IT Tech Packaging(ITP) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides comprehensive financial statements and management's analysis of the company's financial performance and condition Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of income and comprehensive income, cash flows, and changes in stockholders' equity, along with detailed notes explaining the company's organization, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets | Metric | September 30, 2024 | December 31, 2023 | | :----------------------- | :----------------- | :---------------- | | Total Assets | $190,018,239 | $194,743,649 | | Total Liabilities | $25,694,194 | $26,406,786 | | Total Stockholders' Equity | $164,324,045 | $168,336,863 | - Total assets decreased by approximately $4.7 million, and total liabilities decreased by about $0.7 million, leading to a decrease in total stockholders' equity by approximately $4 million[7][8] Condensed Consolidated Statements of Income and Comprehensive Income This section presents the company's financial performance, including revenues, gross profit, and net loss, for the reporting periods Three Months Ended September 30, | Metric | 2024 | 2023 | Change ($) | Change (%) | | :----------------- | :------------- | :------------- | :----------- | :--------- | | Revenues | $25,081,500 | $15,771,560 | $9,309,940 | 59.03% | | Gross Profit (Loss)| $1,917,381 | $(153,223) | $2,070,604 | - | | Net Loss | $(1,973,946) | $(1,975,368) | $1,422 | (0.07)% | | Basic & Diluted EPS| $(0.20) | $(0.20) | $0.00 | 0.00% | Nine Months Ended September 30, | Metric | 2024 | 2023 | Change ($) | Change (%) | | :----------------- | :------------- | :------------- | :------------ | :--------- | | Revenues | $58,195,129 | $65,582,351 | $(7,387,222) | (11.26)% | | Gross Profit | $5,581,794 | $749,636 | $4,832,158 | 644.60% | | Net Loss | $(5,798,229) | $(5,962,026) | $163,797 | (2.75)% | | Basic & Diluted EPS| $(0.58) | $(0.59) | $0.01 | (1.69)% | - For the three months ended September 30, 2024, revenues significantly increased by 59.03%, and the company moved from a gross loss to a gross profit. However, the net loss remained relatively stable. For the nine months, revenues decreased by 11.26%, but gross profit saw a substantial increase of 644.60%, leading to a slight reduction in net loss[8] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities Nine Months Ended September 30, | Cash Flow Activity | 2024 | 2023 | Change ($) | | :---------------------------------- | :------------ | :------------ | :------------ | | Net Cash Provided by Operating Activities | $2,831,111 | $7,494,114 | $(4,663,003) | | Net Cash Used in Investing Activities | $(315,152) | $(9,211,711) | $8,896,559 | | Net Cash (Used in) Provided by Financing Activities | $(2,112,706) | $1,997,269 | $(4,109,975) | | Net Increase (Decrease) in Cash and Cash Equivalents | $500,993 | $(86,927) | $587,920 | - Operating cash flow decreased significantly, while investing cash outflow reduced substantially. Financing activities shifted from providing cash to using cash, resulting in a net increase in cash and cash equivalents for the period, reversing the prior year's decrease[10] Condensed Consolidated Statements of Changes in Stockholders' Equity This section details changes in the company's equity, including net loss and foreign currency adjustments Stockholders' Equity Changes (Nine Months Ended September 30, 2024) | Item | Amount ($) | | :---------------------------------- | :------------ | | Balance at December 31, 2023 | $168,336,863 | | Foreign currency translation adjustment | $1,785,411 | | Net loss | $(5,798,229) | | Balance at September 30, 2024 | $164,324,045 | - Total stockholders' equity decreased from $168.3 million to $164.3 million, primarily due to the net loss, partially offset by a positive foreign currency translation adjustment[12] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies, financial line items, and business context (1) Organization and Business Background This note describes the company's structure, operations, and its Variable Interest Entity (VIE) arrangements in China - IT Tech Packaging, Inc. operates as a holding company for Hebei Baoding Dongfang Paper Milling Company Limited ('Dongfang Paper'), a producer and distributor of paper products in China, acquired in 2007. The company also controls Dongfang Paper and its subsidiary Tengsheng Paper through a Variable Interest Entity (VIE) structure via contractual agreements[13][16][19] VIE Contribution to Company's Financials | Metric | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | As of Sep 30, 2024 | As of Dec 31, 2023 | | :---------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :----------------- | :----------------- | | Revenue | 100% | 99.90% | 100% | 99.86% | - | - | | Total Assets| - | - | - | - | 95.31% | 94.93% | - Dongfang Paper and Tengsheng Paper (VIEs) are critical to the company's operations, contributing nearly 100% of total revenue and over 95% of total assets[25] (2) Basis of Presentation and Significant Accounting Policies This note outlines the accounting principles, estimates, and key policies used in preparing the financial statements - The financial statements are prepared in accordance with GAAP, requiring management estimates and judgments. Key policies include valuation of long-lived assets, fair value measurements (classified into Level 1, 2, and 3 hierarchy), and share-based compensation accounting[32][34][35][36][43] - Derivative liabilities, specifically from warrants, are measured at fair value using the Black-Scholes pricing model and are classified as Level 3 fair value measurements due to significant unobservable inputs[41] (3) Restricted Cash This note details the nature and amount of cash held under restrictions, primarily for legal proceedings Restricted Cash Balances | Date | Amount | | :----------------- | :---------- | | September 30, 2024 | $478,066 | | December 31, 2023 | $472,983 | - Restricted cash is held at the Industrial and Commercial Bank of China for Tengsheng Paper, due to a legal proceeding against Tengsheng Paper and its executive director[46] (4) Inventories This note provides a breakdown of inventory components and changes over the reporting periods Inventories Breakdown | Category | September 30, 2024 | December 31, 2023 | | :----------------- | :----------------- | :---------------- | | Raw Materials | $4,110,074 | $372,968 | | Semi-finished Goods| $303,433 | $300,207 | | Finished Goods | $1,319,032 | $2,885,019 | | Total Inventory, net | $5,732,539 | $3,555,235 | - Total net inventory increased by 61.24% from December 31, 2023, primarily driven by a significant increase in raw materials, especially recycled paper board, which rose from $198,744 to $3,873,233[47] (5) Prepayments and other current assets This note details the composition and changes in the company's prepayments and other short-term assets Prepayments and Other Current Assets | Category | September 30, 2024 | December 31, 2023 | | :--------------------------- | :----------------- | :---------------- | | Prepaid land lease | $7,135 | $- | | Prepayment for purchase of materials | $5,737,653 | $5,446,823 | | Value-added tax recoverable | $13,494,151 | $13,409,459 | | Total | $19,384,595 | $18,981,290 | - Prepayments and other current assets saw a slight increase, mainly due to prepayments for materials and value-added tax recoverable[48] (6) Property, plant and equipment, net This note presents the company's fixed assets, including land use rights, buildings, and machinery, net of depreciation Property, Plant and Equipment, Net | Category | September 30, 2024 | December 31, 2023 | | :-------------------------------------- | :----------------- | :---------------- | | Land use rights | $82,380,439 | $81,504,608 | | Building and improvements | $68,300,564 | $67,939,059 | | Machinery and equipment | $160,198,007 | $158,629,858 | | Less: accumulated depreciation and amortization | $(156,475,574) | $(144,447,712) | | Property, Plant and Equipment, net | $154,755,386 | $163,974,022 | - Net property, plant, and equipment decreased by approximately $9.2 million, primarily due to increased accumulated depreciation and amortization. Certain land use rights and equipment are pledged as collateral for long-term loans[49][50][52] Depreciation and Amortization | Period | 2024 | 2023 | | :------------------------------------ | :------------ | :------------ | | Three months ended September 30 | $3,483,298 | $3,423,231 | | Nine months ended September 30 | $10,346,181 | $10,573,288 | (7) Leases This note describes the company's lease arrangements, both as a lessor and lessee, and associated liabilities - The company acts as both an operating lease lessor (leasing plant to a tenant) and lessee (leasing plant and production equipment). Lease liabilities are determined using the incremental borrowing rate[54][56] Lease Information (Nine Months Ended September 30, 2024) | Metric | Amount ($) | | :-------------------------------------- | :--------- | | Operating lease cost | $74,717 | | Total operating lease payments | $713,531 | | Present value of