May 14, 2020, 4:40 p.m. EDT

10-Q: IT TECH PACKAGING, INC.

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(EDGAR Online via COMTEX) -- 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 March 31, 2020 and 2019 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly report.

In this quarterly report, references to "the Company," "we," "our" and "us" refer to IT Tech Packaging, 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 March 31, 2020 and 2019

Revenue for the three months ended March 31, 2020 was $8,743,851, a decrease of $8,706,441, or 49.89%, from $17,450,292 for the same period in the previous year. This was mainly due to the decrease in sales volume and Average Selling Prices (ASPs) of CMP and tissue paper products.

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 March 31, 2020 was $8,743,851, a decrease of $8,706,441, or 49.89%, from $17,450,292 for the first quarter of 2019. Total offset printing paper, CMP and tissue paper products sold during the three months ended March 31, 2020 amounted to 19,862 tonnes, a decrease of 15,459 tonnes, or 43.77%, compared to 35,321 tonnes sold in the comparable period in the previous year. The decrease was mainly due to production suspension from mid-January 2020 to early March 2020 due to Chinese New Year and the COVID-19 pandemic outbreak. We resumed full capacity of CMP production in May 2020. The changes in revenue dollar amount and in quantity sold for the three months ended March 31, 2020 and 2019 are summarized as follows:







                                   Three Months Ended               Three Months Ended                                                 Percentage
                                     March 31, 2020                   March 31, 2019                     Change in                       Change
                                Quantity                        Quantity                         Quantity
        Sales Revenue           (Tonne)          Amount         (Tonne)          Amount          (Tonne)          Amount         Quantity       Amount
        Regular CMP                13,788     $  5,721,939         26,293     $  12,224,879        (12,505 )   $ (6,502,940 )       -47.56 %      -53.19 %
        Light-Weight CMP            4,889     $  2,015,563          7,425     $   3,365,132         (2,536 )   $ (1,349,569 )       -34.15 %      -40.10 %
        Total CMP                  18,677     $  7,737,502         33,718     $  15,590,011        (15,041 )   $ (7,852,509 )       -44.61 %      -50.37 %
        Offset Printing
        Paper                           -     $          -              -     $           -              -     $          -                %             %
        Tissue Paper
        Products                    1,185     $  1,006,349          1,603     $   1,860,281           (418 )   $   (853,932 )       -26.08 %      -45.90 %
        Total CMP, Offset
        Printing Paper and
        Tissue Paper Revenue       19,862     $  8,743,851         35,321     $  17,450,292        (15,459 )   $ (8,706,441 )      -43.77  %      -49.89 %
        


Monthly sales revenue (excluding revenue from digital photo paper and tissue paper products) for the 24 months ended March 31, 2020, are summarized below:

[[Image Removed]]

The Average Selling Prices (ASPs) for our main products in the three months ended March 31, 2020 and 2019 are summarized as follows:







                                                     Offset
                                                    Printing       Regular CMP      Light-Weight       Tissue Paper
                                                    Paper ASP          ASP             CMP ASP         Products ASP
        Three Months ended March 31, 2019          $         -     $       465     $           453     $      1,160
        Three Months ended March 31, 2020          $         -     $       415     $           412     $        849
        Decrease from comparable period in the
        previous year                              $         -     $       -50     $           -41     $       (311 )
        Decrease by percentage                                 %        -10.75 %             -9.05 %         -26.81 %
        


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 March 31, 2020:

[[Image Removed]]

Corrugating Medium Paper

Revenue from CMP amounted to $7,737,502 (88.49% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2020, representing a decrease of $7,852,509, or 50.37%, from $15,590,011 for the comparable period in 2019.

We sold 18,677 tonnes of CMP in the three months ended March 31, 2020 as compared to 33,718 tonnes for the same period in 2019, representing a 44.61% decrease in quantity sold.

ASP for regular CMP dropped from $465/tonne for the three months ended March 31, 2019 to $415/tonne for the three months ended March 31, 2020, representing a 10.75% decrease. ASP in RMB for regular CMP for the first quarter of 2019 and 2020 was RMB3,119 and RMB2,902, respectively, representing a 6.96% decrease. The quantity of regular CMP sold decreased by 12,505 tonnes, from 26,293 tonnes in the first quarter of 2019 to 13,788 tonnes in the first quarter of 2020.

