IT Tech Packaging(ITP) - 2020 Q1 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements The company's financial statements for the quarter ended March 31, 2020, show a significant decrease in revenue and a net loss of $2.4 million, with total assets decreasing to $182.3 million, while cash flow from operations turned strongly positive at $6.9 million, leading to an increase in the company's cash balance to $11.7 million Condensed Consolidated Balance Sheets As of March 31, 2020, total assets were $182.3 million, a decrease from $190.2 million at the end of 2019, primarily in property, plant, and equipment and prepayments, partially offset by a significant increase in cash and bank balances, while total liabilities decreased to $21.3 million from $24.2 million, and stockholders' equity fell to $161.0 million from $166.0 million Condensed Consolidated Balance Sheets | Financial Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $21,634,039 | $24,041,239 | | Total Assets | $182,256,298 | $190,198,430 | | Total Current Liabilities | $14,032,616 | $16,835,460 | | Total Liabilities | $21,287,277 | $24,203,368 | | Total Stockholders' Equity | $160,969,021 | $165,995,062 | - Cash and bank balances nearly doubled to $11.7 million from $5.8 million at the end of 2019[5] Condensed Consolidated Statements of Income and Comprehensive Income For the three months ended March 31, 2020, the company's revenues fell by nearly 50% year-over-year to $8.7 million, yet the net loss slightly narrowed to $2.4 million from $2.7 million in the prior-year period, resulting in a loss per share of $0.11 Condensed Consolidated Statements of Income and Comprehensive Income | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Revenues | $8,743,851 | $17,450,292 | | Gross Loss | ($169,719) | ($192,466) | | Loss from Operations | ($2,866,682) | ($3,173,939) | | Net Loss | ($2,436,287) | ($2,722,595) | | Basic and Diluted Losses per Share | ($0.11) | ($0.12) | Condensed Consolidated Statements of Cash Flows The company generated $6.9 million in cash from operating activities for the first quarter of 2020, a significant improvement from the $3.1 million used in the same period of 2019, with net cash used in investing activities at $0.8 million and financing activities neutral, resulting in a net increase in cash of $5.9 million, boosting the ending cash balance to $11.7 million Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $6,860,307 | ($3,052,152) | | Net Cash Used in Investing Activities | ($756,514) | ($1,415,761) | | Net Cash Used in Financing Activities | $0 | ($5,366,166) | | Net Increase (Decrease) in Cash | $5,874,407 | ($9,492,366) | | Cash - End of Period | $11,712,152 | $2,625,059 | Notes to Condensed Consolidated Financial Statements The notes reveal the company's reliance on its Variable Interest Entity (VIE), Dongfang Paper, which generates 100% of revenue, with key details including the company's debt structure comprising $6.1 million in short-term and $8.8 million in long-term loans, significant commitments including a $43.6 million payment for the acquisition of Hebei Tengsheng, and the COVID-19 pandemic highlighted as a major risk that impacted production, while subsequent to the quarter's end, the company issued new stock and warrants to raise capital - The company operates through a Variable Interest Entity (VIE) structure, with Dongfang Paper in the PRC accounting for 100% of the company's total revenue for the quarter[21] - As of March 31, 2020, the company had total loans payable of approximately $14.9 million, consisting of $6.1 million in short-term bank loans and $8.8 million in long-term loans from a credit union[47][50] - A significant capital commitment of $43.6 million remains payable by December 31, 2021, for the acquisition of Hebei Tengsheng[89] - The company's revenue was affected by a temporary suspension in production during the quarter due to the COVID-19 pandemic outbreak[101] - Subsequent to the quarter end, in April 2020, the company granted 2 million shares of restricted stock and entered an agreement to sell 4.4 million shares and warrants for gross proceeds of approximately $2.55 million[104][105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 49.9% year-over-year revenue decrease to $8.7 million for Q1 2020, attributing it to lower sales volumes and prices for Corrugating Medium Paper (CMP) and tissue paper, primarily due to the COVID-19 pandemic and Chinese New Year production halts, while the company's liquidity improved significantly, with cash increasing by $5.9 million, driven by strong operating cash flow from better working