lease liabilities | $622,942 | | Weighted average remaining lease term (years) | 3.9 | | Weighted average discount rate | 7.56% | (8) Loans Payable This note details the company's short-term and long-term bank loans, including terms and interest expenses Short-term Bank Loans | Bank/Loan Type | September 30, 2024 | December 31, 2023 | | :------------- | :----------------- | :---------------- | | Bank of Cangzhou | $428,119 | $- | | ICBC Loans | $428,119 | $423,567 | | Total | $856,238 | $423,567 | - Short-term bank loans increased by over 100% to $856,238, with new loans from Bank of Cangzhou and ICBC in 2024. Several ICBC loans from 2023 were repaid in June 2024[62][63][64][65][66][67][69] Long-term Loans | Lender/Loan Type | September 30, 2024 | December 31, 2023 | | :--------------- | :----------------- | :---------------- | | Rural Credit Union | $8,931,986 | $11,378,429 | | Less: Current portion | $(4,365,385) | $(6,874,497) | | Long-term loans | $4,566,601 | $4,503,932 | - Total long-term loans decreased by approximately $2.4 million. Several loans from the Rural Credit Union of Xushui District were renewed or repaid, with varying interest rates (mostly 7% per annum)[71][73][75][76][77][78] Total Interest Expenses | Period | 2024 | 2023 | | :------------------------------------ | :------------ | :------------ | | Three months ended September 30 | $171,430 | $247,628 | | Nine months ended September 30 | $593,271 | $760,807 | (9) Related Party Transactions This note discloses financial transactions and balances with related parties, including the CEO - All loans from CEO Mr. Zhenyong Liu to Dongfang Paper were fully repaid as of September 30, 2024. Accrued interest owing to Mr. Liu was $604,748 as of September 30, 2024[84][216] - Loans from the Company to Mr. Zhenyong Liu, totaling $7,059,455, were fully repaid by December 2023[85][217] Accrued Interest to Related Party (Mr. Zhenyong Liu) | Date | Amount | | :----------------- | :---------- | | September 30, 2024 | $604,748 | | December 31, 2023 | $598,319 | (10) Other payables and accrued liabilities This note provides a breakdown of various accrued expenses and other short-term liabilities Other Payables and Accrued Liabilities | Category | September 30, 2024 | December 31, 2023 | | :-------------------------------------- | :----------------- | :---------------- | | Accrued electricity | $117,171 | $3,054 | | Value-added tax payable | $226,354 | $696 | | Accrued interest to a related party | $604,748 | $598,319 | | Payable for purchase of property, plant and equipment | $10,988,359 | $11,175,858 | | Accrued bank loan interest | $1,295,773 | $1,070,708 | | Others (incl. legal proceeding liability) | $552,528 | $16,842 | | Totals | $13,800,118 | $12,912,517 | - Total other payables and accrued liabilities increased by approximately $0.9 million, primarily due to higher accrued electricity, VAT payable, accrued bank loan interest, and a $473,785 accrued liability for a legal proceeding[86] (11) Derivative Liabilities This note explains the company's derivative financial instruments, their valuation, and changes in fair value - Derivative liabilities, related to warrants, are classified as Level 3 fair value measurements and valued using the Black-Scholes pricing model[87][89] Derivative Liabilities Fair Value | Date | Amount ($) | | :----------------- | :--------- | | Balance at Dec 31, 2023 | $54 | | Change in fair value | $(51) | | Balance at Sep 30, 2024 | $3 | - The fair value of derivative liabilities significantly decreased from $54 to $3, resulting in a gain of $2 for the three months ended September 30, 2024 (compared to $660,429 in 2023)[91][169] (12) Common Stock This note details the company's common stock, including outstanding shares and historical stock offerings - As of November 14, 2024, there were 10,065,920 shares of common stock outstanding. A 1-for-10 reverse stock split was effective on July 7, 2022[4][15] - The company issued common stock and warrants in public offerings in January and March 2021, raising approximately $14.4 million and $21.9 million, respectively[93][94] (13) Warrants This note provides information on outstanding warrants, their exercise prices, and remaining contractual life Outstanding Warrants as of September 30, 2024 | Metric | Value | | :-------------------------- | :--------- | | Number of Shares | 3,016,635 | | Weighted Average Exercise Price | $6.6907 | | Weighted Average Remaining Contractual Life (years) | 1.33 | - The company has 3,016,635 warrants outstanding and exercisable, with an aggregate intrinsic