of September 30, 2017 and December 31, 2016, property, plant and equipment consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Property, Plant, and Equipment:
|
|
|
|
|
|
|
Land use rights
|
|
$
|
12,286,700
|
|
|
$
|
11,755,168
|
|
Building and improvements
|
|
|
97,336,831
|
|
|
|
92,927,111
|
|
Machinery and equipment
|
|
|
126,892,546
|
|
|
|
123,932,336
|
|
Vehicles
|
|
|
584,085
|
|
|
|
590,619
|
|
Construction in progress
|
|
|
33,797,507
|
|
|
|
25,084,416
|
|
Totals
|
|
|
270,897,669
|
|
|
|
254,289,650
|
|
Less: accumulated depreciation and amortization
|
|
|
(80,152,786
|
)
|
|
|
(66,599,770
|
)
|
Property, Plant and Equipment, net
|
|
$
|
190,744,883
|
|
|
$
|
187,689,880
|
|
As
of September 30, 2017 and December 31, 2016, land use rights represented two parcel of state-owned lands located in Xushui County
of Hebei Province in China, with lease terms of 50 years expiring from 2061 to 2066.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company entered into a sale-leaseback arrangement with a leasing company in China on June 16, 2013 for a total financing proceeds
in the amount of RMB 150 million (approximately US$23 million). Under the sale-leaseback arrangement, Orient Paper HB sold certain
of its paper manufacturing equipment to the leasing company for an amount of RMB 150 million (approximately US$23 million). Concurrent
with the sale of equipment, Orient Paper HB leases back all of the equipment (“Leased Equipment”) sold to the leasing
company for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB
15,000 (approximately $2,260) to the leasing company and buy back all of the Leased Equipment. The sale-leaseback was treated
by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately
recognized) under ASC 840-40-25-4. All of the Leased Equipment was included as part of the property, plant and equipment of the
Company during the lease preiod. As a result of the sale, a deferred gain on sale of Leased Equipment in the amount of $1,379,282
was created at the closing of the transaction and presented as a non-current liability. The deferred gain has been amortized by
the Company during the lease term and used to offset the depreciation of the Leased Equipment. See ”
Financing with Sale-Leaseback”
under Note (7), Loans Payable, for details of the transaction and asset collaterals.
On
July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into the 2015 Agreement,
to amend and restate the Lease Financing Agreement entered into in 2013. The 2015 Agreement sets forth a modified and extended
payment schedule with respect to the remaining payment obligation, with the final repayment date extended to June 21, 2017. In
accordance with ASC 840-30-35, the present balances of the capital lease assets and obligations under capital lease were adjusted
by an amount equal to the difference between the present value of the future minimum lease payments under the revised agreement
(computed using the interest rate used to recognize the lease initially) and the present balance of the obligation, which was
approximately $1,617,574 at the date of the 2015 Agreement. As a result, the capital lease asset cost was recorded at the new
cost of $27,599,774 at the date of the 2015 Agreement.
On
August 24, 2017, the Company made a final payment on outstanding obligations and bought back all of the Lease Equipment at nominal
price according to the agreement. The lease assets were reclassified as own assets and capital lease cost were $nil and $24,328,940
as of September 30, 2017 and December 31, 2016, respectively.
Construction
in progress mainly represents payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue
paper workshops and general infrastructure and administrative facilities in the Wei County Industrial Park. The tissue paper development
project at the Wei County Industrial Park is expected to be completed in 2017. For the three months ended September 30, 2017 and
2016, the amount of interest capitalized is $nil and $10,839, respectively. For the nine months ended September 30, 2017
and 2016, the amount of interest capitalized is $9,761 and $43,786, respectively.
As
of September 30, 2017 and December 31, 2016, certain property, plant and equipment of Orient Paper HB with net values of $8,579,118
and $9,813,294, respectively, have been pledged pursuant to a long-term loan from credit union of Orient Paper HB. In addition,
plant and equipment of Orient Paper Shengde with net values of $15,461,557 and $nil as of September 30, 2017 and December 31,
2016 respectively, and another land use right with net values of $5,053,152 and $nil as of September 30, 2017 and December 31,
2016 were pledged for the bank loan from Bank of Cangzhou. See ”
Short-term bank loans
” under Note (7), Loans
Payable, for details of the transaction and asset collaterals.
Depreciation
and amortization of property, plant and equipment was $3,729,002 and $3,716,022 for the three months ended September 30, 2017
and 2016, respectively. Depreciation and amortization of property, plant and equipment was $10,928,502 and $11,668,976 for
the nine months ended September 30, 2017 and 2016, respectively.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7)
Loans Payable
Short-term
bank loans
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Bank of Hebei
|
|
(a)
|
|
$
|
-
|
|
|
$
|
2,162,318
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
(b)
|
|
|
-
|
|
|
|
2,883,091
|
|
Bank of Cangzhou
|
|
(c)
|
|
|
6,026,910
|
|
|
|
-
|
|
ICBC Loan 2
|
|
(d)
|
|
|
4,218,837
|
|
|
|
-
|
|
Total short-term bank loans
|
|
|
|
$
|
10,245,747
|
|
|
$
|
5,045,409
|
|
(a)
|
On July
8, 2016, the Company entered into a working capital loan agreement with the Bank of Hebei, with a balance of $nil as of September
30, 2017 and $2,162,318 as of December 31, 2016, respectively. The loan bears a fixed interest rate of 5.22% per annum. The
loan was due on July 8, 2017. The working capital loan is guaranteed by the Company’s CEO and Hebei Tengsheng with its
land use right and real property pledged by Hebei Tengsheng as collateral for the benefit of the bank. The loan was repaid
on July 6, 2017.
|
|
|
(b)
|
On September 13,
2016, the Company entered into a working capital loan agreement with ICBC, with a balance of $nil as of September 30, 2017
and $2,883,091 as of December 31, 2016, respectively. The loan bears a fixed interest rate of 4.5675% per annum. The loan
was due on October 19, 2017. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as
collateral for the benefit of the bank. The loan was repaid on September 7, 2017.
|
|
|
(c)
|
On December 5, 2016,
the Company entered into a working capital loan agreement with the Bank of Cangzhou. The loan was drawn on January 3, 2017,
with a balance of $6,026,910 as of September 30, 2017. The loan bears a fixed interest rate of 6.09% per annum. The loan will
be due on January 3, 2018. The working capital loan is secured by the Company’s land use right and guaranteed by Orient
Paper Shengde with its production equipment and plant as collateral for the benefit of the bank.
|
|
|
(d)
|
On January 10, 2017,
the Company entered into a working capital loan agreement with the ICBC, with a balance of $4,218,837 as of September 30,
2017. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit
of the bank. The loan bears a fixed interest rate of 4.5675% per annum. The loan will be due on January 17, 2018.
|
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of September 30, 2017, there were guaranteed short-term borrowings of $10,245,747 and unsecured bank loans of $nil. As of December
31, 2016, there were guaranteed short-term borrowings of $5,045,409 and unsecured bank loans of $nil.
The
average short-term borrowing rates for the three months ended September 30, 2017 and 2016 were approximately 5.30% and 8.19%,
respectively. The average short-term borrowing rates for the nine months ended September 30, 2017 and 2016 were approximately
5.28% and 8.53%, respectively.
Long-term
loans from credit union
As
of September 30, 2017 and December 31, 2016, loans payable to Rural Credit Union of Xushui County, amounted to $7,473,368 and
$4,843,592, respectively.
On
April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years,
which is payable 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 0.72% per month. In August 2015, after giving the required notice
to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the
loan in an amount of $188,341, of which $82,870 was paid ahead of its original repayment schedule as of September 30, 2017. As
of September 30, 2017 and December 31, 2016, total outstanding loan balance was $1,295,786 and $1,239,729, respectively, which
is presented as non-current liabilities in the condensed consolidated balance sheet.
On
July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which
is due and payable in various installments from December 21, 2013 to July 26, 2018. The loan is secured by certain of the Company’s
manufacturing equipment with net book value of $8,579,118 and $9,813,294 as of September 30, 2017 and December 31, 2016, respectively.
Interest payment is due quarterly and bears a fixed rate of 0.72% per month. In August 2015, after giving the required notice
to the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the
loan in an amount of $195,875, of which $75,336 was paid ahead of its original repayment schedule as of September 30, 2017. As
of September 30, 2017 and December 31, 2016, the total outstanding loan balance was $3,766,818 and $3,603,863 respectively. Out
of the total outstanding loan balance, current portion amounted were $3,766,818 and $nil as of September 30, 2017 and December
31, 2016, respectively, which are presented as current liabilities in the condensed consolidated balance sheet and the remaining
balance of $nil and $3,603,863 are presented as non-current liabilities in the condensed consolidated balance sheet as of September
30, 2017 and December 31, 2016, respectively.
On
April 20, 2017, the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 2 years,
which is due and payable in various installments from August 26, 2017 to April 19, 2019. The loan is guaranteed by Hebei Tengsheng
with its land use right pledged as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed
rate of 0.6% per month. As of September 30, 2017 the total outstanding loan balance was $2,410,764, out of which $90,404 and $2,320,360
are presented as current and non-current liabilities in the condensed consolidated balance sheet respectively.
Total
interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2017 and 2016 were
$320,077 and $354,011, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months
ended September 30, 2017 and 2016 were $907,785 and $1,172,692, respectively.
Financing
with Sale-Leaseback
The
Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013,
for a total financing proceeds in the amount of RMB 150 million (approximately US$23 million). Under the sale-leaseback arrangement,
Orient Paper HB sold the Leased Equipment to CNFTFL for RMB 150 million (approximately US$23 million). Concurrent with the sale
of equipment, Orient Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the
lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,260) to CNFTFL and buy back all of
the Leased Equipment. The sale-leaseback was treated by the Company as a mere financing and capital lease transaction, rather
than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment
were included as part of the property, plant and equipment of the Company for the periods presented; while the net present value
of the minimum lease payment (including a lease service charge equal to 5.55% of the amount financed, i.e. approximately US$1.36
million) was recorded as obligations under capital lease and was calculated with CNFTFL’s implicit interest rate of 6.15%
per annum and stated at $25,750,170 at the inception of the lease on June 16, 2013.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Orient
Paper HB made all payments due according to the schedule prior to December 15, 2014. On December 15, 2014, Orient Paper HB stopped
making principal payments and entered into negotiations with the CNFTFL regarding a modified payment schedule for the remaining
obligations. On July 1, 2015, Orient Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into an
agreement (the “2015 Agreement”), to amend and restate the Lease Financing Agreement entered into in 2013 (the “2015
Agreement”). The 2015 Agreement sets forth a modified and extended payment schedule with respect to the remaining payment
obligation, with the final repayment date extended to June 21, 2017. Under the 2015 Agreement, the interest accrues at a rate
of 15% per annum starting on June 16, 2015, and is payable on the 20th of every March, June, September and December until the
principal is paid off, except for the first payment, which is due on July 31, 2015. Orient Paper HB made all payments due according
to the modified schedule prior to June 20, 2016. Orient Paper HB made partial payments in the following payment obligations as
well as interests on overdue balance in accordance with the 2015 Agreement until August 24, 2017, when the remaining overdue amount
was fully paid off. All the Lease Equipment was bought back at the nominal price according to the agreement. The balance of the
long-term obligations under capital lease were $nil as of September 30, 2017 and December 31, 2016, and its current portion in
the amount of $nil and $8,786,528, respectively.
