(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data, the financial statements, and the notes to those statements that are included elsewhere in this annual report.
Results of Operations
Revenue for the year ended December 31, 2019 was $117,614,886, an increase of $30,868,128, or 35.58%, from $86,746,758 for 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 year ended December 31, 2019 was $117,613,736, an increase of $30,880,600, or 35.60%, from $86,733,136 for the year ended December 31, 2018. This was mainly due to the increase in sales volume of CMP, offset printing paper and tissue paper, which was partially offset by the decrease in ASP of CMP and offset printing paper.
Total quantities of offset printing paper, CMP and tissue paper products sold during the year ended December 31, 2019 amounted to 250,144 tonnes, an increase of 93,295 tonnes, or 59.48%, compared to 156,849 tonnes sold during the year ended December 31, 2018. Total quantities of CMP and offset printing paper sold increased by 86,505 tonnes in the year of 2019 as compared to 2018. We sold 6,790 tonnes of tissue paper products in the year of 2019. The increase was mainly due to the production suspension that took place from late January 2018 to March 13, 2018 due to a government-mandated restriction on the natural gas supply, and the launch of our PM8 production line in December 2018 for production and sales of tissue paper products. The changes in revenue and quantity sold for the year ended December 31, 2019 and 2018 are summarized as follows:
Year Ended Year Ended Percentage
December 31, 2019 December 31, 2018 Change in Change
Quantity Quantity Quantity
Sales Revenue (Tonne) Amount (Tonne) Amount (Tonne) Amount Quantity Amount
Regular CMP 168,837 $ 72,050,122 116,012 $ 63,199,071 52,825 $ 8,851,051 45.53 % 14.01 %
Light-Weight CMP 45,310 $ 18,776,316 34,646 $ 18,397,173 10,664 $ 379,143 30.78 % 2.06 %
Total CMP 214,147 $ 90,826,438 150,658 $ 81,596,244 63,489 $ 9,230,194 42.14 % 11.31 %
Offset Printing Paper 29,207 $ 20,436,130 6,191 $ 5,136,892 23,016 $ 15,299,238 371.77 % 297.83 %
Tissue Paper Products 6,790 $ 6,351,168 - - 6,790 $ 6,351,168 % %
Total CMP, Offset Printing
Paper and Tissue Paper
Revenue 250,144 $ 117,613,736 156,849 $ 86,733,136 93,295 $ 30,880,600 59.48 % 35.60 %
Monthly revenue (excluding revenue of digital photo paper and tissue paper products) for the 24 months ended December 31, 2019, are summarized below:
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The average selling price, or ASP, for our major products for the years ended December 31, 2019 and 2018 are summarized as follows:
Offset
Printing Regular CMP Light-Weight Tissue Paper
Paper ASP ASP CMP ASP Products ASP
Year Ended December 31, 2018 $ 830 $ 545 $ 531 $ -
Year Ended December 31, 2019 $ 700 $ 427 $ 414 $ 935
Decrease from comparable period in the
previous year $ -130 $ -118 $ -117 $ -
Decrease by percentage -15.66 % -21.65 % -22.03 % - %
The following is a chart showing the month-by-month ASPs (excluding the ASPs of digital photo paper and tissue paper products) for the 24 month period ended December 31, 2019:
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Corrugating Medium Paper
Revenue from CMP amounted to $90,826,438 (77.22% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2019, representing an increase of $9,230,194, or 11.31%, from $81,596,244 during 2018.
We sold 214,147 tonnes of CMP in the year ended December 31, 2019 as compared to 150,658 tonnes in the year ended December 31, 2018, representing a 42.14% increase in quantity sold.
ASP for regular CMP dropped from $545/tonne in 2018 to $427/tonne in 2019, representing a 21.65% decrease. ASP in RMB for regular CMP in 2018 and 2019 was RMB3,614 and RMB2,942, respectively, representing a 18.59% decrease. The quantity of regular CMP sold increased by 52,825 tonnes, from 116,012 tonnes in 2018 to 168,837 tonnes in 2019.