ASP for light-weight CMP decreased from $453/tonne for the three months ended March 31, 2019 to $412/tonne for the three months ended March 31, 2020, representing a 9.05% decrease. ASP in RMB for light-weight CMP for the first quarter of 2019 and 2020 was RMB3,041 and RMB2,883, respectively, representing a 5.20% decrease. The quantity of light-weight CMP sold decreased by 2,536 tonnes, from 7,425 tonnes in the first quarter of 2019, to 4,889 tonnes in the first quarter of 2020.

Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the first quarter of 2020 and 2019 were 14.86% and 28.79%, respectively, representing a decrease of 13.93%.

Quantities sold for regular CMP that was produced by the PM6 production line from April 2018 to March 2020 are as follows:

[[Image Removed]]

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 brand "Qingmu". 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 15,000 tonnes/year.

Revenue from tissue paper products was $1,006,349 (11.51% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2020, representing a decrease of $853,932, or 45.90%, from $1,860,281 for the three months ended March 31, 2019. We sold 1,185 tonnes of tissue paper in the first quarter of 2020, as compared to 1,603 tonnes in the comparable period of 2019, representing a decrease of 418 tonnes, or 26.08%. Tissue paper production was suspended and resumed on February 20, 2020. As a result, the production and sales quantity of tissue paper products decreased in the three months ended March 31, 2020 as compared to the same period of 2019.

ASP for tissue paper products decreased from $1,160/tonne for the three months ended March 31, 2019 to $849/tonne for the three months ended March 31, 2020, representing a 26.81% decrease. ASP in RMB for tissue paper products for the first quarter of 2019 and 2020 was RMB7,786 and RMB5,941, respectively, representing a 23.70% decrease. The quantity of tissue paper products sold decreased by 418 tonnes, from 1,603 tonnes in the first quarter of 2019, to 1,185 tonnes in the first quarter of 2020.

Cost of Sales

Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended March 31, 2020 was $8,913,570, a decrease of $8,729,188, or 49.48%, from $17,642,758 for the comparable period in 2019. This was mainly due to the decrease in sales quantity of CMP, offset printing paper and tissue paper products and decrease in material costs.

Cost of sales for CMP was $7,195,348 for the quarter ended March 31, 2020, as compared to $15,816,086 for the comparable period in 2019. The decrease in the cost of sales of $8,620,739 for CMP was mainly due to the decrease in sales volume of CMP and decrease in average cost of sales. Average cost of sales per tonne for CMP decreased by 17.91%, from $469 in the first quarter of 2019 to $385 in the first quarter of 2020. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board in first quarter of 2020 compared to the first quarter of 2019.

Cost of sales for tissue paper products was $1,718,222 for the quarter ended March 31, 2020, as compared to $1,826,672 for the comparable period in 2019. The decrease in the cost of sales of $108,450 for tissue paper products was mainly due to the decrease in sales volume of tissue paper products, partially offset by the increase in average cost of sales. Average cost of sales per tonne of tissue paper products increased by 27.19%, from $1,140 in the three months ended March 31, 2019, to $1,450 for the comparable period in 2020. This is mainly due to higher average fixed costs per tonne (labor, depreciation and etc.) absorbed owning to low production quantity of PM8 and PM9 in the first quarter of 2020.

Changes in cost of sales and cost per tonne by product for the quarters ended March 31, 2020 and 2019 are summarized below:







                                Three Months Ended                       Three Months Ended
                                  March 31, 2020                           March 31, 2019                             Change in                           Change in percentage
                        Cost of Sales       Cost per Tonne       Cost of Sales       Cost per Tonne       Cost of Sales       Cost per Tonne       Cost of Sales        Cost per Tone
        Regular CMP    $     5,439,510     $            395     $    12,271,075     $            467     $    (6,831,565 )   $            (72 )            -55.67 %             -15.42 %
        Light-Weight
        CMP            $     1,755,837     $            359     $     3,545,011     $            477     $    (1,789,174 )   $           (118 )            -50.47 %             -24.74 %
        Total CMP      $     7,195,348     $            385     $    15,816,086     $            469     $    (8,620,739 )   $            (84 )            -54.51 %             -17.91 %
        Offset
        Printing
        Paper          $             -     $              -     $             -     $              -     $             -     $              -                     %                    %
        Tissue Paper
        Products       $     1,718,222     $          1,450           1,826,672     $          1,140     $      (108,450 )   $            310               -5.94 %              27.19 %
        Total CMP,
        Offset
        Printing
        Paper and
        Tissue Paper   $     8,913,570     $            n/a     $    17,642,758     $           n/a      $    (8,729,188 )   $           n/a               -49.48 %                n/a
        


Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended March 31, 2020 were RMB1,388/tonne (approximately $198/tonne), as compared to RMB1,625/tonne (approximately $242/tonne) for the three months ended March 31, 2019. 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 April 2018 to March 2020 are shown below:

[[Image Removed]]

Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 8.7% of total sales in first quarter of 2020, respectively, compared to 9% and 10.2% of total sales in first quarter of 2019. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended March 31, 2020 are summarized as follows:

[[Image Removed]]

Gross Profit

Gross loss for the three months ended March 31, 2020 was $169,719 (1.94% of the total revenue), representing an increase of $22,747, or 11.82%, from the gross loss of $192,466 (1.10% of the total revenue) for the three months ended March 31, 2019, as a result of factors described above.

Offset Printing Paper, CMP and Tissue Paper Products

Gross loss for offset printing paper, CMP and tissue paper products for the three months ended March 31, 2020 was $169,719, an increase of $22,747, or 11.82%, from the gross loss of $192,466 for the three months ended March 31, 2019. The increase was mainly the result of the factors discussed above.

The overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 0.84 percentage points, from -1.10% for the three months ended March 31, 2019, to -1.94% for the three months ended March 31, 2020.

Gross profit margin for regular CMP for the three months ended March 31, 2020 was 4.94%, or 5.32 percentage points higher, as compared to gross profit margin of -0.38% for the three months ended March 31, 2019. Such increase was mainly due to the decrease in cost of recycled paper board, partially offset by the decrease in ASP of regular CMP in the first quarter of 2020.

Gross profit margin for light-weight CMP for the three months ended March 31, 2020 was 12.89%, or 18.24 percentage points higher, as compared to gross profit margin of -5.35% for the three months ended March 31, 2019. The increase was mainly due to decrease in cost of recycled paper board, partially offset by the decrease in ASP of light-weight CMP in the first quarter of 2020.

Gross profit margin for tissue paper products for the three months ended March 31, 2020 was -70.74%, or 72.55 percentage points lower, as compared to gross profit margin of 1.81% for the three months ended March 31, 2019. The decrease was mainly due to higher unit fixed cost absorbed as a result of lower volume of tissue paper produced in the first quarter of 2020.

Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended March 31, 2020 are as follows:

[[Image Removed]]

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2020 were $2,696,963, a decrease of $284,510, or 9.54% from $2,981,473 for the three months ended March 31, 2019. The decrease was mainly due to a decrease in commission to sales staff and a depreciation of RMB against USD.

Income (Loss) from Operations

Operating loss for the quarter ended March 31, 2020 was $2,866,682, an increase of $307,257, or 9.68%, from $3,173,939 for the quarter ended March 31, 2019.

Other Income and Expenses

Interest expense for the three months ended March 31, 2020 decreased by $10,551, from $255,269 in the three months ended March 31, 2019, to $244,718. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,904,518 as of March 31, 2020, as compared to $16,247,123 as of March 31, 2019.

Subsidy income of $142,998 for the three month ended March 31, 2020 represents funding by the government to finance various expenditures during the COVID-19 pandemic period.

Net Income (Loss)

As a result and the factors discussed above, net loss was $2,436,287 for the quarter ended March 31, 2020, representing an increase of $286,308, or 10.52%, from net loss of $2,722,595 for the quarter ended March 31, 2019.

Accounts Receivable

Net accounts receivable decreased by $1,323,640, or 42.43%, to $1,795,671 as of March 31, 2020, as compared with $3,119,311 as of December 31, 2019. We usually collect accounts receivable within 30 days of delivery and completion of sales.

Inventories

Inventories consist of raw materials (accounting for 50.46% of total value of inventory as of March 31, 2020), semi-finished goods and finished goods. As of March 31, 2020, the recorded value of inventory increased by 20.08% to $2,020,083 from $1,682,298 as of December 31, 2019. As of March 31, 2020, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $727,392, approximately $687,360, or 1717.03%, higher than the balance as of December 31, 2019. Due to the volatility of recycled paper board price, a minimum level of inventory was maintained at the end of 2019.