Total
interest expenses for the sale-leaseback arrangement for the three months ended September 30, 2017 and 2016 were $213,571 and
$237,053, respectively. Total interest expenses for the sale-leaseback arrangement for the nine months ended September 30, 2017
and 2016 were $789,322 and $526,912, respectively.
As
a result of the sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The
deferred gain was amortized over the lease term and as an offset to depreciation of the Leased Equipment. In term of the extension
of the new payment schedule, the deferred gain was amortized over the remaining lease term up to June 21, 2017.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8)
Related Party Transactions
The
Company’s CEO has loaned money to Orient Paper HB for working capital purposes over a period of time. On January 1, 2013,
Orient Paper HB 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 $386,225 and $369,517 of interest were outstanding to Mr. Zhenyong
Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance
sheet as of September 30, 2017 and December 31, 2016, respectively.
On
December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $9,040,365 and $8,649,272 as of September 30,
2017 and December 31, 2016, to Orient Paper HB for working capital purpose with an interest rate of 5.25% 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. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due
on December 2, 2020. As of September 30, 2017 and December 31, 2016, the outstanding loan balance was $3,013,455 and $2,883,090,
respectively and the accrued interest was $143,516 and $43,246, respectively, 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 Orient Paper HB to borrow from the CEO an amount
up to $18,080,730 (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 $4,348,267
was drawn from the facility, which carried an interest rate of 5.25%. On October 14, 2016 an unsecured amount of $2,898,845 was
drawn from the facility, which carried an interest rate of 4.35%. 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. As of September 30,
2017 and December 31, 2016, the outstanding loan balance were $7,533,638 and $7,207,727, respectively and the accrued interest
was $354,552 and $104,062, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities
in the consolidated balance sheet.
As
of September 30, 2017 and December 31, 2016, total amount of loans due to Mr. Zhenyong Liu were $10,547,093 and $10,090,817, respectively.
The interest expenses incurred for such related party loans are $114,315 and $97,351 for the three months ended September 30,
2017 and 2016, respectively. The interest expenses incurred for such related party loans are $336,231 and $438,630 for the nine
months ended September 30, 2017 and 2016, respectively. On October 20, 2017, the Company’s CEO agreed to permit the Company
to postpone the repayment of the loan and accrued interest on his loan to Orient Paper HB until the earliest date on which the
Company’s quarterly or annual financial statements filed with the SEC show a satisfactory working capital level. The accrued interest
owe to Mr. Zhenyong Liu was approximately $884,293 and $516,825 as of September 30, 2017 and December 31, 2016, respectively,
which was recorded in other payables and accrued liabilities (see Note (10) below) as part of the current liabilities.
During
the three and nine months ended September 30, 2017 the Company borrowed $nil from shareholders. During the three and nine months
ended September 30, 2016, the Company borrowed $nil and $14,000 from shareholders to pay for various expenses incurred in the
U.S. The amount was due on demand with interest free. The Company repaid the entire balance by the end of the period.
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 $147,228 (RMB1,000,000).
The lease agreement expired in August 2016. On August 9, 2016, the Company paid off the rental for the first lease agreement and
entered into a supplementary agreement with Hebei Fangsheng, who agreed to extend the lease term for another two years, with the
same rental payment as original lease agreement.
On
October 20, 2017, Hebei Fangsheng agreed to permit the Company to continue to postpone the repayment of the accrued rental charged
to Orient Paper HB until the earliest date on which the Company’s quarterly or annual financial statements filed with the SEC
show a satisfactory working capital level. The accrued rental owed to Hebei Fangsheng was approximately $21,775 and $56,872, which
was recorded as part of the current liabilities as of September 30, 2017 and December 31, 2016, respectively.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9)
Notes payable
As
of September 30, 2017, the Company had bank acceptance notes of $6,026,910 from the Bank of Cangzhou to one of its major suppliers
for settling purchase of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and
are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $6,026,910 in the bank as
mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at nil% per annum and 0.05% of notes amount
as handling charge. The acceptance notes will become due and payable on January 5, 2018.
As
of December 31, 2016, the Company had bank acceptance notes of $2,162,318 from the Bank of Hebei to one of its major suppliers
for settling purchases of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and
are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $2,162,318 in the bank as
mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at nil% per annum and 0.05% of notes amount
as handling change. The acceptance note was repaid in February 2017.
(10)
Other payables and accrued liabilities
Other
payables and accrued liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued electricity
|
|
$
|
2,754
|
|
|
$
|
335,169
|
|
Value-added tax payable
|
|
|
557,316
|
|
|
|
1,080,055
|
|
Accrued interest to a related party
|
|
|
884,293
|
|
|
|
516,825
|
|
Payable for purchase of equipment
|
|
|
48,818
|
|
|
|
223,143
|
|
Accrued commission to salesmen
|
|
|
10,952
|
|
|
|
160,014
|
|
Others
|
|
|
57,343
|
|
|
|
109,572
|
|
Totals
|
|
$
|
1,561,476
|
|
|
$
|
2,424,778
|
|
(11)
Common Stock
Issuance
of common stock to investors
On
August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our
common stock (the “Offering”). Each share of common stock and accompanying warrant was sold at a price of $1.60. Please
refer to Note (12), Stock Warrants, for details.
Issuance
of common stock pursuant to the 2012 Incentive Stock Plan and 2015 Omnibus Equity Incentive
On
January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans
to nine officers, directors and employees of and a consultant when the stock was at $1.25 per share, as compensation for their
services in the past years, of which 168,416 shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500
shares were granted under the 2015 Omnibus Equity Incentive. Please see Note (15), Stock Incentive Plans for more details. Total
fair value of the stock was calculated at $1,417,395 as of the date of grant.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12)
Stock warrants
On
August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our
common stock. The warrants have an exercise price of $1.70 per share. These warrants are exercisable immediately upon issuance
on September 3, 2014 and have a term of exercise equal to five years from the date of issuance till September 2, 2019. The fair
value of these shares amounted to $780,000, is classified as equity at the date of issuance.
The
fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:
Terms of warrants
|
|
|
5 years
|
|
Expected volatility
|
|
|
72.0
|
|
Risk-free interest rate
|
|
|
1.69
|
|
Expected dividend yield
|
|
|
0.81
|
|
In
connection with the Offering, the Company issued warrants to its placement agent of this Offering, which can purchase an aggregate
of up to 2.50% of the aggregate number of shares of common stock sold in the Offering, i.e. 39,062 shares. These warrants have
substantially the same terms as the warrants issued to purchaser in the Offering, except that the exercise price is $2.00 per
share and the expiration date is from September 3, 2014 to June 26, 2019. The fair value of these shares amounted to $35,191,
is classified in the equity at the date of issuance to net off the proceeds from the issuance of the shares and warrants.
The
fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:
Terms of warrants
|
|
|
4.81 years
|
|
Expected volatility
|
|
|
69.8
|
|
Risk-free interest rate
|
|
|
1.62
|
|
Expected dividend yield
|
|
|
0.81
|
|
The
Company applied judgment in estimating key assumptions in determining the fair value of the warrants on the date of issuance.
The Company used historical data to estimate stock volatilities and expected dividend yield. The risk-free rates are consistent
with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.
A
summary of stock warrant activities is as below:
|
|
Three and Nine Months Ended
September 30,
2017
|
|
|
|
Number
|
|
|
Weight
average
exercise
price
|
|
Outstanding and exercisable at beginning of the period
|
|
|
820,312
|
|
|
$
|
1.71
|
|
Issued during the period
|
|
|
-
|
|
|
|
-
|
|
Exercised during the period
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired during the period
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at end of the period
|
|
|
820,312
|
|
|
$
|
1.71
|
|
Range of exercise price
|
|
|
$1.70 to $2.00
|
|
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
No
warrants were issued, exercised, cancelled or expired during the nine months ended September 30, 2017. As of September 30, 2017,
the aggregated intrinsic value of warrants outstanding and exercisable was $nil.
No
warrants were issued, exercised, cancelled or expired during the nine months ended September 30, 2016. As of December 31, 2016,
the aggregated intrinsic value of warrants outstanding and exercisable was $nil.
(13)
Earnings Per Share
For
the three months ended September 30, 2017 and 2016, basic and diluted net income per share are calculated as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Basic income per share
|
|
|
|
|
|
|
Net income for the period - numerator
|
|
$
|
1,572,335
|
|
|
$
|
3,034,542
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,450,316
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.07
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
Net income for the period- numerator
|
|
$
|
1,572,335
|
|
|
$
|
3,034,542
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,450,316
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,450,316
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.07
|
|
|
$
|
0.14
|
|
For
the nine months ended September 30, 2017 and 2016, basic and diluted net income per share are calculated as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Basic income per share
|
|
|
|
|
|
|
Net income for the period - numerator
|
|
$
|
3,296,121
|
|
|
$
|
4,242,251
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,404,627
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.15
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
Net income for the period- numerator
|
|
$
|
3,296,121
|
|
|
$
|
4,242,251
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,404,627
|
|
|
|
|
|
|
|
|
|
|
Effect of dilution
|
|
|
-
|
|
|
|
-
|
|
Weighted average common stock outstanding - denominator
|
|
|
21,450,316
|
|
|
|
21,404,627
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.15
|
|
|
$
|
0.20
|
|
For
the three and nine months ended September 30, 2017 and 2016, 820,312 warrants shares are excluded from the calculations of dilutive
net income per share as their effects would have been anti-dilutive since the average share price were lower than the warrants
exercise price. For the three and nine months ended September 30, 2017, there were no securities with dilutive effect issued and
outstanding.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(14)
Income Taxes
United
States
Orient
Paper 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.
PRC
Orient
Paper HB and Orient Paper Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC
New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.
The
provisions for income taxes for three months ended September 30, 2017 and 2016 were as follows:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
Current Tax Provision PRC
|
|
$
|
1,211,668
|
|
|
$
|
1,521,099
|
|
Deferred Tax Provision PRC
|
|
|
(706,503
|
)
|
|
|
(487,240
|
)
|
Total Provision for Income Taxes
|
|
$
|
505,165
|
|
|
$
|
1,033,859
|
|
The
provisions for income taxes for the nine months ended September 30, 2017 and 2016 were as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
Current Tax Provision PRC
|
|
$
|
2,993,819
|
|
|
$
|
3,534,967
|
|
Deferred Tax Provision PRC
|
|
|
(1,887,891
|
)
|
|
|
(1,457,141
|
)
|
Total Provision for Income Taxes
|
|
$
|
1,105,928
|
|
|
$
|
2,077,826
|
|
During
the three months ended September 30, 2017 and 2016, the effective income tax rate was estimated by the Company to be 24.3% and
25.4%, respectively. During the nine months ended September 30, 2017 and 2016, the effective income tax rate was estimated by
the Company to be 25.1% and 32.9%, respectively.