ASP for light-weight CMP dropped from $531/tonne in 2018 to $414/tonne in 2019, representing a $22.03% decrease. ASP in RMB for light-weight CMP in 2018 and 2019 was RMB3,523 and RMB2,857, respectively, representing a 18.90% decrease. The quantity of light-weight CMP sold increased by 10,664 tonnes, from 34,646 tonnes in 2018, to 45,310 tonnes in 2019.
Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December 31, 2019 and 2018 were 46.68% and 32.54%, respectively, representing an increase of 14.14%.
Quantities sold for regular CMP that was produced by the PM6 production line from January 2018 to December 2019 are as follows:
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Offset Printing Paper
Revenue from offset printing paper was $20,436,130 (17.38% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2019, representing an increase of $15,299,238, or 297.83%, from $5,136,892 in 2018. We sold 29,207 tonnes of offset printing paper in the year ended December 31, 2019, compared to 6,191 tonnes in 2018, an increase of 23,016 tonnes, or 371.77%. ASPs for offset printing paper in the year ended December 31, 2018 and 2019 was $830/tonne and $700/tonne, respectively, representing a 15.66% decrease. ASP in RMB for offset printing paper for the year ended December 31, 2018 and 2019 was RMB5,504 and RMB4,824, respectively, representing a 12.35% decrease.
Tissue Paper Products
We produce tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the Dongfang Paper brand. In December 2018 and November 2019, we completed the construction, installation and test of operation of our PM8 and PM9 production lines. We launched the complete line of processing base tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue paper products with designated capacity of 10,000 tonnes/year.
Revenue from tissue paper products was $6,351,168 (5.40% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2019, representing an increase of $6,351,168 from $nil in 2018. We sold 6,790 tonnes of tissue paper products in the year of 2019.
Cost of Sales
Total cost of sales for CMP, offset printing paper and tissue paper products in the year ended December 31, 2019 was $103,922,414, an increase of $23,013,001, or 28.44%, from $80,909,412 for the year ended December 31, 2018. This was mainly a result of the increase in volume sold, partially offset by the decreases in costs of recycled paper board and recycled white scrap paper. Cost of sales for CMP was $81,511,234 for the year ended December 31, 2019, as compared to $75,811,876 in 2018. The increase in the cost of sales of $5,699,359 for CMP was mainly due to the increase in the quantities of CMP sold, partially offset by the decrease in cost of recycled paper board in the year of 2019. Average cost of sales per tonne for CMP decreased by 24.25%, from $503 for the year ended December 31, 2018, to $381 in 2019. The decrease was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board. Cost of sales for offset printing paper was $14,061,771 for the year ended December 31, 2019, as compared to $5,097,537 in 2018. Average cost of sales per tonne of offset printing paper decreased by 41.56%, from $823 in the year ended December 31, 2018, to $481 in 2019. The decrease was mainly attributable to lower average unit purchase costs (net of applicable value added tax) of recycled white scrap paper. Cost of sales for tissue paper products was $8,349,409 for the year ended December 31, 2019. Average cost of sales per tonne of tissue paper products was $1,230 for the year ended December 31, 2019.