value of nil as of September 30, 2024[100][101] (14) Earnings Per Share This note presents the basic and diluted earnings (loss) per share for the reporting periods Basic and Diluted Loss Per Share | Period | 2024 ($) | 2023 ($) | | :------------------------------------ | :------- | :------- | | Three months ended September 30 | (0.20) | (0.20) | | Nine months ended September 30 | (0.58) | (0.59) | - Basic and diluted loss per share remained stable at $(0.20) for the three months ended September 30, 2024, and slightly improved to $(0.58) for the nine months ended September 30, 2024, compared to $(0.59) in the prior year[102][104] (15) Income Taxes This note details the company's income tax provisions, effective tax rates, and deferred tax assets and liabilities - PRC operating companies (Dongfang Paper and Baoding Shengde) are subject to a 25% Enterprise Income Tax. No U.S. federal income tax provision is made as earnings are considered permanently invested in the PRC[105][106] Total Income Tax Expenses (Benefits) | Period | 2024 ($) | 2023 ($) | | :------------------------------------ | :------- | :------- | | Three months ended September 30 | 345,710 | (3,236) | | Nine months ended September 30 | 799,273 | 348,024 | Effective Income Tax Rate | Period | 2024 | 2023 | | :------------------------------------ | :------- | :------- | | Three months ended September 30 | (21.2)% | 0.2% | | Nine months ended September 30 | (16.0)% | (6.2)% | - The company maintains a 100% valuation allowance on U.S. deferred tax assets due to limited operating history and continuing losses for U.S. income tax purposes[109] (16) Stock Incentive Plans This note describes the company's equity incentive plans for directors, officers, employees, and consultants - The 2023 Omnibus Equity Incentive Plan was adopted on October 31, 2023, reserving 1,500,000 shares of common stock for issuance to directors, officers, employees, and consultants[116] (17) Commitments and Contingencies This note outlines the company's contractual obligations, capital expenditure commitments, and guarantees - The company has an annual land lease payment of approximately $16,902 for 32.95 acres in Xushui District, expiring in 2031[118] Capital Expenditure Commitments | Date | Amount | | :----------------- | :---------- | | September 30, 2024 | $3,524,845 | | December 31, 2023 | $3,499,936 | - The company has capital commitments of $3.5 million for a new tissue paper production line (PM10) and building improvements, expected to be paid within 1-3 years[122] - The company guarantees a $4,423,895 long-term loan for Baoding Huanrun Trading Co., a major raw material supplier, maturing in 2028[123] (18) Segment Reporting This note provides financial information by operating segment, including revenues and net income (loss) - The company operates through three segments: Dongfang Paper and Tengsheng Paper (offset printing, corrugating medium, tissue paper) and Baoding Shengde (face masks, digital photo paper). All sales are to customers in the PRC[124][125] Segment Revenues (Three Months Ended September 30, 2024) | Segment | Revenues ($) | | :-------------- | :----------- | | Dongfang Paper | $25,044,376 | | Tengsheng Paper | $37,124 | | Baoding Shengde | $- | Segment Net Income (Loss) (Nine Months Ended September 30, 2024) | Segment | Net Income (Loss) ($) | | :-------------- | :-------------------- | | Dongfang Paper | $1,910,971 | | Tengsheng Paper | $(6,790,051) | | Baoding Shengde | $(227,256) | - Dongfang Paper is the primary revenue generator and profitable segment, while Tengsheng Paper and Baoding Shengde reported net losses for the nine months ended September 30, 2024[128] (19) Concentration and Major Customers and Suppliers This note discloses concentrations of business with major customers and suppliers - No single customer accounted for over 10% of total sales for the three and nine months ended September 30, 2024 and 2023[134] - Three major suppliers accounted for 74%, 16%, and 7% of total purchases for the nine months ended September 30, 2024[136] (20) Concentration of Credit Risk This note describes the company's exposure to credit risk, particularly regarding cash held in financial institutions - The company's cash is primarily held in PRC financial institutions, with balances exceeding the RMB500,000 ($71,353) deposit insurance coverage amounting to $4,557,735 as of September 30, 2024[137] (21) Risks and Uncertainties This note outlines various operational, financial, and regulatory risks and uncertainties faced by the company - The company