The
following table reconciles the PRC statutory rates to the Company’s effective tax rate for:
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of different tax jurisdiction
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
Effect of expenses not deductible for PRC tax purposes
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
Over provision in previous years
|
|
|
(2.4
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
1.9
|
|
|
|
0.7
|
|
Effective income tax rate
|
|
|
24.3
|
%
|
|
|
25.4
|
%
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
PRC Statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of different tax jurisdiction
|
|
|
(0.3
|
)
|
|
|
(2.8
|
)
|
Effect of expenses not deductible for PRC tax purposes
|
|
|
0.3
|
|
|
|
0.1
|
|
(Over) Under provision in previous years
|
|
|
(1.1
|
)
|
|
|
0.1
|
|
Change in valuation allowance
|
|
|
1.2
|
|
|
|
10.5
|
|
Effective income tax rate
|
|
|
25.1
|
%
|
|
|
32.9
|
%
|
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s
financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability
for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still
subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which
in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period
could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the
Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations
for the given period. As of September 30, 2017 and December 31, 2016, 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 condensed
consolidated financial statements for the three and nine months ended September 30, 2017 and 2016, 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.
(15)
Stock Incentive Plans
Issuance
of common stock pursuant to the 2011 Incentive Stock Plan and 2012 Incentive Stock Plan
On
August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan of Orient Paper, Inc. (the
“2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant
an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants.
No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares
of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share, as compensation
for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance.
On
September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of Orient Paper, Inc. (the
“2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant
an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants.
Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options
or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value
of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions,
terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012
ISP’s administration. On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which
265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees
of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of
the stock was calculated at $790,020 as of the date of grant.
2015
Incentive Plan
On
August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of Orient Paper, 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 un-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.
(16)
Commitments and Contingencies
Operating
Lease
Orient
Paper leases 32.95 acres of land from a local government in Xushui County, Baoding City, Hebei, China through a real estate lease
with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,667
(RMB 120,000). This operating lease is renewable at the end of the 30-year term.
On
November 27, 2012, Orient Paper entered into a 49.4 acres land lease with an investment company in the Economic Development Zone
in Wei County, Hebei Province, China. The lease term of the Wei County land lease commences on the date of the lease and lasts
for 15 years. The lease requires an annual rental payment of $530,020 (RMB 3,600,000). The Company is currently building two new
tissue paper production lines and future production facilities in the leased Wei County land.
As
mentioned in Note (9) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei
Fangsheng agrees to lease the Industrial Buildings back to Orient Paper at an annual rental of $147,228 (RMB 1,000,000), for a
total term of up to five years.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future
minimum lease payments of all operating leases are as follows:
September 30,
|
|
Amount
|
|
2018
|
|
|
686,063
|
|
2019
|
|
|
560,503
|
|
2020
|
|
|
560,503
|
|
2021
|
|
|
560,503
|
|
2022
|
|
|
560,503
|
|
Thereafter
|
|
|
2,924,558
|
|
Total operating lease payments
|
|
$
|
5,852,633
|
|
Capital
commitment
As
of September 30, 2017, the Company has signed several contracts for construction of equipment and facilities, including a new
tissue paper production line PM8. Total outstanding commitments under these contracts were $11,002,635 and $13,921,168 as of September
30, 2017 and December 31, 2016, respectively. The Company expected to pay off all the balances within 1 year.
Guarantees
and Indemnities
The
Company agreed with a third party to guarantee certain obligations of the third party, and as of September 30, 2017 and December
31, 2016, the Company guaranteed the third party’s long-term loan from financial institutions amounting to $8,437,674 (RMB56,000,000)
and $8,072,654 (RMB56,000,000) that matured at various times in 2018. In most cases, the Company cannot estimate the potential
amount of future payments under these guarantees until events arise that would result in a liability under the guarantees. The
Company believes that payment under this guarantee is not probable.
(17)
Segment Reporting
Since
March 10, 2010, Orient Paper Shengde started its operations and thereafter the Company manages its operations through two business
operating segments: Orient Paper HB, which produces offset printing paper and corrugating medium paper, and Orient Paper 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.
Summarized
financial information for the two reportable segments is as follows:
|
|
Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
|
Orient Paper
|
|
|
Orient Paper
|
|
|
Not Attributable
|
|
|
Elimination
of
|
|
|
Enterprise-wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,507,053
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,507,053
|
|
Gross profit
|
|
|
7,221,288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,221,288
|
|
Depreciation and amortization
|
|
|
3,497,635
|
|
|
|
231,367
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,729,002
|
|
Loss from disposal of property, plant and equipment
|
|
|
(1,653,039
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,653,039
|
)
|
Interest income
|
|
|
3,548
|
|
|
|
1,955
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,503
|
|
Interest expense
|
|
|
604,351
|
|
|
|
43,612
|
|
|
|
-
|
|
|
|
-
|
|
|
|
647,963
|
|
Income tax expense(benefit)
|
|
|
579,232
|
|
|
|
(74,067
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
505,165
|
|
Net income (loss)
|
|
|
1,916,821
|
|
|
|
(225,778
|
)
|
|
|
(118,708
|
)
|
|
|
-
|
|
|
|
1,572,335
|
|
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
September 30, 2016
|
|
|
|
Orient Paper
|
|
|
Orient Paper
|
|
|
Not Attributable
|
|
|
Elimination
of
|
|
|
Enterprise-wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
37,397,395
|
|
|
$
|
64,671
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,462,066
|
|
Gross profit (loss)
|
|
|
7,347,908
|
|
|
|
(17,065
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
7,330,843
|
|
Depreciation and amortization
|
|
|
3,485,154
|
|
|
|
230,868
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,716,022
|
|
Loss from disposal of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
14,568
|
|
|
|
264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,832
|
|
Interest expense
|
|
|
677,576
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
677,576
|
|
Income tax expense(benefit)
|
|
|
1,098,270
|
|
|
|
(64,411
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,033,859
|
|
Net income (loss)
|
|
|
3,313,671
|
|
|
|
(196,558
|
)
|
|
|
(82,571
|
)
|
|
|
-
|
|
|
|
3,034,542
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
|
Orient Paper
|
|
|
Orient Paper
|
|
|
Not Attributable
|
|
|
Elimination
of
|
|
|
Enterprise-wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
81,584,395
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
81,584,395
|
|
Gross profit
|
|
|
16,339,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,339,874
|
|
Depreciation and amortization
|
|
|
10,247,936
|
|
|
|
680,566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,928,502
|
|
Loss from disposal of property, plant and equipment
|
|
|
(1,665,140
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,665,140
|
)
|
Interest income
|
|
|
25,767
|
|
|
|
3,492
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,259
|
|
Interest expense
|
|
|
1,953,379
|
|
|
|
70,198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,023,577
|
|
Income tax expense(benefit)
|
|
|
1,402,558
|
|
|
|
(296,630
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,105,928
|
|
Net income (loss)
|
|
|
4,350,831
|
|
|
|
(516,705
|
)
|
|
|
(538,005
|
)
|
|
|
-
|
|
|
|
3,296,121
|
|
|
|
As of September 30, 2017
|
|
|
|
Orient
|
|
|
Orient
|
|
|
Not
|
|
|
Elimination
|
|
|
Enterprise-
|
|
|
|
Paper
|
|
|
Paper
|
|
|
Attributable
|
|
|
of
|
|
|
wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
191,096,727
|
|
|
$
|
30,480,117
|
|
|
$
|
276
|
|
|
$
|
-
|
|
|
$
|
221,577,120
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
|
Orient Paper
|
|
|
Orient Paper
|
|
|
Not Attributable
|
|
|
Elimination
of
|
|
|
Enterprise-wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
102,703,977
|
|
|
$
|
664,314
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103,368,291
|
|
Gross profit (loss)
|
|
|
18,376,724
|
|
|
|
(390,243
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
17,986,481
|
|
Depreciation and amortization
|
|
|
10,966,088
|
|
|
|
702,888
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,668,976
|
|
Loss from disposal of property, plant and equipment
|
|
|
(25,774
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(25,774
|
)
|
Interest income
|
|
|
94,430
|
|
|
|
796
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,226
|
|
Interest expense
|
|
|
2,094,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,094,448
|
|
Income tax expense(benefit)
|
|
|
2,248,946
|
|
|
|
(171,120
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,077,826
|
|
Net income (loss)
|
|
|
6,747,378
|
|
|
|
(559,747
|
)
|
|
|
(1,945,380
|
)
|
|
|
-
|
|
|
|
4,242,251
|
|
|
|
As of December 31, 2016
|
|
|
|
Orient
|
|
|
Orient
|
|
|
Not
|
|
|
Elimination
|
|
|
Enterprise-
|
|
|
|
Paper
|
|
|
Paper
|
|
|
Attributable
|
|
|
of
|
|
|
wide,
|
|
|
|
HB
|
|
|
Shengde
|
|
|
to Segments
|
|
|
Inter-segment
|
|
|
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,689,131
|
|
|
$
|
28,687,027
|
|
|
$
|
1,460
|
|
|
$
|
-
|
|
|
$
|
208,377,618
|
|
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(18)
Concentration and Major Customers and Suppliers
For
the three months ended September 30, 2017 and 2016, the Company had no single customer contributed over 10% of total sales.
For
the nine months ended September 30, 2017 and 2016, the Company had no single customer contributing over 10% of total sales.
For
the three months ended September 30, 2017, the Company had three major suppliers accounted for 83%, 7% and 4% of total purchases. For
the three months ended September 30, 2016, the Company had three major suppliers which primarily accounted for 63%, 14% and 8%
of the total purchases.
For
the nine months ended September 30, 2017, the Company had three major suppliers which primarily accounted for 66%, 11% and 6%
of the total purchases. For the nine months ended September 30, 2016, the Company had three major suppliers which primarily accounted
for 63%, 10% and 7% of the total purchases.
(19)
Concentration of Credit Risk
Financial
instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company
places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that
the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance
system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of
the United States as of September 30, 2017 and December 31, 2016. 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$75,336) per depositor per insured financial
intuition, including both principal and interest. For the cash placed in financial institutions in the United States, the Company’s
U.S. bank accounts are all fully covered by the FDIC insurance as of September 30, 2017 and December 31, 2016, respectively, while
for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to
RMB81,101,668 (US$12,219,812) as of September 30, 2017.
(20)
Risks and Uncertainties
Orient
Paper 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.
(21)
Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers” (“ASU 2014-09”). This ASU is a comprehensive new revenue recognition
model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that
reflects the consideration it expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Gross versus Net), which is effective
upon adoption of ASU 2014-09. This ASU clarifies the implementation guidance in ASU 2014-09 on principal versus agent considerations.
These ASUs are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual
periods. The Company will adopt ASU 2014-09, and its related clarifying ASUs, as of January 1, 2018. The Company is continuing
to assess the potential effects of these ASUs on its consolidated financial statements, business processes, systems and controls.