Changes in cost of sales and cost per tonne by product for the year ended December 31, 2019 and 2018 are summarized below:
Year Ended Year Ended Change in
December 31, 2019 December 31, 2018 Change in percentage
Cost of Cost per Cost of Cost Cost of Cost per Cost of Cost per
Sales Tonne Sales per tonne Sales Tonne Sales Tone
Regular CMP $ 64,636,452 $ 383 $ 58,342,301 $ 503 $ 6,294,151 $ (120 ) 10.79 % -23.86 %
Light-Weight CMP $ 16,874,783 $ 372 $ 17,469,575 $ 504 $ (594,792 ) $ (132 ) -3.40 % -26.19 %
Total CMP $ 81,511,234 $ 381 $ 75,811,876 $ 503 $ 5,699,359 $ (122 ) 7.52 % -24.25 %
Offset Printing Paper $ 14,061,771 $ 481 $ 5,097,537 $ 823 $ 8,964,234 $ (342 ) 175.85 % -41.56 %
Tissue Paper Products $ 8,349,409 $ 1,230 $ - $ - 8,349,409 $ 1,230 % %
Total CMP, Offset Printing
Paper and Tissue Paper
Revenue $ 103,922,414 $ n/a $ 80,909,412 $ n/a $ 23,013,001 $ n/a 28.44 % n/a%
Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31, 2019 were RMB 1,536/tonne (approximately $223/tonne) and RMB 1,855/tonne (approximately $269/tonne), respectively, as compared to RMB 2,079/tonne (approximately $313/tonne) and RMB 3,013/tonne (approximately 454/tonne) for the year ended December 31, 2018, respectively. These changes (in US dollars) represent a year-over-year decrease of 28.75% for the unit purchase cost of recycled paper board and a year-over-year decrease of 40.75% for the unit purchase cost of recycled white scrap paper. 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 January 2018 to December 2019 are shown below:
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Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 6% and 10.3% of total sales in 2019, respectively, compared to 6% and 9.5% of total sales 2018.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 December 31, 2019 are summarized as follows:
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Gross Profit
Gross profit for December 31, 2019 was $13,679,518 (11.63% of the total revenue), representing an increase of $7,859,117, or 135.03%, from the gross profit of $5,820,401 (6.71% of the total revenue) for the year ended December 31, 2018. The increase was mainly due to (i) the increase in quantities sold of CMP, offset printing paper and tissue paper and (ii) the decrease of material purchase price of CMP and offset printing paper, partially offset by the decrease of ASP of these products.
Corrugating Medium Paper, Offset Printing Paper and Tissue Paper Products
Gross profit for offset printing paper, CMP and tissue paper products for the year ended December 31, 2019 was $13,691,322, an increase of $7,867,598, or 135.10%, from the gross profit of $5,823,724 for the year ended December 31, 2018. The increase was mainly the result of the factors discussed above.
The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 4.93 percentage points, from 6.71% for the year ended December 31, 2018, to 11.64% for the year ended December 31, 2019.
Gross profit margin for regular CMP for the year ended December 31, 2019 was 10.29%, or 2.61 percentage points higher, as compared to gross profit margin of 7.68% for the year ended December 31, 2018. Such increase was primarily due to decrease of material purchase price, partially offset by the decrease in ASP of regular CMP.
Gross profit margin for light-weight CMP for the year ended December 31, 2019 was 10.13%, or 5.09 percentage points higher, as compared to gross profit margin of 5.04% for the year ended December 31, 2018.
Gross profit margin for offset printing paper was 31.19% for the year ended December 31, 2019, an increase of 30.42 percentage points, as compared to 0.77% for the year ended December 31, 2018. Such increase was mainly due to the decrease of purchase price of recycled white scrap paper, partially offset by the decrease in ASP of offset printing paper.
Gross profit margin for tissue paper products for the year ended December 31, 2019 was -31.46%.
Monthly gross profit margins for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2019 are as follows:
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2019 were $9,781,719, a decrease of $3,316,654, or 25.32% from $13,098,373 for the year ended December 31, 2018. The decrease was mainly due to additional repair and maintenance costs incurred during the production suspension period and depreciation of idle fixed assets in 2018.
Income (Loss) from Operations
Operating income for the year ended December 31, 2019 was $3,897,799, an increase of $15,080,113, or 134.86%, from loss from operations of $11,182,314 for the year ended December 31, 2018. The increase in operating loss was primarily due to the increase in gross profit and the decrease in selling, general and administrative expenses.