faces substantial risks from intense industry competition, financing and liquidity requirements, rapidly changing customer demands, foreign currency exchange rates, and operating under PRC laws and restrictions[138] (22) Subsequent Event This note reports on significant events occurring after the balance sheet date - No subsequent events were reported[138] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three and nine months ended September 30, 2024, compared to the prior year, highlighting key drivers of revenue, cost, and profitability changes, as well as liquidity and capital resources Cautionary Notice Regarding Forward-Looking Statements This section warns that forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially - The report contains forward-looking statements subject to various assumptions, risks, and factors that could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these statements[142] Results of Operations This section analyzes the company's financial performance, including revenue, cost of sales, and profitability, for the reporting periods Comparison of the Three months ended September 30, 2024 and 2023 This section compares the company's financial results for the three months ended September 30, 2024 and 2023 Revenue This section analyzes the drivers of revenue changes, including sales volume and average selling prices Revenue (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :----------- | :--------- | | Total Revenues | 25,081,500 | 15,771,560 | 9,309,940 | 59.03% | | CMP, Offset Printing, Tissue Paper Revenue | 25,044,375 | 15,756,399 | 9,287,976 | 58.95% | | CMP Quantity Sold (tonnes) | 74,884 | 44,396 | 30,488 | 68.67% | | Regular CMP ASP ($/tonne) | 337 | 350 | (13) | (3.71)% | | Light-Weight CMP ASP ($/tonne) | 324 | 340 | (16) | (4.71)% | - Total revenue increased by 59.03% primarily due to a 68.67% increase in Corrugating Medium Paper (CMP) sales volume, despite a decrease in average selling prices (ASPs) for both regular and light-weight CMP. Production of offset printing paper and tissue paper products was suspended[143][145][148][149][153][154] Cost of Sales This section examines the factors influencing the cost of goods sold, such as material costs and production volume Cost of Sales (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :----------- | :--------- | | Total Cost of Sales | 23,163,835 | 15,907,217 | 7,256,618 | 45.62% | | CMP Cost of Sales | 23,163,835 | 14,844,637 | 8,319,198 | 56.04% | | CMP Average Cost per Tonne ($) | 309 | 334 | (25) | (7.49)% | | Recycled Paper Board Unit Cost ($/tonne)| 171 | 176 | (5) | (2.84)% | - Cost of sales increased by 45.62% due to higher CMP sales volume, but the average unit cost of sales for CMP decreased by 7.49%, mainly attributable to lower average unit purchase costs of recycled paper board[156][157][159] Gross Profit (Loss) This section discusses changes in gross profit and gross profit margin, highlighting profitability trends Gross Profit (Loss) (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :----------- | :--------- | | Gross Profit (Loss) | 1,917,381 | (153,223) | 2,070,604 | - | | Gross Profit Margin | 7.64% | (0.97)% | 8.61 pp | - | | Regular CMP Gross Profit Margin | 7.54% | 7.01% | 0.53 pp | - | | Light-Weight CMP Gross Profit Margin | 7.33% | (7.47)% | 14.80 pp | - | - The company shifted from a gross loss to a gross profit, with the overall gross profit margin improving significantly from -0.97% to 7.64%. This improvement was driven by decreased recycled paper board costs, partially offset by lower ASPs[162][164][165] Selling, General and Administrative Expenses This section details the components and changes in the company's operating expenses SG&A Expenses (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :----- | :---------- | :---------- | :---------- | :--------- | | SG&A | 3,381,502 | 2,334,746 | 1,046,756 | 44.83% | - Selling, general and administrative expenses increased by 44.83%, mainly due to depreciation of idle fixed assets during production suspension and an accrued liability for a legal proceeding[166] Loss from Operations This section analyzes the company's operating performance before non-operating income and expenses Operating Loss (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------- | :---------- | :---------- | :---------- | :--------- | | Operating Loss | (1,464,121) | (2,484,513) | 1,020,392 | (41.07)% | - Operating loss decreased by 41.07%, primarily due to the increase in gross profit, partially offset by higher selling, general and administrative