capital management, and the report details operational performance by product, cost analysis, and capital resources Results of Operations Revenue for Q1 2020 plummeted by 49.9% to $8.7 million from $17.5 million in Q1 2019, driven by a 43.8% decrease in sales volume and lower Average Selling Prices (ASPs), with the decline most pronounced in Corrugating Medium Paper (CMP), resulting in a gross loss of $169,719, a slight increase from a loss of $192,466 in the prior year, and an overall gross margin deteriorating to -1.94%, leading to a net loss for the quarter of $2.4 million Revenue by Product | Product | Q1 2020 Revenue | Q1 2019 Revenue | % Change | | :--- | :--- | :--- | :--- | | Total CMP | $7,737,502 | $15,590,011 | -50.37% | | Tissue Paper | $1,006,349 | $1,860,281 | -45.90% | | Total | $8,743,851 | $17,450,292 | -49.89% | - The decrease in revenue was attributed to production suspension from mid-January to early March 2020 due to the Chinese New Year and the COVID-19 pandemic outbreak[112] Average Selling Prices by Product | Product ASP | Q1 2020 | Q1 2019 | % Decrease | | :--- | :--- | :--- | :--- | | Regular CMP | $415/tonne | $465/tonne | -10.75% | | Light-Weight CMP | $412/tonne | $453/tonne | -9.05% | | Tissue Paper | $849/tonne | $1,160/tonne | -26.81% | - Gross profit margin for tissue paper products fell sharply to -70.74% from 1.81% in the prior year, mainly due to higher unit fixed costs absorbed by lower production volume[134] Liquidity and Capital Resources The company's cash and cash equivalents increased by $5.9 million to $11.7 million as of March 31, 2020, primarily driven by a strong net cash inflow from operating activities of $6.9 million, a significant reversal from the prior year, with the positive operating cash flow resulting from effective working capital management, including a large decrease in accounts receivable, and the company finances its operations through cash flow, bank loans, and has recently raised additional capital through a stock and warrant offering - Cash and cash equivalents increased to $11.7 million at March 31, 2020, from $5.8 million at December 31, 2019[144] - Net cash provided by operating activities was $6.9 million, a turnaround of $9.9 million from the $3.1 million used in the same period in 2019, chiefly due to a $1.3 million decrease in accounts receivable and a $5.5 million decrease in prepayments[144] - The company had approximately $0.9 million in capital expenditure commitments as of March 31, 2020, mainly for building improvements[143] - Subsequent to the quarter, the company raised approximately $2.55 million in gross proceeds from a registered direct offering to institutional investors[148] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange risk, due to operations in Chinese RMB and reporting in U.S. dollars, and inflation risk in China, which could compress margins if cost increases cannot be passed on to customers, and the company does not use hedging instruments to mitigate these risks - The company is exposed to foreign exchange risk as almost all revenues and costs are denominated in RMB, while financial statements are reported in USD. No hedging transactions are used[171] - Inflation in China poses a risk to operating results if the company cannot increase selling prices to offset rising costs[172] Item 4. Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company concluded that its disclosure controls and procedures were effective as of March 31, 2020, and there were no material changes to internal controls over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period[173] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2020[174] Part II - Other Information Item 1. Legal Proceedings The company reported no legal proceedings during the period - None[176] Item 1A. Risk Factors As a smaller reporting company, IT Tech Packaging, Inc. is not required to provide risk factor disclosures in its Form 10-Q - The company is a smaller reporting company and is not required to provide this information[177] Item 5. Other Information The company announced its intention to hold its 2020 Annual Meeting of Stockholders on July 23, 2020, and provided the deadline for the submission of stockholder proposals - The company intends to hold its 2020 Annual Meeting of Stockholders on July 23, 2020[178] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, which include certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and XBRL-related documents - The report includes certifications from the CEO and CFO pursuant to Sarbanes-Oxley Act sections 302 and 906, as well as XBRL data files[180]