Other Income and Expenses
Interest expense for the year ended December 31, 2019 decreased by $565,751, from $1,492,119 in the year ended December 31, 2018, to $926,368. The Company had short-term and long-term interest-bearing loans and related party loans that aggregated $15,137,181 as of December 31, 2019, as compared to $21,185,452 as of December 31, 2018.
Net Income (Loss)
As a result of the above, net income was $2,221,182 for the year ended December 31, 2019, representing an increase of $12,766,866, or 121.06%, from net loss of $10,545,684 for year ended December 31, 2018.
Accounts Receivable
Net accounts receivable increased by $242,679, or 8.44%, to $3,119,311 as of December 31, 2019, as compared with $2,876,632 as of December 31, 2018. We usually collect accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist of raw materials (accounting for 23.04% of total value of inventory as of December 31, 2019), semi-finished goods and finished goods. As of December 31, 2019, the recorded value of inventory decreased by 43.63% to $1,647,882 from $2,923,516 as of December 31, 2018. As of December 31, 2019, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $40,032, approximately $372,285, or 90.29%, lower than the balance as of December 31, 2018. Due to the volatility of recycled paper board and recycled white scrap paper price, we maintained a minimum level of inventory of raw materials at the end of the year.
A summary of changes in major inventory items is as follows:
December 31, December 31,
2019 2018 $ Change % Change
Raw Materials
Recycled paper board $ 40,032 $ 412,317 -372,285 -90.29 %
Recycled white scrap paper 10,541 611,861 -601,320 -98.28 %
Tissue base paper 182,096 24,027 158,069 657.90 %
Coal & gas 41,675 167,230 -125,555 -75.08 %
Digital photo base paper and other raw
materials 111,838 140,268 -28,430 -20.27 %
Total Raw Materials 386,182 1,355,703 -969,521 -71.51 %
Semi-finished Goods 83,266 - 83,266
Finished Goods 1,212,849 1,567,813 -354,964 -22.64 %
Total inventory, gross 1,682,297 2,923,516 -1,241,218 -42.46 %
Inventory reserve (74,835 ) - (74,835 )
Total inventory, net $ 1,607,462 $ 2,923,516 (1,241,218 ) -42.46 %
Accounts Payable and Notes Payable
Accounts payable and notes payable was $250,486 as of December 31, 2019, a decrease of 4,021,184, or 94.14%, from $4,271,670 as of December 31, 2018. Accounts payable was $250,486 and $629,054 as of December 31, 2019 and December 31, 2018, respectively. We have been relying on the bank acceptance notes issued under our credit facilities with Bank of Cangzhou to make the majority of our raw materials payments to our vendors. Our notes payable to Bank of Cangzhou were $nil and $3,642,616 as of December 31, 2019 and December 31, 2018, respectively. In January 2018, Bank of Cangzhou issued bank acceptance notes on our behalf for $3,642,616, which we paid off in January 2019.
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 $145,037 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $56,552 and $203,188 which was recorded as part of the current liabilities as of December 31, 2019 and December 31, 2018, respectively.
Capital Expenditure Commitment as of December 31, 2019
We finance our daily operations mainly by cash flows generated from our business operations. As December 31, 2019, we had approximately $1 million in capital expenditure commitments that were mainly related to improvement of Industrial Buildings. These commitments are expected to be financed by bank loans and cash flows generated from our business operations.