expenses[167] Other Income and Expenses This section covers non-operating income and expenses, including interest and derivative gains/losses Other Income (Expense) (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | | :----------------------- | :------- | :------- | | Interest expense | (171,430)| (247,818)| | Gain on derivative liability | 2 | 660,429 | - Interest expense decreased by $76,388. The gain on derivative liability significantly decreased from $660,429 in 2023 to $2 in 2024[168][169] Net Loss This section summarizes the company's overall profitability or loss for the reporting period Net Loss (Three Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :------- | :---------- | :---------- | :--------- | :--------- | | Net Loss | (1,973,946) | (1,975,368) | 1,422 | (0.07)% | - Net loss remained relatively stable, decreasing slightly by 0.07% compared to the prior year[170] Comparison of the Nine months ended September 30, 2024 and 2023 This section compares the company's financial results for the nine months ended September 30, 2024 and 2023 Revenue This section analyzes the drivers of revenue changes, including sales volume and average selling prices Revenue (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :------------ | :--------- | | Total Revenues | 58,195,129 | 65,582,351 | (7,387,222) | (11.26)% | | CMP, Offset Printing, Tissue Paper Revenue | 58,083,990 | 65,483,282 | (7,399,292) | (11.30)% | | Total CMP Quantity Sold (tonnes) | 168,919 | 167,018 | 1,901 | 1.14% | | Regular CMP ASP ($/tonne) | 346 | 370 | (24) | (6.49)% | | Light-Weight CMP ASP ($/tonne) | 333 | 356 | (23) | (6.46)% | - Total revenue decreased by 11.26%, primarily due to a decrease in ASPs for CMP and the suspension of offset printing paper and tissue paper products production, despite a slight increase in total CMP quantity sold[171][172][173] Cost of Sales This section examines the factors influencing the cost of goods sold, such as material costs and production volume Cost of Sales (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :------------ | :--------- | | Total Cost of Sales | 52,612,788 | 64,717,786 | (12,104,998) | (18.70)% | | CMP Cost of Sales | 52,612,788 | 58,592,582 | (5,979,794) | (10.21)% | | CMP Average Cost per Tonne ($) | 311 | 351 | (40) | (11.40)% | - Total cost of sales decreased by 18.70%, mainly due to a significant decrease in the average unit material costs of CMP (down 11.40%), partially offset by increased regular CMP sales volume[175][176] Gross Profit This section discusses changes in gross profit and gross profit margin, highlighting profitability trends Gross Profit (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :----------- | :--------- | | Gross Profit | 5,581,794 | 749,636 | 4,832,158 | 644.60% | | Gross Profit Margin | 9.59% | 1.14% | 8.45 pp | - | | Regular CMP Gross Profit Margin | 9.44% | 5.26% | 4.18 pp | - | | Light-Weight CMP Gross Profit Margin | 9.33% | 1.68% | 7.65 pp | - | - Gross profit increased substantially by 644.60%, with the overall gross profit margin improving from 1.14% to 9.59%. This was primarily driven by the decrease in unit material costs of CMP, despite lower ASPs[178][179][180][181] Selling, General and Administrative Expenses This section details the components and changes in the company's operating expenses SG&A Expenses (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :----- | :---------- | :---------- | :---------- | :--------- | | SG&A | 9,999,833 | 6,153,513 | 3,846,320 | 62.51% | - Selling, general and administrative expenses increased by 62.51%, mainly due to depreciation of idle fixed assets during production suspension and an accrued liability for a legal proceeding[182] Loss from Operations This section analyzes the company's operating performance before non-operating income and expenses Operating Loss (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :-------------- | :---------- | :---------- | :---------- | :--------- | | Operating Loss | (4,418,039) | (5,775,557) | 1,357,518 | (23.50)% | - Operating loss decreased by 23.50%, driven by the significant increase in gross profit, partially offset by higher selling, general and administrative expenses[183] Other Income and Expenses This section covers non-operating income and expenses, including interest and derivative gains/losses Other Income (Expense) (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | | :----------------------- | :------- | :------- | | Interest expense | (593,271)| (767,668)| | Gain on derivative liability | 51 | 646,020 | - Interest expense