10-K
1
f10k2020_itteckpackinginc.htm
ANNUAL REPORT
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December
31, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to ______________
Commission file number 001-34577
IT Tech Packaging,
Inc.
(Exact name of registrant as specified in
its charter)
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
Science Park,
Juli Road,
Xushui District,
Baoding City
Hebei Province,
The People’s Republic of China 072550
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including
area code: (86) 312-8698215
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock ITP NYSE American
Securities registered pursuant to section
12(g) of the Act:
Common Stock
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒
No
The aggregate market value of the voting and non-voting common
stock of the registrant held by non-affiliates as of June 30, 2020 was approximately $14,089,570 based upon 23,097,655 shares of
common stock held by non-affiliates and the closing price of the common stock of $0.61 on June 30, 2020.
As of March 23, 2021, there were 113,617,333
shares of the registrant’s common stock, par value $0.001, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS 1
Item 1A. RISK FACTORS 15
Item 1B. UNRESOLVED STAFF COMMENTS 28
Item 2. PROPERTIES 28
Item 3. LEGAL PROCEEDINGS 28
Item 4. MINE SAFETY DISCLOSURES 28
PART II
Item 6. SELECTED FINANCIAL DATA 30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 42
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 42
Item 9A. CONTROLS AND PROCEDURES 43
Item 9B. OTHER INFORMATION 43
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 44
Item 11. EXECUTIVE COMPENSATION 47
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 51
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 52
SIGNATURES 56
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INTRODUCTION
In this annual report,
“IT Tech Packaging,” “the Company,” “we,” “our,” or “us” refer to IT
Tech Packaging, Inc., and unless the context requires otherwise, includes its subsidiaries and its controlled entity, Hebei Baoding
Dongfang Paper Milling Company Limited (“Dongfang Paper”). “Baoding Shengde” means our PRC subsidiary Baoding
Shengde Paper Co., Ltd.
All references
to “RMB” or “Renminbi” refer to the legal currency of China; all references to “US$,” “dollars,”
“U.S. dollars” and “$” refer to the legal currency of the United States.
This annual
report on Form 10-K includes our audited consolidated statements of income and comprehensive income and our audited consolidated
balance sheets as of December 31, 2019 and 2020.
FORWARD LOOKING STATEMENTS
This Annual Report
on Form 10-K contains “forward-looking statements.” These statements are made under the “safe harbor” provisions
of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terms such as
“may,” “will,” “expects,” “anticipates,” “future,” “intend,”
“plan,” “believe,” “estimate,” “is/are likely to” and similar expressions. These
statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements
to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute
to such differences in results and outcomes include, without limitation, COVID-19 outbreak, our anticipated revenues from the corrugating
medium paper business segment and offset printing paper business, our ability to implement the planned capacity expansion of tissue
paper, our ability to introduce new products, market acceptance of new products, general economic and business conditions, the
ability to attract or retain qualified senior management personnel and research and development staff, and those specifically addressed
under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” The forward-looking statements made in this annual report relate only to events as of the date on
which the statements are made. We undertake no obligation, beyond any than as required by law, to update any forward-looking statement
to reflect events or circumstances after the date on which the statement is made, even though our situation changes in the future.
We operate in an emerging
and evolving environment. New risk factors emerge from time to time and it is impossible for our management to predict all risk
factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statement.
ii
PART I
Item 1. Business
Corporate History
IT Tech Packaging,
Inc. (the “Company”) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral,
Inc.” Through the steps described below, we became the holding company for Hebei Baoding Dongfang Paper Milling Company Limited
(“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and effective December
21, 2007, we changed our name to “Orient Paper, Inc.”.
Effective on August
1, 2018, we changed our corporate name to IT Tech Packaging, Inc. The name change was effected through a parent/subsidiary short-form
merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and
into us. We were the surviving entity. In connection with the name change, our common stock began being traded under a new NYSE
symbol, “ITP,” at such time.
On October 29, 2007,
pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang Zhiye Holding Limited
(“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British Virgin Islands, and issued
the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse stock split effected in
November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders of Dongfang Holding in accordance
with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement, Dongfang Holding owned all
of the issued and outstanding stock and ownership of Dongfang Paper and such shares of Dongfang Paper were held in trust with Zhenyong
Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Dongfang Paper) to exercise
control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s behalf until Dongfang
Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant PRC Administration
of Industry and Commerce as the 100% owner of Dongfang Paper’s shares. As a result of the merger transaction, Dongfang Holding
became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned subsidiary, Dongfang Paper, became an
indirectly owned subsidiary of the Company.