Cash ,Cash Equivalents and restricted cash
Our cash, cash equivalents and restricted cash as of December 31, 2019 was $5,837,745, a decrease of $6,279,680, from $12,117,425 as of December 31, 2018. The decrease of cash and cash equivalents for the year ended December 31, 2019 was attributable to a number of factors:
i. Net cash provided by operating activities
Net cash provided by operating activities was $7,530,474 for the year ended December 31, 2019. The balance represented a decrease of cash of $1,639,900, or 17.88%, from $9,170,374 provided for the year ended December 31, 2018. Net income for the year ended December 31, 2019 was $2,221,182 representing an increase of $12,766,866, or 121.06%, from a net loss of $10,545,684 for the year ended December 31, 2018. Changes in various asset and liability account balances throughout the year ended December 31, 2019 also contributed to the net change in cash from operating activities in year ended December 31, 2019. Chief among such changes is the increase of accounts receivable in the amount of $294,882 during the year of 2019 (a decrease to net cash) and the decrease of notes payable in the amount of $3,625,921 (an increase to net cash). There was also a decrease of $1,242,780 in the ending inventory balance as of December 31, 2019 (an increase to net cash for the year ended December 31, 2019 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $15,304,039 and provision of inventory reserve of $75,719. The Company also had a net increase of $5,392,916 in prepayment and other current assets (a decrease to net cash) and a net increase of $504,451 in other payables and accrued liabilities and related parties (an increase to net cash), as well as an increase in income tax payable of $1,180,493 (an increase to net cash) during the year ended December 31, 2019.
ii. Net cash used in investing activities
We incurred $7,866,849 in net cash expenditures for investing activities during the year ended December 31, 2019, as compared to $2,198,852 for the year ended December 31, 2018. Expenditures in the year ended December 31, 2019 were for the prepayment of acquisition of Hebei Tengsheng assets and expenditures on improvement of industrial building.
iii. Net cash used in financing activities
Net cash used in financing activities was $5,772,467 for the year ended December 31, 2019, as compared to net cash used in financing activities in the amount of $3,165,607 for the year ended December 31, 2018. The decrease was mainly attributable to repayment of bank loans and related party loans in 2019.
Short-term bank loans
December 31, December 31,
2019 2018
Industrial and Commercial Bank of China ("ICBC") Loan 1 (a) $ - $ 4,079,730
Bank of Cangzhou (b) - 5,099,662
ICBC Loan 2 (c) - 2,622,683
ICBC Loan 3 (d) 6,163,814 -
Total short-term bank loans $ 6,163,814 $ 11,802,075
(a) On February 6, 2018, the Company entered into a working capital loan agreement with the ICBC, with a balance of $4,079,730 as of December 31, 2018. 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 bore a fixed interest rate of 5.4% per annum. The loan was due and repaid on January 28, 2019.
(b) On January 2, 2018, the Company entered into a working capital loan agreement with the Bank of Cangzhou, with a balance of $5,099,662 as of December 31, 2018. The loan bore a fixed interest rate of 6.09% per annum. The working capital loan was secured by the Company's land use right and guaranteed by the Company's CEO and Baoding Shengde with its production equipment as collateral for the benefit of the bank. The loan was due and repaid on January 3, 2019.
(c) On November 22, 2018, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,622,683 as of December 31, 2018. The working capital loan was secured by the Company's land use right as collateral for the benefit of the bank. The loan bore a fixed interest rate of 4.741% per annum. The loan was repaid on October 19, 2019.
(d) On December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,163,814 as of December 31, 2019. The working capital loan was secured by land use right of Hebei Tengsheng as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid by December 23, 2020.
As of December 31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil. As of December 31, 2018, there were guaranteed short-term borrowings of $11,802,075 and unsecured bank loans of $nil.
The average short-term borrowing rates for the years ended December 31, 2019 and 2018 were approximately 4.93% and 5.66%, respectively.
Long-term loans from credit union
As of December 31, 2019 and 2018, loans payable to Rural Credit Union of Xushui County, amounted to $8,973,367 and $7,197,808, respectively.
On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of December 31, 2019 and 2018, total outstanding loan balance was $1,232,763 and $1,253,060, respectively, Out of the total outstanding loan balance, current portion amounted were $143,345 and $87,423 as of December 31, 2019 and 2018, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,089,418 and $1,165,637 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, respectively.
On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company's manufacturing equipment with net book value of $3,935,270 and $5,782,640 as of December 31, 2019 and 2018, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% . . .
Mar 23, 2020
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