decreased by $174,397. The gain on derivative liability significantly decreased from $646,020 in 2023 to $51 in 2024[184][185] Net Loss This section summarizes the company's overall profitability or loss for the reporting period Net Loss (Nine Months Ended September 30) | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :------- | :---------- | :---------- | :--------- | :--------- | | Net Loss | (5,798,229) | (5,962,026) | 163,797 | (2.75)% | - Net loss decreased by 2.75%, primarily due to improved operating results[186] Accounts Receivable This section analyzes changes in the company's accounts receivable balance and its implications Accounts Receivable, Net | Date | Amount | Change ($) | Change (%) | | :----------------- | :---------- | :---------- | :--------- | | September 30, 2024 | $1,727,370 | 1,151,844 | 200.14% | | December 31, 2023 | $575,526 | - | - | - Net accounts receivable increased significantly by 200.14% to $1,727,370 as of September 30, 2024[186] Inventories This section discusses inventory levels and management strategies, particularly for raw materials Inventory Changes | Category | September 30, 2024 | December 31, 2023 | Change ($) | Change (%) | | :----------------- | :----------------- | :---------------- | :---------- | :--------- | | Total Inventory, net | $5,732,539 | $3,555,235 | 2,177,304 | 61.2% | | Recycled paper board | $3,873,233 | $198,744 | 3,674,489 | 1848.9% | - Total net inventory increased by 61.24%, primarily driven by an 1848.9% increase in recycled paper board inventory, reflecting a strategy to manage stock turnover and price volatility[187][188] Renewal of operating lease This section details the renewal of a significant operating lease agreement for industrial buildings - The lease agreement for industrial buildings, originally sold and leased back, was renewed in August 2022 for a term of six years with an annual rental payment of approximately $140,847[189] Capital Expenditure Commitment as of September 30, 2024 This section outlines the company's future capital spending plans and their financing - As of September 30, 2024, the company had approximately $3.5 million in capital expenditure commitments, mainly for the purchase of paper machinery for the new PM10 tissue paper production line, to be financed by bank loans and cash flows[190][191] Cash and Cash Equivalents This section analyzes the company's cash position and the factors influencing its changes Cash, Cash Equivalents and Restricted Cash | Date | Amount | Change ($) | Change (%) | | :----------------- | :---------- | :---------- | :--------- | | September 30, 2024 | $4,892,914 | 500,993 | 11.41% | | December 31, 2023 | $4,391,921 | - | - | - Cash, cash equivalents, and restricted cash increased by $500,993. This was influenced by a decrease in net cash from operating activities, a significant reduction in cash used in investing activities, and a shift to net cash used in financing activities[192][193][194] Short-term bank loans This section details the company's short-term borrowing activities and associated interest rates Short-term Bank Loans | Bank/Loan Type | September 30, 2024 | December 31, 2023 | | :------------- | :----------------- | :---------------- | | Bank of Cangzhou | $428,119 | $- | | ICBC Loans | $428,119 | $423,567 | | Total | $856,238 | $423,567 | - Short-term bank loans increased to $856,238, with new loans from Bank of Cangzhou and ICBC in 2024. The average short-term borrowing rate for the nine months ended September 30, 2024, was approximately 4.47%[195][199][201][202][203] Long-term loans This section discusses the company's long-term debt obligations, renewals, and repayment schedules Long-term Loans | Lender/Loan Type | September 30, 2024 | December 31, 2023 | | :--------------- | :----------------- | :---------------- | | Rural Credit Union | $8,931,986 | $11,378,429 | | Less: Current portion | $(4,365,385) | $(6,874,497) | | Long-term loans | $4,566,601 | $4,503,932 | - Total long-term loans decreased by approximately $2.4 million. Several loans from the Rural Credit Union of Xushui District were renewed or repaid, with interest rates around 7% per annum[204][205][206][207][209][210] Shareholder Loans This section provides an update on loans involving the company's CEO and their repayment status - All loans from CEO Mr. Zhenyong Liu to Dongfang Paper were fully repaid as of September 30, 2024. Accrued interest owing to Mr. Liu was $604,748[216] - Loans from the Company to Mr. Zhenyong Liu, totaling $7,059,455, were fully repaid by December 2023[217] Critical