Dongfang Holding,
as the 100% owner of Dongfang Paper, was unable to complete the registration of Dongfang Paper’s capital under its name within
the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions described
below, Dongfang Holding directed the trustees to return the shares of Dongfang Paper to their original shareholders, and the original
Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”)
to transfer the control of Dongfang Paper over to Baoding Shengde.
On June
24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued and outstanding
shares of Shengde Holdings Inc., a Nevada corporation. Shengde Holdings Inc. was incorporated in the State of Nevada on February
25, 2009, and holds a wholly-owned subsidiary, Baoding Shengde, a limited liability company organized under the laws of the PRC
on June 1, 2009. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc., it is regarded as a wholly foreign-owned
entity under PRC law.
Effective June 24,
2009, Baoding Shengde, Dongfang Paper and the original shareholders of Dongfang Paper entered into a number of contractual arrangements,
as subsequently amended on February 10, 2010, pursuant to which Baoding Shengde acts as the management company for Dongfang Paper,
and Dongfang Paper conducts the principal operations of the business. The contractual arrangements, as amended, effectively transferred
the preponderance of the economic benefits of Dongfang Paper to Baoding Shengde, and Baoding Shengde assumed effective control
and management over Dongfang Paper. The contractual arrangements, as amended, include the following:
(i) Exclusive Technical Service and Business Consulting Agreement
The exclusive
technical service and business consulting agreement, entered into by and between Baoding Shengde and Dongfang Paper, provides that
Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange for
service fees including a fee equivalent to 80% of Dongfang Paper’s total annual net profits. The agreement is terminable
upon mutual written agreement.
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(ii) Call Option Agreement
The call option agreement,
entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that the shareholders
of Dongfang Paper irrevocably grant to Baoding Shengde an option to purchase all or part of each shareholder’s equity interest
in Dongfang Paper. The exercise price for the options shall be RMB yuan for each of the shareholders’ equity interests, or
if at any time there are PRC laws regulating the minimum exercise price of such options, then to the extent permitted under PRC
Law. The call option agreement contains covenants from Dongfang Paper and its shareholders that they will refrain from taking certain
actions without Baoding Shengde’s consent that would materially affect Dongfang Paper’s operations and asset value,
including (i) supplementing or amending its articles of association or bylaws, (ii) changing Dongfang Paper’s registered
capital or shareholding structure, (iii) selling, transferring, mortgaging or disposing of any interests in Dongfang Paper’s
assets or income, or encumbering Dongfang Paper’s assets or income in a way that would approve a security interest on such
assets, (iv) incurring or guaranteeing any debts not incurred in its normal business operations, (v) entering into any material
contract or urging Dongfang Paper management to dispose of any Dongfang Paper assets, unless it is within the company’s normal
business operations; (vi) providing any loan or guarantee to any third party; (vii) appointing or removing any management personnel
or directors that can be changed upon Dongfang Paper shareholder approval; (viii) declaring or distributing any dividends to the
stockholders. The agreement remains effective until Baoding Shengde or its designees have acquired 100% of the equity interests
of Dongfang Paper underlying the options.
(iii) Share Pledge Agreement
The share pledge agreement
entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that the Dongfang
Paper shareholders will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations
under the other management agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged
equity interests in the event that the Dongfang Paper shareholders or Dongfang Paper fails to pay the service fees to Baoding Shengde
pursuant to the exclusive technical service and business consulting agreement or fails to perform their other obligations under
the other management agreement. The agreement contains covenants from Dongfang Paper’s shareholders that they will refrain
from taking certain actions without Baoding Shengde’s prior written consent, such as transferring or assigning their equity
interests, or creating or permitting the creation of any pledges which may have an adverse effect on the rights or benefits of
Baoding Shengde under the agreement. The Dongfang Paper shareholders also promise to comply with the laws and regulations relevant
to the pledges under the agreement and to facilitate in good faith the protection of the ability of Baoding Shengde to exercise
its rights under the agreement. The terms of the share pledge agreement remains in effect until all the obligations under the other
management agreements have been fulfilled, whether or not the terms of the other management agreements have expired.