A summary of changes in major inventory items is as follows:







                                                    March 31,       December 31,
                                                       2020             2019           $ Change      % Change
        Raw Materials
        Recycled paper board                       $    727,392     $      40,032        687,360       1717.03 %
        Recycled white scrap paper                       10,379            10,541           -162         -1.54 %
        Tissue base paper                                72,675           122,648        -49,973        -40.75 %
        Coal & gas                                       45,691            41,675          4,016          9.64 %
        Digital photo base paper and other raw
        materials                                     163,256             171,287         -8,031         -4.69 %
        Total Raw Materials                           1,019,392           386,183        633,209        163.97 %
        Semi-finished Goods                             145,259            83,266         61,993         74.45 %
        Finished Goods                                855,431           1,212,849       -357,418        -29.47 %
        Total inventory, gross                        2,020,083         1,682,298        337,785         20.08 %
        Inventory reserve                               (68,706 )         (74,835 )        6,129         -8.19 %
        Total inventory, net                       $  1,951,376     $   1,607,463        343,913         21.39 %
        


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 $142,998 (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 provided for in the original lease agreement. The accrued rental owed to Hebei Fangsheng was $nil and $56,552 as of March 31, 2020 and December 31, 2019, respectively, and such amounts were recorded as part of the current liabilities.

Capital Expenditure Commitment as of March 31, 2020

We finance our daily operations mainly by cash flows generated from our business operations. As of March 31, 2020, we had approximately $0.9 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 and Cash Equivalents

Our cash, cash equivalents and restricted cash as of March 31, 2020 was $11,712,152, an increase of $5,874,407, from $5,837,745 as of December 31, 2019. The increase of cash and cash equivalents for the three months ended March 31, 2020 was attributable to a number of factors:

i. Net cash provided by operating activities

Net cash provided by operating activities was $6,860,307 for the three months ended March 31, 2020. The balance represented an increase of cash of $9,912,459, or 324.77%, from $3,052,152 used in operating activities for the three months ended March 31, 2019. Net loss for the three months ended March 31, 2020 was $2,436,287, representing an increase of $286,308, or 10.52%, from a net loss of $2,722,595 for the three months ended March 31, 2019. Changes in various asset and liability account balances throughout the three months ended March 31, 2020 also contributed to the net change in cash from operating activities in three months ended March 31, 2020. Chief among such changes is the decrease of accounts receivable in the amount of $1,315,128 during the three months of 2020 (an increase to net cash). There was also an increase of $373,470 in the ending inventory balance as of March 31, 2020 (a decrease to net cash for the three months ended March 31, 2020 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $3,774,674. The Company also had a net decrease of $5,486,216 in prepayment and other current assets (an increase to net cash) and a net decrease of $1,023,343 in other payables and accrued liabilities and related party balances (an increase to net cash), as well as a decrease in income tax payable of $1,379,130 (a decrease to net cash) during the three months ended March 31, 2020.

ii. Net cash used in investing activities

We incurred $756,514 in net cash expenditures for investing activities during the first three months of 2020, as compared to $1,415,761 for the same period of 2019. Payments in the three months ended March 31, 2020 were for the expenditures on improvement of industrial buildings.

iii. Net cash provided by financing activities

Net cash used in financing activities was $nil for the three months ended March 31, 2020, as compared to net cash used in financing activities in the amount of $5,366,166 for the three months ended March 31, 2019.

On April 29, 2020, the Company and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020, pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered direct offering and warrants to purchase up to 4,400,000 shares of the Company's common stock in a concurrent private placement, for gross proceeds of approximately $2.55 million. The Company plans to raise additional capital through sales of the Company's capital stock if necessary.

Short-term bank loans







                                                                                 March 31,       December 31,
                                                                                   2020              2019
        Industrial and Commercial Bank of China ("ICBC") Loan 1       (a)       $ 6,069,075     $    6,163,814
        Total short-term bank loans                                             $ 6,069,075     $    6,163,814
        


On December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,069,075 and $6,163,814 as of March 31, 2020 and December 31, 2019, respectively. The working capital loan was secured by the 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 March 31, 2020, there were guaranteed short-term borrowings of $6,069,075 and unsecured bank loans of $nil. As of December 31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil.

The average short-term borrowing rates for the three months ended March 31, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.

Long-term loans from credit union

As of March 31, 2020 and December 31, 2019, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443 and $8,973,367, 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 March 31, 2020 and December 31, 2019, total outstanding loan balance was $1,213,815 and $1,232,763, . . .

May 14, 2020

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