While the assessment process is ongoing, the Company anticipates adopting the standard using the modified retrospective transition
approach. Under this approach, the new standard would apply to all new contracts initiated on or after January 1, 2018. For existing
contracts that have remaining obligations as of January 1, 2018, any difference between the recognition criteria in these ASUs
and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the
opening balance of retained earnings. We do not expect the adoption of these ASUs to have a material impact on our condensed consolidated
financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity
investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted
for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also
require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. In addition the amendments in this update eliminate the requirement
to disclose the method(s) and significant assumptions used to estimate the fair value that are required to be disclosed for financial
instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments
in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is
not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our condensed consolidated financial
statements.
ORIENT
PAPER, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in
this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting
for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information
to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference
between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating
leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria
for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing
between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance
leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive
income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the
adoption of ASU 2016-02 on our condensed consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based
payment transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective
for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted.
We are currently evaluating the impact of the adoption of ASU 2016-09 on our condensed consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines
on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at
amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that
is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale
debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit
losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net
investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities,
trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment
or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after
a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently
evaluating the impact of the adoption of ASU 2016-15 on our condensed consolidated financial statements.
In
November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU
2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described
as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2016-18 on our condensed consolidated
financial statements. The Company had $6,026,910 and $2,162,318 of restricted cash as of September 30, 2017 and December 31, 2016,
respectively.
In
January 2017, the FASB issued ASU No. 2017-01, “‘Business Combinations (Topic 805): Clarifying the Definition of a Business”
(“ASU 2017-01”), which clarify the definition of a business. The amendments affect all companies and other reporting
organizations that must determine whether they have acquired or sold a business. The amendments in this ASU are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted so long as the transaction has not been reported in financial statements that have been issued or made available
for issuance. We are currently evaluating the impact of the adoption of ASU 2017-01 on our condensed consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “‘Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”), which provide guidance on determining which changes to the terms and conditions of share-based payment
awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2017-09 on
our condensed consolidated financial statements.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Cautionary Notice Regarding Forward-Looking
Statements
The following discussion
of the financial condition and results of operations of the Company for the periods ended September 30, 2017 and 2016 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 “Orient Paper,” “ONP,” “the Company,” “we,” “our”
and “us” refer to Orient Paper, Inc. and its PRC subsidiary and variable interest entity unless the context requires
otherwise.
We make certain forward-looking
statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic
performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations,
including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements. In some cases
these statements are identifiable through the use of words such as “anticipate”, “believe”, “estimate”,
“expect”, “intend”, “plan”, “project”, “target”, “can”,
“could”, “may”, “should”, “will”, “would”, and similar expressions.
We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject
to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these
forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially
from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions may prove
to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements
and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks
and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities
and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking statements. In evaluating the
forward-looking statements contained in this report, you should consider various factors, including, without limitation, the following:
(a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth
efficiently and operate profitably, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and
grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash. We assume no obligation
to update forward-looking statements, except as otherwise required under federal securities laws.
Results of Operations
Comparison of the Three Months Ended
September 30, 2017 and 2016
Revenue for the three
months ended September 30, 2017 was $33,507,053, a decrease of $3,955,013, or 10.56%, from $37,462,066 for the same period in the
previous year.
Revenue of Offset Printing Paper, Corrugating
Medium Paper and Tissue Paper Products
Revenue from
sales of offset printing paper, corrugating medium paper (“CMP”) and tissue paper products for the three months
ended September 30, 2017 was $33,507,053, a decrease of $3,890,342, or 10.40%, from $37,397,395 for the third quarter of
2016. Total offset printing paper, CMP and tissue paper products sold during the three months ended September 30, 2017
amounted to 61,903 tonnes, a decrease of 35,030 tonnes, or 36.14%, compared to 96,933 tonnes sold in the comparable period in
the previous year. We removed all coal burning boilers and started to replace them with gas boilers in September 2017 in
compliance with the latest government regulation. Production was suspended during the removal of boilers. In addition, the
temporary restrictions on our production volume instated in November 2016 by the government remain in place. As a result, the
production volume of regular CMP, light-Weight CMP and offset printing paper and sales of these products decreased in
the third quarter of 2017. The changes in revenue dollar amount and in quantity sold for the three months ended September 30,
2017 and 2016 are summarized as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
43,202
|
|
|
$
|
22,397,413
|
|
|
|
68,422
|
|
|
$
|
22,248,535
|
|
|
|
(25,220
|
)
|
|
$
|
148,878
|
|
|
|
-36.86
|
%
|
|
|
0.67
|
%
|
Light-Weight CMP
|
|
|
10,173
|
|
|
$
|
4,995,701
|
|
|
|
12,613
|
|
|
$
|
4,181,371
|
|
|
|
(2,440
|
)
|
|
$
|
814,330
|
|
|
|
-19.35
|
%
|
|
|
19.48
|
%
|
Total CMP
|
|
|
53,375
|
|
|
$
|
27,393,114
|
|
|
|
81,035
|
|
|
$
|
26,429,906
|
|
|
|
(27,660
|
)
|
|
$
|
963,208
|
|
|
|
-34.13
|
%
|
|
|
3.64
|
%
|
Offset Printing Paper
|
|
|
8,035
|
|
|
$
|
5,453,889
|
|
|
|
14,571
|
|
|
$
|
9,338,690
|
|
|
|
(6,536
|
)
|
|
$
|
(3,884,801
|
)
|
|
|
-44.86
|
%
|
|
|
-41.60
|
%
|
Tissue Paper Products
|
|
|
493
|
|
|
$
|
660,050
|
|
|
|
1,327
|
|
|
|
1,628,799
|
|
|
|
(834
|
)
|
|
$
|
(968,749
|
)
|
|
|
-62.85
|
%
|
|
|
-59.48
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
61,903
|
|
|
$
|
33,507,053
|
|
|
|
96,933
|
|
|
$
|
37,397,395
|
|
|
|
(35,030
|
)
|
|
$
|
(3,890,342
|
)
|
|
|
-36.14
|
%
|
|
|
-10.40
|
%
|
Monthly sales revenue
(excluding revenue from digital photo paper and tissue paper products) for the 24 months ended September 30, 2017, are summarized
below:
The Average Selling
Prices (ASPs) for our main products in the three months ended September 30, 2016 and 2017 are summarized as follows:
|
|
Offset Printing Paper ASP
|
|
|
Regular CMP ASP
|
|
|
Light-Weight CMP ASP
|
|
|
Tissue Paper Products
ASP
|
|
Three Months ended September 30, 2016
|
|
$
|
641
|
|
|
$
|
325
|
|
|
$
|
332
|
|
|
$
|
1227
|
|
Three Months ended September 30, 2017
|
|
$
|
679
|
|
|
$
|
518
|
|
|
$
|
491
|
|
|
$
|
1339
|
|
Increase from comparable period in the previous year
|
|
$
|
38
|
|
|
$
|
193
|
|
|
$
|
159
|
|
|
$
|
112
|
|
Increase by percentage
|
|
|
5.93
|
%
|
|
|
59.38
|
%
|
|
|
47.89
|
%
|
|
|
9.13
|
%
|
The following chart
shows the month-by-month ASPs (excluding the ASPs of the digital photo paper and tissue paper products) for the 24 month period
ended September 30, 2017:
Corrugating Medium Paper
Revenue from CMP amounted
to $27,393,114 (81.75% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September
30, 2017, representing an increase of $963,208, or 3.64%, from $26,429,906 for the comparable period in 2016.
We sold 53,375 tonnes
of CMP in the three months ended September 30, 2017 as compared to 81,035 tonnes for the same period in 2016, representing a 34.13%
decrease in quantity sold.
ASP for regular CMP
increased from $325/tonne for the three months ended September 30, 2016 to $518/tonne for the three months ended September 30,
2017, representing a 59.38% increase. ASP in RMB for regular CMP for the third quarter of 2016 and 2017 was RMB2,165 and RMB3,468,
respectively, representing a 60.18% increase. The quantity of regular CMP sold decreased by 25,220 tonnes, from 68,422 tonnes in
the third quarter of 2016 to 43,202 tonnes in the third quarter of 2017.
ASP for light-weight
CMP increased from $332/tonne for the three months ended September 30, 2016 to $491/tonne for the three months ended September
30, 2017, representing a 47.89% increase. ASP in RMB for light-weight CMP for the third quarter of 2016 and 2017 was RMB2,208 and
RMB3,299, respectively, representing a 49.41% increase. The quantity of light-weight CMP sold decreased by 2,440 tonnes, from 12,613
tonnes in the third quarter of 2016, to 10,173 tonnes in the third quarter of 2017.
Our production
was suspended in September 2017 due to boiler replacement mandated by regulation. Our production volume was also restricted pursuant to restrictions put into place in November 2016. The government has been requiring outdated paper
facilities to close since 2010 and is expected to continue to force the closure of outdated facilities in the next few years.
With the restriction of production volume and the decrease in supply due to government restrictions on production, we expect
that the market demand and ASPs for CMP and other packaging paper will be on an upward trend in the next 12 months.
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 2017 and 2016 were 47.41% and 74.59%, respectively, representing a decrease of 27.18%.
Quantities sold for
regular CMP that was produced by the PM6 production line from October 2015 to September 2017 are as follows:
Offset Printing Paper
Revenue from
offset printing paper was $5,453,889 (16.28% of the total offset printing paper, CMP and tissue paper products revenues) for
the three months ended September 30, 2017, representing a decrease of $3,884,801, or 41.60%, from $9,338,690 for the three
months ended September 30, 2016. We sold 8,035 tonnes of offset printing paper in the third quarter of 2017, as compared to
14,571 tonnes in the comparable period of 2016, a decrease of 6,536 tonnes, or 44.86%., as a result of the production
suspension and restriction on production volume described above. ASPs for offset printing paper for the third quarter of 2016
and 2017 were $641 and $679, respectively, representing a 5.93% increase. ASP in RMB for offset printing paper for the third
quarter of 2016 and 2017 was RMB4,274 and RMB4,543, respectively, representing a 6.29% increase. With the restriction on
production volume and decrease in supply due to government restrictions on production, we expect that the ASP for offset printing paper will show an upward trend in the next 12 months.
Tissue Paper Products
We began the commercial
production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper purchased from a long-term
supplier and produce finished 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 Orient Paper brand.
Revenue from
tissue paper products was $660,050 (1.97% of the total offset printing paper, CMP and tissue paper products revenues) for the
three months ended September 30, 2017, representing a decrease of $968,749, or 59.48%, from $1,628,799 for the three months
ended September 30, 2016. We sold 493 tonnes of tissue paper in the third quarter of 2017, as compared to 1,327 tonnes in the
comparable period of 2016, a decrease of 834 tonnes, or 62.85%, as a result of the restriction in production volume described
above.
Revenue of Digital Photo Paper
Revenue generated
from selling digital photo paper were $nil for the three months ended September 30, 2017. In June 2016, we suspended the production
of digital photo paper due to low market demand for our products and now are upgrading the production line to produce more competitive
photo paper products. We expect to resume our digital photo paper production in the near future.