(iv) Proxy Agreement
The proxy agreement,
entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that the Dongfang
Paper shareholders shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the
right to represent such shareholder to exercise his or her rights at any shareholder’s meeting of Dongfang Paper or with
respect to any shareholder action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association. The
terms of the agreement are binding on the parties for as long as the Dongfang Paper shareholders continue to hold any equity interest
in Dongfang Paper. An Dongfang Paper shareholder will cease to be a party to the agreement once it transfers its equity interests
with the prior approval of Baoding Shengde.
On June 24, 2009,
Zhao Tianqing, the sole shareholder of Shengde Holdings Inc., assigned to the Company, for good and valuable consideration, 100
shares representing 100% of the issued and outstanding shares of Shengde Holdings Inc. As a result of this assignment and the restructuring
transactions described above, Shengde Holdings Inc., Baoding Shengde, and Dongfang Paper became directly and indirectly controlled
by the Company, and Dongfang Paper continued to function as the Company’s operating entity.
2
In addition to controlling
the operations and beneficial ownership of Dongfang Paper, Baoding Shengde also acquired a digital photo paper production line
(including two photo paper coating lines and ancillary equipment) in an asset acquisition transaction on November 25, 2009 and
began directly conducting business in the PRC. We suspended production of photo paper in June 2016 and now are upgrading the production
line to produce more competitive photo paper products. We expect to resume our digital photo paper production in the near future.
An agreement was entered
into among Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper on December 31, 2010, reiterating that Baoding
Shengde is entitled to the distributable profit of Dongfang Paper, pursuant to the above mentioned Exclusive Technical Service
and Business Consulting Agreement. In addition, Dongfang Paper and the shareholders of Dongfang Paper agreed that they would not
declare any of Dongfang Paper’s unappropriated earnings, including any earnings of Dongfang Paper from its establishment
to 2010 and thereafter, as dividend.
The following diagram sets forth the current corporate
structure of IT Tech Packaging:
100% ownership
Controlled by contractual arrangements
3
Recent Developments
March 2021 Public
Offering
On March
1, 2021, the Company offered and sold to the public investors an aggregate of 29,277,866 shares of common stock and
14,638,933 warrants to purchase up to 14,638,933 shares of common stock in a firm commitment underwritten public offering
for gross proceeds of approximately $21.9 million. The purchase price for each share of common stock and accompanying warrant
sold in the offering was $0.75. The warrants are exercisable commencing on March 1, 2021 at an exercise price of $0.75 and
will expire on March 1, 2026. In the event of a stock split, stock dividend, combination, subsequent right offering or
reclassification of the outstanding shares of Common Stock, the exercise price and the number of shares issuable upon
exercise of the warrants shall be proportionately adjusted. The Company intends to use the net proceeds from the offering for
general corporate and working capital purposes.
January 2021 Public
Offering
On January 20, 2021,
the Company offered and sold to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818
warrants to purchase up to 26,181,818 shares of common stock in a best-efforts public offering for gross proceeds of approximately
$14.4 million. The purchase price for each share of common stock and the corresponding warrant sold in the offering was $0.55.
The warrants are exercisable commencing on January 20, 2021 at an exercise price of $0.55 and will expire on January 20, 2026.
In the event of a stock split, stock dividend, combination, subsequent right offering or reclassification of the outstanding shares
of Common Stock, the exercise price and the number of shares issuable upon exercise of the warrants shall be proportionately adjusted.
The Company intends to use the net proceeds from the offering for general corporate and working capital purposes.
Cogenerating Project
In November 2020,
we completed inviting bids for the 75 tonne per hour biomass boiler procurement for our biomass cogeneration project. Multiple
well-known enterprises in the biomass industry participated in tendering opening bids. In February 2021, we completed evaluation
on the bidding proposals and announced that Tai Shan Group Co., Ltd., a top manufacturer in the biomass industry in China, has
won the bid. Installation of the boilers is expected to commence in the near future. We expect to participate in the bidding process
for urban central heating projects.
Summary of Risk Factors
Investing in our securities
involves significant risks and uncertainties. You should carefully consider all of the information in this prospectus before making
an investment in our securities. Below please find a summary of the principal risks we face, organized under relevant headings.
These risks are discussed more fully in the section titled “Risk Factors.”