Accounting Policies and Estimates This section highlights the key accounting policies and significant management judgments impacting financial reporting - Key accounting policies include revenue recognition (upon delivery and fixed price), valuation of long-lived assets (impairment review based on cash flows), and foreign currency translation (RMB functional currency, translated to USD at period-end rates)[219][220][221][222] Off-Balance Sheet Arrangements This section discloses the company's off-balance sheet obligations, such as loan guarantees - The company guarantees a $4,423,895 long-term bank loan for Baoding Huanrun Trading Co., a major raw material supplier, maturing in 2028[223] Recent Accounting Pronouncements This section discusses the potential impact of newly issued accounting standards on the company's financial statements - The company is evaluating the impact of ASU 2023-09 (Improvements to Income Tax Disclosures) and ASU 2021-08 (Accounting for Contract Assets and Liabilities from Contracts with Customers), with no material impact expected from ASU 2021-08[224][225] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses the company's exposure to market risks, including foreign exchange and inflation Foreign Exchange Risk This section assesses the company's exposure to currency fluctuations and their potential financial impact - The company is exposed to foreign exchange risk due to RMB-denominated revenues and costs, and US dollar reporting. No hedging transactions are currently in place[226] Inflation This section discusses the potential effects of inflation on the company's operating costs and profitability - Inflation, particularly in product and overhead costs, could adversely affect operating results if selling prices do not increase proportionally. The company does not believe inflation in China has had a material impact to date[227] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and internal control over financial reporting Effectiveness of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2024[228] Changes in Internal Control over Financial Reporting This section addresses any material changes in the company's internal control over financial reporting - There were no material changes to internal control over financial reporting during the quarter ended September 30, 2024[229] PART II - OTHER INFORMATION This section covers non-financial information, including legal proceedings, risk factors, equity security sales, defaults, mine safety disclosures, other information, and exhibits Item 1. Legal Proceedings This section details ongoing legal disputes and their potential financial implications for the company - The company is a defendant in a breach of contract lawsuit by FT Global Capital, Inc., where a default judgment on liability was granted against the company, with damages to be determined[231] - Tengsheng Paper, a VIE, was ordered by a PRC court to repay a RMB3.32 million loan, for which it is jointly liable, and its bank deposits were frozen[232] Item 1A. Risk Factors This section identifies and describes the significant risks and uncertainties that could affect the company's business and financial results - As a smaller reporting company, the registrant is not required to provide information under this item[234] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on any sales of equity securities not registered under the Securities Act and the application of proceeds - No unregistered sales of equity securities or use of proceeds were reported[234] Item 3. Defaults Upon Senior Securities This section discloses any defaults on the company's senior debt obligations - No defaults upon senior securities were reported[234] Item 4. Mine Safety Disclosures This section provides information related to mine safety, if applicable to the company's operations - This item is not applicable to the company[234] Item 5. Other Information This section includes any other material information not covered elsewhere in the report - No directors or officers reported the adoption or termination of Rule 10b5-1 trading arrangements during the quarter[236] Item 6. Exhibits This section lists all exhibits filed as part of the report, including certifications and financial data - The report includes various certifications (e.g., Rule 13a-14, 18 U.S.C. Section 1350) and Inline XBRL documents as exhibits[237] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the report - The report is signed by Zhenyong Liu, Chief Executive Officer, and Jing Hao, Chief Financial Officer, on November 15, 2024[240]