Changes in revenue
and quantities sold of our digital photo paper for the three months ended September 30, 2017 and 2016 are summarized as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Photo Paper
|
|
|
-
|
|
|
$
|
-
|
|
|
|
38
|
|
|
$
|
64,671
|
|
|
|
(38
|
)
|
|
|
(64,671
|
)
|
|
|
-100.00
|
%
|
|
|
-100.00
|
%
|
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products for the quarter ended September 30, 2017 was $26,285,765, a decrease of
$3,763,722, or 12.53%, from $30,049,487 for the comparable period in 2016. This was mainly a result of (i) a decrease in cost of
sales of $2,164,910 for offset printing paper, and (ii) a decrease in cost of sales of $1,328,931 for regular CMP.
Cost of sales for
CMP was $21,066,773 for the quarter ended September 30, 2017, as compared to $21,854,757 for the comparable period in 2016. The
decrease in the cost of sales of $787,984 for CMP was mainly due to the decrease in sales volume, partially offset by increase
in cost of recycled paper board. Average cost of sales per tonne for CMP increased by 46.30%, from $270 in the third quarter of
2016 to $395 in the third quarter of 2017. 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 the third quarter of 2017 compared to the third
quarter of 2016. Cost of sales for offset printing paper was $4,603,292 for the quarter ended September 30, 2017, as compared to
$6,768,202 for the comparable period in 2016. Average cost of sales per tonne of offset printing paper increased by 23.49%, from
$464 in the three months ended September 30, 2016, to $573 during the comparable period in 2017. The increase in average cost of
sales of offset printing paper was mainly due to the increase in cost of recycled white scrap paper. Cost of sales for tissue paper
products was $615,700 for the quarter ended September 30, 2017, as compared to $1,426,528 for the comparable period in 2016. Average
cost of sales per tonne of tissue paper products increased by 16.19%, from $1,075 in the three months ended September 30, 2016,
to $1,249 for the comparable period in 2017 due to subsidies to the labors during the production restriction.
Changes in cost of
sales and cost per tonne by product for the quarters ended September 30, 2017 and 2016 are summarized below:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
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
|
|
$
|
17,361,505
|
|
|
$
|
402
|
|
|
$
|
18,690,436
|
|
|
$
|
273
|
|
|
$
|
(1,328,931
|
)
|
|
$
|
129
|
|
|
|
-7.11
|
%
|
|
|
47.25
|
%
|
Light-Weight CMP
|
|
$
|
3,705,268
|
|
|
$
|
364
|
|
|
$
|
3,164,321
|
|
|
$
|
251
|
|
|
$
|
540,947
|
|
|
$
|
113
|
|
|
|
17.10
|
%
|
|
|
45.02
|
%
|
Total CMP
|
|
$
|
21,066,773
|
|
|
$
|
395
|
|
|
$
|
21,854,757
|
|
|
$
|
270
|
|
|
$
|
(787,984
|
)
|
|
$
|
125
|
|
|
|
-3.61
|
%
|
|
|
46.30
|
%
|
Offset Printing Paper
|
|
$
|
4,603,292
|
|
|
$
|
573
|
|
|
$
|
6,768,202
|
|
|
$
|
464
|
|
|
$
|
(2,164,910
|
)
|
|
$
|
109
|
|
|
|
-31.99
|
%
|
|
|
23.49
|
%
|
Tissue Paper Products
|
|
$
|
615,700
|
|
|
$
|
1,249
|
|
|
|
1,426,528
|
|
|
$
|
1,075
|
|
|
$
|
(810,828
|
)
|
|
$
|
174
|
|
|
|
-56.84
|
%
|
|
|
16.19
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper
|
|
$
|
26,285,765
|
|
|
$
|
n/a
|
|
|
$
|
30,049,487
|
|
|
$
|
n/a
|
|
|
$
|
(3,763,722
|
)
|
|
$
|
n/a
|
|
|
|
-12.53
|
%
|
|
|
n/a
|
|
Our average unit
purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper in the three months
ended September 30, 2017 were RMB 1,978/tonne (approximately $291/tonne) and RMB 2,728/tonne (approximately $402/tonne), as
compared to RMB 1,084/tonne (approximately $165/tonne) and RMB 2,222/tonne (approximately $338/tonne) for the three months
ended September 30, 2016, respectively. These changes (in US dollars) represent a year-over-year increase of 76.36% for the recycled paper
board. We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do
not rely on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our
experience suggests that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled
paper.
The pricing trends
of our major raw materials for the 24-month period from October 2015 to September 2017 are shown below:
Electricity and coal
are our two main energy sources. The price of coal has been subject to seasonal fluctuations in China, with the peaks often
occurring in the winter months. In 2016, electricity and coal accounted for approximately 8% and 4% of total sales,
respectively. The average cost per tonne of coal went up from $68.2 (RMB449) in the third quarter of 2016 to $92.3 (RMB627)
in third quarter of 2017, accounting for approximately 5% of total sales in the third quarter of 2017. In order to reduce carbon
emissions, we have been required to reduce coal consumption by the local government. After replacing some of the coal burning boilers
with gas boilers, we started using natural gas in December 2016 and liquefied gas in February 2017, which accounted for approximately
0.7% of total sales in third quarter of 2017. The monthly energy cost (electricity, coal and gas) as a percentage of total monthly
sales of our main paper products for the 24 months ended September 30, 2017 are summarized as follows:
Gross Profit
Gross profit for the
three months of September 30, 2017 was $7,221,288 (21.55% of the total revenue), representing a decrease of $109,555, or 1.49%,
from the gross profit of $7,330,843 (19.57% of the total revenue) for the three months ended September 30, 2016. The decrease was
mainly due to the decrease in sales volume and increase in unit cost of recycled paper board, partially offset by the increase
in average selling prices as further described above.
Offset Printing Paper, CMP and Tissue
Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the three months ended September 30, 2017 was $7,221,288, a decrease of $126,620,
or 1.72%, from the gross profit of $7,347,908 for the three months ended September 30, 2016. The decrease was mainly the result
of the factors discussed above.
The overall gross
profit margin for offset printing paper, CMP and tissue paper products increased by 1.90 percentage points, from 19.65% for the
three months ended September 30, 2016, to 21.55% for the three months ended September 30, 2017.
Gross profit margin
for regular CMP for the three months ended September 30, 2017 was 22.48%, or 6.49 percentage points higher, as compared to gross
profit margin of 15.99% for the three months ended September 30, 2016. Such increase was primarily the result of the increase in
average selling price of regular CMP, partially offset by increase in cost of recycled paper board in the third quarter of 2017.
Gross profit margin
for light-weight CMP for the three months ended September 30, 2017 was 25.83%, or 1.51 percentage points higher, as compared to
gross profit margin of 24.32% for the three months ended September 30, 2016. The increase was primarily the result of increase
in average selling price of light-weight CMP, partially offset by increase in cost of recycled paper board in the third quarter
of 2017.
Gross
profit margin for offset printing paper was 15.60% for the three months ended September 30, 2017, a decrease of 11.93
percentage points, as compared to 27.53% for the three months ended September 30, 2016.The decrease was primarily the result
of an increase in the cost of recycled white scrap paper in the third quarter of 2017.
Gross profit margin
for tissue paper products for the three months ended September 30, 2017 was 6.72%, or 5.70 percentage points lower, as compared
to gross profit margin of 12.42% for the three months ended September 30, 2016.
Monthly gross profit
margins on the sales of our CMP and offset printing paper for the 24-month period ended September 30, 2017 are as follows:
Digital Photo Paper
Profit for digital
photo paper for the three months ended September 30, 2017 was $nil. In June 2016, we suspended the production of digital photo
paper due to low market demand for our products and now are upgrading the production line to produce more competitive photo paper
products. We expect to resume our digital photo paper production in the near future.
Selling, General and Administrative
Expenses
Selling, general and
administrative expenses for the three months ended September 30, 2017 were $2,848,699, an increase of $249,001, or 9.58% from $2,599,698
for the three months ended September 30, 2016.
Income from Operations
Operating income for
the quarter ended September 30, 2017 was $2,719,550, a decrease of $2,011,595, or 42.52%, from $4,731,145 for the quarter ended
September 30, 2016. The decrease in operating income was primarily due to the decrease in gross profit as discussed above.
Other Income and Expenses
Interest expense for
the three months ended September 30, 2017 decreased by $29,613, from $677,576 in the three months September 30, 2016, to $647,963.
The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $28,266,208
as of September 30, 2017, as compared to $35,711,062 as of September 30, 2016. The interest incurred during the three months ended
September 30 2017 and 2016, were $nil and $10,839, respectively, and were capitalized as soft-cost of construction-in-progress.
The interest expense capitalized in both periods was solely related to the sale-leaseback obligation with China National Foreign
Trade Financial & Leasing Co., Ltd (“CNFTFL”).
Net Income
As a result of the
above, net income was $1,572,335 for the quarter ended September 30, 2017, representing a decrease of $1,462,207, or 48.19%, from
$3,034,542 for the quarter ended September 30, 2016.
Comparison of the nine months ended
September 30, 2017 and 2016
Revenue for the nine
months ended September 30, 2017 was $81,584,395, a decrease of $21,783,896, or 21.07%, from $103,368,291 for the same period in
the previous year.
Revenue of Offset Printing Paper, Corrugating
Medium Paper and Tissue Paper Products
Revenue from sales
of offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2017 was $81,584,395, a decrease
of $21,119,582, or 20.56%, from $102,703,977 for the nine months ended September 30, 2016. Total quantities of offset printing
paper, CMP and tissue paper products sold during the nine months ended September 30, 2017 amounted to 175,101 tonnes, a decrease
of 87,649 tonnes, or 33.36%, compared to 262,750 tonnes sold during the nine months ended September 30, 2016. Total quantities
of CMP and offset printing paper sold decrease by 85,480 tonnes in the nine months of 2017 as compared to the same period of 2016.
We sold 1,619 tonnes of tissue paper products in the nine months of 2017 as opposed to 3,788 tonnes in the same period of 2016.
We removed all coal burning boilers and started to replace them with gas boilers in September 2017 in compliance with the latest
government regulation. Production was suspended during the removal of boilers. In addition, the temporary restrictions on our production
volume instated in November 2016 by the government remain in place. As a result, the production volume of regular CMP, light-Weight
CMP and offset printing paper and sales of these products decreased for the nine months ended September 30, 2017.