Risks Related to Our Business
Risks and uncertainties
related to our business include, but are not limited to, the following:
4
Risks Related to Doing Business in the PRC
We face risks and uncertainties
related to doing business in China in general, including, but not limited to, the following:
Risks Related to Our Corporate Structure
We are also subject
to risks and uncertainties related to our corporate structure, including, but not limited to, the following:
5
General Risks Related to Our Common Stock
In addition to the risks
described above, we are subject to general risks and uncertainties related to our common stock, including, but not limited to,
the following:
Impact of COVID-19 on Our Operations
and Financial Performance
Outbreaks of epidemic,
pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results
of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as
a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts
to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year
holiday, quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering,
among other things. During the early part of 2020, COVID-19 caused temporary closure of our CMP production, and as a result,
our revenue of CMP decreased by 49.89 % in the first quarter of 2020. It is, however, still unclear how the pandemic will evolve
going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on
our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues.
While we have resumed
business operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development
as a global pandemic. Hence, the extent of the business disruption and the related impact on our financial results and outlook
for 2021 cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts our results will depend on
future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning
the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing
insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing
our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no
assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences,
including downturns in business sentiment generally.
Our Business
We engage in production
and distribution of three categories of paper products: corrugating medium paper, offset printing paper, tissue paper products
and non-medical face masks.
Our principal executive offices are located at Science
Park, Juli Road, Xushui District, Baoding City, Hebei Province, People’s Republic of China.
Our telephone number is (86) 312-869-8215. Our website is located
at http://www.itpackaging.cn.
Manufacturing Process
Corrugating Medium Paper and Offset Printing Paper
Our current products
(excluding tissue paper products) generally undergo two stages of manufacturing: (1) creating pulp from recycled paper products,
and (2) treating the pulp and molding it into the desired types of paper products. A brief overview of the pulp and papermaking
process is provided below.
Pulping
The recycled waste
paper is first sorted by machine, and then broken down and beaten or smashed into small pieces using water and mechanical energy.
It is then put through a course screening drum, followed by a fine screening drum to separate different grades of pulp, a process
that we refer as “concentration”. In order to purify the pulp further, an approach flow system is used to filter out
any impurities or inconsistencies, such as sand, in the pulp.
Paper Making
The pulp is
sieved to remove the excess water and molded into a specific size. The moisture content is further reduced by applying hydraulic
pressure to the pulp. The pulp then enters the drying section where it is rolled over by heated cylinders. The dried paper is
then coated with a mixture of clay, white pigment and binder to produce a surface on which ink can sit without being fully absorbed,
enabling crisper, more consistent print quality.
6
The paper goes through
a process called calendaring, which flattens and smoothens the paper into long sheets. The paper is then wound onto a reel that
is mounted in a roll-slitting machine for rewinding, during which cutters are used to cut the paper into the desired widths. Upon
completion, the rolls are fitted with sleeves and labeled, and then sent to quality control before shipment or storage.
Base Tissue Paper
While we make tissue paper products, we currently purchase
paper pulp from suppliers and use it to manufacture base tissue paper directly.
Products
Corrugating medium paper
Corrugating medium
paper, or CMP is used in the manufacturing of cardboard. Since the launch of our new Paper Machine (“PM6”) production
line in December 2011, corrugating medium paper has become a major product of the Company. For the year ended December 31, 2020,
corrugating medium paper comprised approximately 86.61% of our total paper production quantities and roughly 78.42% of our total
revenue. Raw materials used in the production of corrugating medium paper include recycled paper board (or Old Corrugating Cardboard
or “OCC,” as it is commonly referred to in the United States) and certain supplementary agents. In January 2013, we
suspended the operation of our PM1 production line for renovation, which was then used to produce corrugating medium paper. In
May 2014, we launched the commercial production of a renovated PM1 production line. The renovated PM1 production line produces
light-weight corrugating medium paper with a specification of 40 to 80 grams per square meter (“g/s/m”). PM1’s
light-weight corrugating medium paper products have a wide range of commercial applications. For example, they can be used as a
construction material for wall and floor insulation or to manufacture moisture-proof packaging materials for the transportation
of books and magazines by the publishing industry. It can also be used as corrugating medium to make corrugating cardboard for
packaging that requires light-weight boxes. The manufacturing process of light-weight corrugating medium paper is similar to that
of the regular corrugating medium paper and also uses recycled paper boards as a major source of raw material. We now have two
corrugating medium paper production lines, PM6 and PM1. We refer to products produced from the PM6 production line as Regular CMP
and products produced from the PM1 production line as Light-Weight CMP.
Offset printing paper
Offset printing paper
is used for offset printing in the publishing industry. Offset printing paper comprised approximately 8.96% of our total paper
production quantities and approximately 12.15% of our total sales revenue for the year ended December 31, 2020. Raw materials used
in making offset printing paper include recycled white scrap paper, fluorescent whitening agent and sizing agent. We currently
have two production lines, PM2 and PM3, for the production of offset printing paper.