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, 2017
|
|
|
September 30, 2016
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular CMP
|
|
|
128,988
|
|
|
$
|
55,741,068
|
|
|
|
183,044
|
|
|
$
|
59,615,744
|
|
|
|
(54,056
|
)
|
|
$
|
(3,874,676
|
)
|
|
|
-29.53
|
%
|
|
|
-6.50
|
%
|
Light-Weight CMP
|
|
|
24,396
|
|
|
$
|
10,449,339
|
|
|
|
34,478
|
|
|
$
|
11,452,823
|
|
|
|
(10,082
|
)
|
|
$
|
(1,003,484
|
)
|
|
|
-29.24
|
%
|
|
|
-8.76
|
%
|
Total CMP
|
|
|
153,384
|
|
|
$
|
66,190,407
|
|
|
|
217,522
|
|
|
$
|
71,068,567
|
|
|
|
(64,138
|
)
|
|
$
|
(4,878,160
|
)
|
|
|
-29.49
|
%
|
|
|
-6.86
|
%
|
Offset Printing Paper
|
|
|
20,098
|
|
|
$
|
13,306,551
|
|
|
|
41,440
|
|
|
$
|
26,919,794
|
|
|
|
(21,342
|
)
|
|
$
|
(13,613,243
|
)
|
|
|
-51.50
|
%
|
|
|
-50.57
|
%
|
Tissue Paper Products
|
|
|
1,619
|
|
|
$
|
2,087,437
|
|
|
|
3,788
|
|
|
|
4,715,616
|
|
|
|
(2,169
|
)
|
|
$
|
(2,628,179
|
)
|
|
|
-57.26
|
%
|
|
|
-55.73
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
|
175,101
|
|
|
$
|
81,584,395
|
|
|
|
262,750
|
|
|
$
|
102,703,977
|
|
|
|
(87,649
|
)
|
|
$
|
(21,119,582
|
)
|
|
|
-33.36
|
%
|
|
|
-20.56
|
%
|
ASPs for our main
products in the nine-month period ended September 30, 2017 and 2016 are summarized as follows:
|
|
Offset Printing Paper ASP
|
|
|
Regular CMP ASP
|
|
|
Light-Weight CMP ASP
|
|
|
Tissue Paper Products
ASP
|
|
Nine Months Ended September 30, 2016
|
|
$
|
650
|
|
|
$
|
326
|
|
|
$
|
332
|
|
|
$
|
1245
|
|
Nine Months Ended September 30, 2017
|
|
$
|
662
|
|
|
$
|
432
|
|
|
$
|
428
|
|
|
$
|
1289
|
|
Increase from comparable period in the previous year
|
|
$
|
12
|
|
|
$
|
106
|
|
|
$
|
96
|
|
|
$
|
44
|
|
Increase by percentage
|
|
|
1.85
|
%
|
|
|
32.52
|
%
|
|
|
28.92
|
%
|
|
|
3.53
|
%
|
Revenue of Digital Photo Paper
Revenue generated
from selling digital photo paper were $nil for the nine months ended September 30, 2017. In June 2016, we suspended the production
of digital photo paper due to low market demand for our products and now are upgrading the production line to produce more competitive
photo paper products. We expect to resume our digital photo paper production in the near future.
Changes in revenue
and quantities sold of our digital photo paper for the nine months ended September 30, 2017 and 2016 are summarized as follows:
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Change in
|
|
|
Change
|
|
Sales Revenue
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity (Tonne)
|
|
|
Amount
|
|
|
Quantity
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Photo Paper
|
|
|
-
|
|
|
$
|
-
|
|
|
|
372
|
|
|
$
|
664,314
|
|
|
|
(372
|
)
|
|
|
(664,314
|
)
|
|
|
-100.00
|
%
|
|
|
-100.00
|
%
|
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products in the nine months ended September 30, 2017 was $65,244,521, a decrease
of $19,082,732, or 22.63%, from $84,327,253 for the nine months ended September 30, 2016. This was mainly a result of the decrease
in volume sold, partially offset by increase in cost of recycled paper board. Cost of sales for CMP was $52,337,031 for the nine
months ended September 30, 2017, as compared to $59,227,017 in the same period of 2016. The decrease in the cost of sales of $6,889,986
for CMP was mainly due to the decrease in the quantities of regular CMP and light-weight CMP sold in the nine months of 2017, partially
offset by the increase in cost of recycled paper board. Average cost of sales per tonne for CMP increased by 25.37%, from $272
for the nine months ended September 30, 2016, to $341 in the same period of 2017. The increase was mainly attributable to the higher
average unit purchase costs (net of applicable value added tax) of recycled paper board in the nine months ended September 30,
2017 compared to the same period of 2016. Cost of sales for offset printing paper was $10,956,465 for the nine months ended September
30, 2017, as compared to $20,951,362 in the same period of 2016. Average cost of sales per tonne of offset printing paper increased
by 7.71%, from $506 in the nine months ended September 30, 2016, to $545 in the same period of 2017. Cost of sales for tissue paper
products was $1,951,025 for the nine months ended September 30, 2017. Average cost of sales per tonne of tissue paper products
was $1,205 for the nine months ended September 30, 2017.
Changes in cost of
sales and cost per tonne by product for the nine months ended September 30, 2017 and 2016 are summarized below:
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
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
|
|
$
|
44,325,899
|
|
|
$
|
344
|
|
|
$
|
50,513,721
|
|
|
$
|
276
|
|
|
$
|
(6,187,822
|
)
|
|
$
|
68
|
|
|
|
-12.25
|
%
|
|
|
24.64
|
%
|
Light-Weight CMP
|
|
$
|
8,011,132
|
|
|
$
|
328
|
|
|
$
|
8,713,296
|
|
|
$
|
253
|
|
|
$
|
(702,164
|
)
|
|
$
|
75
|
|
|
|
-8.06
|
%
|
|
|
29.64
|
%
|
Total CMP
|
|
$
|
52,337,031
|
|
|
$
|
341
|
|
|
$
|
59,227,017
|
|
|
$
|
272
|
|
|
$
|
(6,889,986
|
)
|
|
$
|
69
|
|
|
|
-11.63
|
%
|
|
|
25.37
|
%
|
Offset Printing Paper
|
|
$
|
10,956,465
|
|
|
$
|
545
|
|
|
$
|
20,951,362
|
|
|
$
|
506
|
|
|
$
|
(9,994,897
|
)
|
|
$
|
39
|
|
|
|
-47.71
|
%
|
|
|
7.71
|
%
|
Tissue Paper Products
|
|
$
|
1,951,025
|
|
|
$
|
1,205
|
|
|
$
|
4,148,874
|
|
|
$
|
1,095
|
|
|
|
(2,197,849
|
)
|
|
$
|
110
|
|
|
|
-52.97
|
%
|
|
|
10.05
|
%
|
Total CMP, Offset Printing Paper and Tissue Paper Revenue
|
|
$
|
65,244,521
|
|
|
$
|
n/a
|
|
|
$
|
84,327,253
|
|
|
$
|
n/a
|
|
|
$
|
(19,082,732
|
)
|
|
$
|
n/a
|
|
|
|
-22.63
|
%
|
|
|
n/a
|
%
|
For the nine months
ended September 30, 2017, cost of sales for digital photo paper was $nil, as compared to $1,054,557 for the same period in year
2016.
Gross Profit
Gross profit for the
nine months ended September 30, 2017 was $16,339,874 (20.03% of the total revenue), representing a decrease of $1,646,607, or 9.15%,
from the gross profit of $17,986,481 (17.40% of the total revenue) for the nine months ended September 30, 2016. The decrease was
mainly due to (i) the decrease in quantities sold and (ii) the increase of material purchase price of CMP, partially offset by
the increase of ASP of regular CMP.
Offset Printing Paper, CMP and Tissue
Paper Products
Gross profit for offset
printing paper, CMP and tissue paper products for the nine months ended September 30, 2017 was $16,339,874, a decrease of $2,036,850,
or 11.08%, from the gross profit of $18,376,724 for the nine months ended September 30, 2016. The decrease was mainly the result
of the factors discussed above.
The overall gross
profit margin for offset printing paper, CMP and tissue paper products increased by 2.14 percentage points, from 17.89% for the
nine months ended September 30, 2016, to 20.03% for the nine months ended September 30, 2017.
Gross profit margin
for regular CMP for the nine months ended September 30, 2017 was 20.48%, or 5.21 percentage points higher, as compared to gross
profit margin of 15.27% for the nine months ended September 30, 2016. Such increase was primarily due to the increase in ASP of
regular CMP.
Gross profit margin
for light-weight CMP for the nine months ended September 30, 2017 was 23.33%, or 0.59 percentage points lower, as compared to gross
profit margin of 23.92% for the nine months ended September 30, 2016.
Gross profit margin
for offset printing paper was 17.66% for the nine months ended September 30, 2017, a decrease of 4.51 percentage points, as compared
to 22.17% for the nine months ended September 30, 2016.
Gross profit margin
for tissue paper products was 6.53% for the nine months ended September 30, 2017, a decrease of 5.49 percentage points, as compared
to 12.02% for the nine months ended September 30, 2016.
Digital Photo Paper
Profit for digital
photo paper for the nine months ended September 30, 2017 was $nil, compared with a loss of $390,243, for the nine months ended
September 30, 2016. In June 2016, we suspended the production of digital photo paper due to low market demand for our products
and now are upgrading the production line to produce more competitive photo paper products. We expect to resume our digital photo
paper production in the near future.
Selling, General and Administrative
Expenses
Selling, general and
administrative expenses for the nine months ended September 30, 2017 were $8,319,590, a decrease of $1,321,818, or 13.71% from
$9,641,408 for the nine months ended September 30, 2016. The expenses were higher in 2016 because the Company issued 1,133,916
shares of common stock, valued at $1,417,395, pursuant to the Company’s compensatory incentive plans in January 2016.
Income from Operations
Operating income for
the nine months ended September 30, 2017 was $6,355,144, a decrease of $1,964,155, or 23.61%, from $8,319,299 for the nine months
ended September 30, 2016. The decrease in operating income was primarily due to the decrease in gross profit, partially offset
by the decrease in selling, general and administrative expenses as discussed above.
Other Income and Expenses
Interest expense for
the nine months ended September 30, 2017 decreased by $70,871, from $2,094,448 in the nine months ended September 30, 2016, to
$2,023,577. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated
$28,266,208 as of September 30, 2017, as compared to $35,711,062 as of September 30, 2016. The interest incurred during the nine
months ended September 30, 2017 and 2016, were $9,761 and $43,786 (a portion of interest related to the sale-leaseback arrangement
with CNFTFL), respectively, and were capitalized as soft-cost of construction-in-progress.
Net Income
As a result of the
above, net income was $3,296,121 for the nine months ended September 30, 2017, representing a decrease of $946,130, or 22.30%,
from $4,242,251 for nine months ended September 30, 2016.
Accounts Receivable
Net accounts receivable
decreased by $3,763,508, or 96.64%, to $130,928 as of September 30, 2017, as compared with $3,894,436 as of December 31, 2016.
We usually collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist
of raw materials (accounting for 90.49% of total value of inventory as of September 30, 2017) and finished goods. As of September
30, 2017, the recorded value of inventory increased by 70.51% to $9,603,313 from $5,632,030 as of December 31, 2016. As of September
30, 2017, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $6,711,977, approximately
$3,374,328, or 101.10%, higher than the balance as of December 31, 2016. As a result of the restrictions in our production volume
(described above) and the rising price of recycled paper board, we reduced the Company’s inventory of recycled paper board
at the end of 2016. We brought our inventory back to normal levels in anticipation of the prices of raw materials increasing and
anticipated growth in demand in 2017.
A summary of changes
in major inventory items is as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
$
Change
|
|
|
%
Change
|
|
Raw Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycled paper board
|
|
$
|
6,711,977
|
|
|
$
|
3,337,649
|
|
|
|
3,374,328
|
|
|
|
101.10
|
%
|
Recycled white scrap paper
|
|
|
838,086
|
|
|
|
-
|
|
|
|
838,086
|
|
|
|
|
|
Recycled scrap binding margin
|
|
|
831,968
|
|
|
|
547,803
|
|
|
|
284,165
|
|
|
|
51.87
|
%
|
Tissue base paper
|
|
|
41,299
|
|
|
|
87,641
|
|
|
|
-46,342
|
|
|
|
-52.88
|
%
|
Coal & gas
|
|
|
85,950
|
|
|
|
242,307
|
|
|
|
-156,357
|
|
|
|
-64.53
|
%
|
Digital photo base paper and other raw materials
|
|
|
180,763
|
|
|
|
177,823
|
|
|
|
2,940
|
|
|
|
1.65
|
%
|
Total Raw Materials
|
|
|
8,690,043
|
|
|
|
4,393,223
|
|
|
|
4,296,820
|
|
|
|
97.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
|
913,270
|
|
|
|
1,238,807
|
|
|
|
-325,537
|
|
|
|
-26.28
|
%
|
Totals
|
|
$
|
9,603,313
|
|
|
$
|
5,632,030
|
|
|
|
3,971,283
|
|
|
|
70.51
|
%
|
Accounts Payable and Notes Payable
Accounts payable and
notes payable was $6,037,930 as of September 30, 2017, an increase of 3,315,660, or 121.80%, from $2,722,270 as of December 31,
2016. Accounts payable was $11,020 and $559,952 as of September 30, 2017 and December 31, 2016, respectively. We have been relying
on the bank acceptance notes issued under our credit facilities with Bank of Hebei and Bank of Cangzhou to make the majority of
our raw materials payments to our vendors. Our notes payable to Bank of Cangzhou and Bank of Hebei were $6,026,910 and $2,162,318
as of September 30, 2017 and December 31, 2016, respectively. We have paid off bank acceptance notes of $2,260,091 in February
2017. We also acquired additional bank acceptance notes of $6,026,910 from Bank of Cangzhou in January 2017, which we expect to
pay off upon maturity on January 5, 2018.
Liquidity and Capital Resources
Overview
As of September 30,
2017, we had net working capital deficit of $1,004,941, an improvement of $5,103,328, from the net working capital deficit of $6,108,269
at December 31, 2016. Total current assets as of September 30, 2017 amounted to $22,322,334. Substantially all cash and cash equivalents
are cash deposits in bank accounts. Restricted cash of $6,026,910 was included in our current assets as of September 30, 2017.
Restricted cash is deposited at the Bank of Cangzhou for the purpose of securing the bank acceptance notes from the bank. The acceptance
notes are due and payable on January 5, 2018, and the Company anticipates renewing such notes upon maturity on substantially similar
terms.
Current liabilities
as of September 30, 2017 totaled $23,327,275, an increase of $2,741,684, from the December 31, 2016 balance of $20,585,591. We
use bank acceptance notes, which are typically 6-to-12 month notes, to guarantee the payments to our vendors. Notes payable was
$6,026,910 as of September 30, 2017, representing an increase of $3,864,592, or 178.72%, from $2,162,318 as of December 31, 2016.
Most of our current short-term bank loans are either revolving or term loans. We expect to renew these loans with the banks on
similar terms at or before maturity. All of our short-term loans (with the exception of the notes payable, which carry no interest
but require a deposit equal to a portion of the credit facilities at the issuing banks) have interest-only monthly payments, with
a balloon payment for the entire principal amount upon maturity of the loan. The long term loans from the credit union require
monthly and quarterly interest payments, with one large balloon payment upon maturity.
Financing with Sale-Leaseback
The Company entered
into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013, for a total financing
proceeds in the amount of RMB 150 million (approximately US$23 million). Pursuant to the Lease Financing Agreement, Orient Paper
HB sold some equipment to CNFTFL for RMB 150 million (approximately US$23 million). Concurrent with the sale of equipment, Orient
Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient
Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,260) to CNFTFL to buy back all of the Leased Equipment.
On July 1, 2015, Orient
Paper HB, China Orient, and other guarantors of Lease Financing Agreement, entered into an agreement (the “2015 Agreement”),
to amend and restate the Lease Financing Agreement entered into in 2013 (the “2015 Agreement”). The 2015 Agreement
sets forth a modified and extended payment schedule with respect to the remaining payment obligation, with the final repayment
date extended to June 21, 2017. Orient Paper HB made all payments due according to the modified schedule prior to June 20, 2016.
Orient Paper HB made partial payments in the following payment obligations as well as interests on overdue balance until August
24, 2017, when the remaining overdue amount was fully paid off. All the Lease Equipment was bought back at the nominal price according
to the agreement. The balance of the long-term obligations under capital lease were $nil as of September 30, 2017 and December
31, 2016, and its current portion in the amount of nil and $8,786,528, respectively.
Total interest expenses
for the sale-leaseback arrangement for the three months ended September 30, 2017 and 2016 were $213,571 and $237,053, respectively.
Total interest expenses for the sale-leaseback arrangement for the nine months ended September 30, 2017 and 2016 were $789,322
and $526,912, respectively.
As a result of the
sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The deferred gain was
amortized over the lease term and as an offset to depreciation of the Leased Equipment. In term of the extension of the new payment
schedule, the deferred gain was amortized over the remaining lease term through June 21, 2017.
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 $147,228 (RMB1,000,000). The lease
agreement expired in August 2016. On August 9, 2016, the Company paid off the rental for the first lease agreement and entered
into a supplementary agreement with Hebei Fangsheng, who agreed to extend the lease term for another two years, with the same rental
payment as original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $21,775 and $56,872, which was
recorded as part of the current liabilities as of September 30, 2017 and December 31, 2016, respectively.
Capital Expenditure Commitment as of
September 30, 2017
We finance our daily
operations mainly by cash flows generated from our business operations and loans from banking institutions (including leasing companies)
and our major shareholders. Major capital expenditures in the nine months ended September 30, 2017 were primarily financed by cash
generated from business operations. As of September 30, 2017, we had approximately $11 million in capital expenditure commitments
that were mainly related to the construction costs of building equipment and other facilities in a new industrial park in Wei County
of Hebei, China, where we expect to build two tissue paper production lines (PM8 and PM9), and install other paper production machinery.
These commitments are expected to be financed by bank loans and cash flows generated from our business operations and loans.
Capital Expenditures
Our committed capital
expenditures for the next 12 months are approximately $11 million, which mainly includes budgeted costs for the projects described
below.
New Production Lines at the Wei County
Industrial Park
In November 2012,
we entered into a 15-year land lease with a land investment company in Wei County for the purpose of developing the 49.4 acres
of land into the base of our next capacity expansion. In December 2012, we signed a contract with an equipment contractor in Shanghai
to build the first of our two tissue paper production lines in Wei County. The two production lines, each having production capacity
of 15,000 tonnes/year, will be designated as PM8 and PM9 upon completion. Total estimated cost of the Wei County tissue paper project
is up to approximately $123 million (of which $115 million has been incurred thus far), including the estimated costs of general
infrastructure and administrative facilities such as warehouses, offices, dorms and landscaping, of up to $102 million (of which
$93 million has been incurred thus far) and the estimated costs for the two paper machines and related packaging equipment of up
to $22 million (of which $22 million has been incurred thus far). We had previously estimated that the installation and test operations
of the PM8 production line would be completed in the second half of 2014. Our current estimated completion time of the PM8 production
line is the first half of 2018. We have experienced delays resulting from our inability to obtain approval for a coal burning boiler
in the PM8 production line from the Heibei Provincial Government. According to the latest regulation announced by the Heibei Provincial
Government, coal burning boilers are no longer allowed for new plants. We are considering alternative solutions such as gas boilers
and going through necessary procedures for a re-application. The delay of completion of the PM8 production line did not have any
major financial impact on our current period earnings, as we did not previously budget significant revenue or net earnings from
the PM8 production line tissue paper for 2017.
We plan to build a
second 15,000 tonnes/year tissue paper production line (designated as PM9) at an estimated cost of $7.8 million after the PM8 production
line is put into production.
Relocation of Digital Photo Paper
PM4 and PM5 Production Lines
In August 2015, we
completed the relocation of our digital photo paper production lines (PM4 and PM5), as well as related chemical and packaging equipment,
from the workshops located in our Headquarters Compound to a new location that is across the street from our Xushui Paper Mill,
the Xushui Mill Annex. Total cost of the relocation of the PM4 and PM5 production lines and building construction costs incurred
was approximately $4.5 million.
We purchased the land
use rights of the 58,566 square meters at Xushui Mill Annex for approximately $7.7 million in April 2012 and constructed three
industrial buildings for the digital photo paper operations, a dormitory for factory workers and offices to hold our consolidated
Xushui County operations. We completed the relocation and resumed commercial production of digital photo paper in August 2015.
In June 2016, we suspended the production of digital photo paper due to low market demand for our products. We are upgrading the
facilities to produce more competitive photo paper products. We expect to resume the digital photo paper production in the near
future.
Cash and Cash Equivalents
Our cash and cash
equivalents as of September 30, 2017 was $6,505,284, an increase of $4,172,638, from $2,332,646 as of December 31, 2016. The increase
of cash and cash equivalents for the nine months ended September 30, 2017 was attributable to a number of factors:
i. Net cash provided
by operating activities
Net cash provided
by operating activities was $16,841,558 for the nine months ended September 30, 2017. The balance represented an increase of cash
of $8,211,524, or 95.15%, from $8,630,034 provided for the nine months ended September 30, 2016. Net income for the nine months
ended September 30, 2017 was $3,296,121, representing a decrease of $946,130, or 22.30%, from a net income of $4,242,251 for the
nine months ended September 30, 2016. Changes in various asset and liability account balances throughout the nine months ended
September 30, 2017 also contributed to the net change in cash from operating activities in nine months ended September 30, 2017.
Chief among such changes is the decrease of accounts receivable in the amount of $3,928,087 during the nine months of 2017 and
the increase of notes payable in the amount of $3,680,693. There was also an increase of $3,631,641 in the ending inventory balance
as of September 30, 2017 (a decrease to net cash for the nine months ended September 30, 2017 cash flow purposes). In addition,
the Company had non-cash expenses relating to depreciation and amortization in the amount of $10,928,502. The Company also had
a net decrease of $472,847 in prepayment and other current assets (an increase to net cash) and a net decrease of $687,584 in other
payables and accrued liabilities and due to a related party (a decrease to net cash), as well as a decrease in income tax payable
of $107,105 (a decrease to net cash) during the nine months ended September 30, 2017.
ii. Net cash used
in investing activities
We incurred $7,570,166
in net cash expenditures for investing activities during the nine months of 2017, as compared to $7,674,649 for the same period
of 2016. Expenditures in the nine months ended September 30, 2017 were mainly for the progress payments for the construction of
our first tissue paper production line (PM8) and related facilities, including three paper mill workshops and maintenance workshops
and four warehouses at the Wei County industrial park in Wei County, Hebei province.
iii. Net cash provided
by (used in) financing activities
Net cash used in financing
activities was $5,440,381 for the nine months ended September 30, 2017, as compared to net cash provided by financing activities
in the amount of $2,191,637 for the nine months ended September 30, 2016. The decrease was mainly attributable to (i) repayment
of capital lease obligation and (ii) cash outflow from the increase of restricted deposits upon additions of notes payables to
Bank of Cangzhou.