Tissue Paper Products
We began
the commercial production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper
purchased from long-term cooperative third party and produce finished tissue paper products, including toilet paper, boxed
and soft-packed tissues, handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are
marketed and sold under the Dongfang Paper brand. In December 2018 and November 2019, we completed the construction,
installation and test of operation of PM8 and PM9, respectively, and commercially launched tissue paper production of PM8 and
PM9 at such time. On May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production
line PM10 and the Company signed an agreement to purchase paper machine with paper machine supplier. The Company expected the
new tissue paper production line to be launched after the completion of trial run. Tissue paper products comprised
approximately 4.43% of our total paper production quantities and approximately 8.34% of our total sales revenue for the year
ended December 31, 2020.
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Face Masks
On
April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion
of raw materials preparation, trial run of the equipment and the sample products inspection. In January 2021, the Company
announced it has submitted an application for the license for its new single-use surgical masks from local
food and drug administration in Hebei province.
Market for our Products
The PRC Paper Making Industry
According
to the 2019 China Paper Industry Annual Report, issued by the China Paper Association, there were approximately 2,700 paper
and paper board manufacturers (down from 3,700 in 2010) in China, with a total output of 107.65 million tonnes, up by 3.16%
from 104.35 million tonnes in 2018. Total domestic consumption was 107.04 million tonnes in 2019, up by 2.54% from 104.39
million tonnes in 2018.
Compared
with 2010, output in 2019 increased by approximately 3.16% and consumption grew by approximately 2.54%. The output of paper
and paper board maintained an average growth rate of approximately 1.68% during the ten-year period from 2010 to 2019, while
consumption increased at an average annual rate of 1.73%. The growth is expected to continue. It is estimated that China
currently has the largest paper and paper board products output and consumption in the world. (Data source: 2019 Annual
Report of China Paper Manufacturing, May 2020, China Paper Association)
Data source: 2019Annual Report of China’s
Paper Industry, May 2020, China Paper Association
Corrugating medium
paper production in China totaled 22.20 million tonnes in 2019, a 5.46% increase from 2018. Consumption of corrugating medium paper
in China amounted to 23.74 million tonnes in 2019, an increase of 7.28% as compared to 2018.
Uncoated offset
printing paper production in China totaled 17.80 million tonnes in 2019, a 1.71% increase from 2018. Consumption of uncoated offset
printing paper in China amounted to 17.49 million tonnes in 2019, a decrease of 0.11% as compared to 2018.
The paper making industry
in China is concentrated in the east coast provinces. The largest paper production capacities by province for 2018 and 2019 (the
most recent year for which relevant information is available) are summarized in the table below. The three provinces with largest
capacities showed moderate increases in paper production capacities; provinces with smaller capacities, such as, Chongqing, Hubei
and Fujian, showed noticeable increases as well.
Province 2018 Capacity (10k tonnes) 2019 Capacity (10k tonnes) % Change
Data Sources: 2019 Annual Report of China’s
Paper Industry, May 2020, China Paper Association
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Customers
We
generally sell our corrugating medium paper to companies making corrugating cardboards and offset printing paper to printing
companies. Our largest customer is a packaging company in Tianjin City. Our total corrugating medium and offset printing
paper revenue in 2020 was primarily derived from customers in Tianjin, Hebei Province and Shandong Province.
For the
year ended December 31, 2020, five major customers who individually accounted for more than 5% of our total sales revenue are
as follows:
Sales Amount
(USD$, net of % of
applicable Total
VAT) Revenue
Eight of
our top-ten customers of 2020 are also in the top-ten customer list in 2019, representing 78.6% of the 2019 top-ten customer
sales.
Target Market
We target corporate
customers in the middle range of the marketplace, where, with solid quality and competitive pricing, we see potential for high
volume growth for corrugating medium paper and offset printing paper. Our primary market has been the region of North China, especially
in the province of Hebei.