Short-term bank loans
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Bank of Hebei
|
|
(a)
|
|
$
|
-
|
|
|
$
|
2,162,318
|
|
Industrial and Commercial Bank of China (“ICBC”) Loan 1
|
|
(b)
|
|
|
-
|
|
|
|
2,883,091
|
|
Bank of Cangzhou
|
|
(c)
|
|
|
6,026,910
|
|
|
|
-
|
|
ICBC Loan 2
|
|
(d)
|
|
|
4,218,837
|
|
|
|
-
|
|
Total short-term bank loans
|
|
|
|
$
|
10,245,747
|
|
|
$
|
5,045,409
|
|
(a)
|
On July 8, 2016, the Company entered into a working capital loan agreement with the Bank of Hebei, with a balance of $nil as of September 30, 2017 and $2,162,318 as of December 31, 2016, respectively. The loan bears a fixed interest rate of 5.22% per annum. The loan was due on July 8, 2017. The working capital loan is guaranteed by the Company’s CEO and Hebei Tengsheng with its land use right and real property pledged by Hebei Tengsheng as collateral for the benefit of the bank. The loan was repaid on July 6, 2017.
|
|
|
(b)
|
On September 13, 2016, the Company entered into a working capital loan agreement with ICBC, with a balance of $nil as of September 30, 2017 and $2,883,091 as of December 31, 2016, respectively. The loan bears a fixed interest rate of 4.5675% per annum. The loan was due on October 19, 2017. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit of the bank. The loan was repaid on September 7, 2017.
|
|
|
(c)
|
On December 5, 2016, the Company entered into a working capital loan agreement with the Bank of Cangzhou. The loan was drawn on January 3, 2017, with a balance of $6,026,910 as of September 30, 2017. The loan bears a fixed interest rate of 6.09% per annum. The loan will be due on January 3, 2018. The working capital loan is secured by the Company’s land use right and guaranteed by Orient Paper Shengde with its production equipment as collateral for the benefit of the bank.
|
|
|
(d)
|
On January 10, 2017, the Company entered into a working capital loan agreement with the ICBC, with a balance of $4,218,837 as of September 30, 2017. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.5675% per annum. The loan will be due on January 17, 2018.
|
As of September 30,
2017, there were guaranteed short-term borrowings of $10,245,747 and unsecured bank loans of $nil. As of December 31, 2016, there
were guaranteed short-term borrowings of $5,045,409 and unsecured bank loans of $nil.
The average short-term
borrowing rates for the three months ended September 30, 2017 and 2016 were approximately 5.30% and 8.19%, respectively. The average
short-term borrowing rates for the nine months ended September 30, 2017 and 2016 were approximately 5.28% and 8.53%, respectively.
Long-term loans from credit union
As of September 30,
2017 and December 31, 2016, loans payable to Rural Credit Union of Xushui County, amounted to $7,473,368 and $4,843,592, respectively.
On April 16, 2014,
the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is payable
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 0.72% per month. In August 2015, after giving the required notice to the Rural Credit
Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the loan in an amount of
$188,341, of which $82,870 was paid ahead of its original repayment schedule as of September 30, 2017. As of September 30, 2017
and December 31, 2016, total outstanding loan balance was $1,295,786 and $1,239,729 respectively, which is presented as non-current
liabilities in the condensed consolidated balance sheet.
On July 15, 2013,
the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is due and
payable in various installments from December 21, 2013 to July 26, 2018. The loan is secured by certain of the Company’s
manufacturing equipment with net book value of $8,579,118 and $9,813,294 as of September 30, 2017 and December 31, 2016, respectively.
Interest payment is due quarterly and bears a fixed rate of 0.72% per month. In August 2015, after giving the required notice to
the Rural Credit Union of Xushui County in accordance with the terms on the agreement, the Company repaid a portion of the loan
in an amount of $195,875, of which $75,336 was paid ahead of its original repayment schedule as of September 30, 2017. As of September
30, 2017 and December 31, 2016, the total outstanding loan balance was $3,766,818 and $3,603,863 respectively. Out of the total
outstanding loan balance, current portion amounted were $3,766,818 and $nil as of September 30, 2017 and December 31, 2016, respectively,
which are presented as current liabilities in the condensed consolidated balance sheet and the remaining balance of $nil and $3,603,863
are presented as non-current liabilities in the condensed consolidated balance sheet as of September 30, 2017 and December 31,
2016 respectively.
On April 20, 2017,
the Company entered into a loan agreement with the Rural Credit Union of Xushui County for a term of 2 years, which is due and
payable in various installments from August 26, 2017 to April 19, 2019. The loan is guaranteed by Hebei Tengsheng with its land
use right pledged as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of 0.6% per
month. As of September 30, 2017 the total outstanding loan balance was $2,410,764, out of which $90,404 and $2,320,360 are presented
as current and non-current liabilities in the condensed consolidated balance sheet respectively.
Total interest expenses
for the short-term bank loans and long-term loans for the three months ended September 30, 2017 and 2016 were $320,077 and $354,011,
respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30,
2017 and 2016 were $907,785 and $1,172,692, respectively.
Shareholder Loans
The Company’s
CEO has loaned money to Orient Paper HB for working capital purposes over a period of time. On January 1, 2013, Orient Paper HB
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 $386,225 of interest is still 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 as of September 30,
2017.
On December 10, 2014,
the CEO provided an unsecured loan to the Company of $9,040,365 (RMB 60,000,000), for working capital purpose with an interest
rate of 5.25% per annum, which was based on the primary lending rate of People’s Bank of China. The loan would be originally
due on December 10, 2017. During the year ended December 31, 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together
with the interest of $288,596. Mr. Zhenyong Liu agreed to extend the loan for further 3 years and the remaining balance will be
due on December 2, 2020. As of September 30, 2017, the outstanding loan balance was $3,013,455 and the accrued interest was $143,516,
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 Orient Paper HB to borrow from the CEO an amount up to $18,080,730
(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 $4,348,267 was drawn from the
facility, which carried an interest rate of 5.25%. On October 14, 2016 an unsecured amount of $2,898,845 was drawn from the facility,
which carried an interest rate of 4.35%. 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. As of September 30, 2017 the outstanding loan
balance was $7,533,638 and the accrued interest was $354,552, which was recorded in other payables and accrued liabilities as part
of the current liabilities in the consolidated balance sheet.
As of September 30,
2017 and December 31, 2016, total amount of loans due to Mr. Zhenyong Liu were $10,547,093 and $10,090,817, respectively. The interest
expenses incurred for such related party loans are $114,315 and $97,351 for the three months ended September 30, 2017 and 2016,
respectively. On October 20, 2017, the Company’s CEO agreed to permit the Company to postpone the repayment of the loan and
accrued interest on his loan to Orient Paper HB until the earliest date on which the Company’s quarterly or annual financial statements
filed with the SEC show a satisfactory working capital level. The accrued interest owe to Mr. Zhenyong Liu was approximately $884,293
as of September 30, 2017, which was recorded in other payables and accrued liabilities as part of the current liabilities.
During the three and
nine months ended September 30, 2017, the Company borrowed $nil from shareholders. During the three and nine months ended
September 30, 2016, the Company borrowed $nil and $14,000 from shareholders to pay for various expenses incurred in the U.S. The
amount was due on demand with interest free. The Company repaid the entire balance by the end of the period.
Critical Accounting Policies and Estimates
The Company’s
financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require
us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual
results could differ materially from those estimates. The most critical accounting policies are listed below:
Revenue Recognition Policy
The Company recognizes
revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed,
no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered
when the customer’s truck picks up goods at our finished goods inventory warehouse.
Long-Lived Assets
The Company evaluates
the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management
to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated
fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational
performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry.
For the three months ended September 30, 2017 and 2016, 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 Orient Paper HB and Orient Paper Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30,
all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal
period. The current exchange rates used by the Company as of September 30, 2017 and December 31, 2016 to translate the Chinese
RMB to the U.S. Dollars are 6.6369:1 and 6.9370:1, respectively. Revenues and expenses are translated using the prevailing average
exchange rates at 6.7922:1, and 6.6529:1 for the three months ended September 30, 2017 and 2016, respectively. Translation adjustments
are included in other comprehensive income (loss).
Off-Balance Sheet Arrangements
We were the guarantor
for a third party for its long-term bank loans in an amount of $8,437,674 (RMB56,000,000), which matures at various times in 2018.
The third party is one of our major suppliers. This helps us to maintain a good relationship with the supplier and negotiate for
better terms in payment for materials. Except as aforesaid, we have no material off-balance sheet transactions.
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from
Contracts with Customers” (“ASU 2014-09”). This ASU is a comprehensive new revenue recognition model that requires
a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration
it expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts
with Customers: Principal versus Agent Considerations (Reporting Gross versus Net), which is effective upon adoption of ASU 2014-09.
This ASU clarifies the implementation guidance in ASU 2014-09 on principal versus agent considerations. These ASUs are effective
for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company will
adopt ASU 2014-09, and its related clarifying ASUs, as of January 1, 2018. The Company is continuing to assess the potential effects
of these ASUs on its consolidated financial statements, business processes, systems and controls. While the assessment process
is ongoing, the Company anticipates adopting the standard using the modified retrospective transition approach. Under this approach,
the new standard would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining
obligations as of January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current
revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings.
We do not expect the adoption of these ASUs to have a material impact on our condensed consolidated financial statements.
In January 2016, the
FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments
to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under
equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement
to disclose the method(s) and significant assumptions used to estimate the fair value that are required to be disclosed for financial
instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in
ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted.
We do not expect the adoption of ASU 2016-01 to have a material impact on our condensed consolidated financial statements.
In February 2016,
the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create
Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The
objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users
of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between
Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases
under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing
between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between
capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases
and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive
income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the
adoption of ASU 2016-02 on our condensed consolidated financial statements.
In April 2016, the
FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions.
The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after
December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the
impact of the adoption of ASU 2016-09 on our condensed consolidated financial statements.
In June 2016, the
FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting
credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost
basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect
its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from
the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt
securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses
be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment
in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables,
net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded
from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption
of ASU 2016-13 on our condensed consolidated financial statements.
In August 2016, the
FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including
bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU
are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the
adoption of ASU 2016-15 on our condensed consolidated financial statements.
In November 2016,
the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”),
which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2016-18 on our condensed consolidated
financial statements. The Company had $6,026,910 and $2,162,318 of restricted cash as of September 30, 2017 and December 31, 2016,
respectively.
In January 2017, the
FASB issued ASU No. 2017-01, “‘Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU
2017-01”), which clarify the definition of a business. The amendments affect all companies and other reporting organizations
that must determine whether they have acquired or sold a business. The amendments in this ASU are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted
so long as the transaction has not been reported in financial statements that have been issued or made available for issuance.
We are currently evaluating the impact of the adoption of ASU 2017-01 on our condensed consolidated financial statements.
In May 2017, the FASB
issued ASU No. 2017-09, “‘Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU
2017-09”), which provide guidance on determining which changes to the terms and conditions of share-based payment awards
require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2017-09 on our condensed
consolidated financial statements.