Our Production Lines
During the year ended
December 31, 2020, we had six PM production lines in operation and are in the process of launching one more that are designated
as PM7. These production lines include the followings:
Designed
Paper Product Capacity
PM# Produced (tonnes/year) Owned by Operated by Status as of December 31, 2020
PM1 Corrugating Medium 60,000 Dongfang Paper Dongfang Paper In production
Paper
PM2 Offset Printing Paper 50,000 Dongfang Paper Dongfang Paper In production
PM3 Offset Printing Paper 40,000 Dongfang Paper Dongfang Paper In production
demand
demand
PM6 Corrugating Medium 360,000 Baoding Shengde Dongfang Paper*** In production
Paper
PM8 Tissue paper 15,000 Dongfang Paper Dongfang Paper In production
PM9 Tissue paper 15,000 Dongfang Paper Dongfang Paper In production.
PM10 Tissue paper 20,000 Dongfang Paper Dongfang Paper In construction
*: Paper machines under renovation, under construction, or in
the planning stage.
***: PM6 is funded and owned by Baoding Shengde; ancillary facilities
that support the PM6 operation are built and owned by Dongfang Paper.
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On December
31, 2009, we acquired a digital photo paper production line, including two coating lines that are designated as PM4 and PM5 and
ancillary equipment, for a total purchase price of approximately $13.6 million. We suspended production of photo paper in June
2016.
In order to meet the
growing domestic demand for paper, which we believe currently exceeds domestic supply in the case of corrugating medium paper,
especially in the region of North China, we installed a corrugating medium paper production line (PM6) with a designed capacity
of 360,000 tonnes per year. We completed the installation of the PM6 production line in November 2011 and began commercial production
in December 2011.
We have implemented
a plan to renovate one of the old production lines that has been idle since the end of 2007. We previously made paper with anti-counterfeit
features from that production line. When the renovation is completed, we intend to use the renovated production line to produce
high-profit margin specialty papers. Our current plan is to complete the renovation project, put in place a new production and
marketing team and launch the renovated production line as PM7 by the end of 2021.
On
November 27, 2012, we signed a 15-year lease relating to approximately 49.4 acres of land in the Economic Development Zone in
Wei County, Hebei Province, China for the purpose of developing a new tissue paper production plant. We planned to build two
tissue paper production lines, each with 15,000 tonnes/year capacity, and other packaging facilities and infrastructures on
the leased land. In December 2012, we signed a contract with an equipment contractor in Shanghai to build PM8, the first of
our two tissue paper production lines in Wei County. In December 2018 and November 2019, we completed the construction,
installation and test of operation of PM8 and PM9, respectively and commercially launched tissue paper productions of PM8 and
PM9 at such time. On May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production
line PM10 and the Company signed an agreement to purchase paper machine with paper machine supplier. The Company expected the
new tissue paper production line to be launched after the completion of trial run.
We voluntarily renovated
our 150,000 tonnes/year corrugating medium paper PM1 in anticipation of increased regulatory concerns on energy efficiencies as
well as to improve the quality of our corrugating medium products. Rather than converting PM1 to a regular corrugating medium paper
machine, we decided in 2013 that, based on the market conditions and our waste water treatment capability, the better option was
to convert PM1 to produce Light-Weight CMP with a specification of 40 to 80 grams per square meter (“g/s/m”) with a
designed capacity of 60,000 tonnes/year. We started the renovation in January 2013 and launched commercial production of the renovated
PM1 production line in May 2014.
Raw Materials and Principal Suppliers
The supplies used
in our production processes are comprised mainly of recycled paper board and unprinted recycled white scrap paper, both of which
are ready-to-use items and available from multiple domestic and foreign sources. We currently purchase all of our recycled paper
supplies from some domestic recycling stations and do not rely on imported recycled paper. We also purchase coal and chemical agents
from nearby suppliers. Ongoing inflationary pressures and higher demand for recycled paper could lead to an increase in our costs
of raw materials and production, which we may or may not be able to pass to our customers.
We sign annual raw
materials supplier contracts with our suppliers. Although we have contracts with our suppliers, these contracts do not lock-in
the purchase price of our raw materials or provide hedge against the fluctuation in the market price of these raw materials. For
the year ended December 31, 2020, we had two large suppliers which accounted for approximately 72% and 12% of our total purchases,
respectively.
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For the year ended December 31, 2020, two major suppliers
who individually accounted for more than 5% of our total purchase are as follows:
Purchase
Amount
(USD$, net of % of
applicable Total
VAT) Purchase
Competition
Dongfang Paper’s
main competitors are: Chenming Paper Group Limited, Huatai Group Limited, Nine Dragons Paper (Holdings) Limited and Sun Paper Group
Limited. A number of our competitors are public entities with larger capacities, broader customer bases and greater financial resources
than those available to us. The businesses of our primary competitors are briefly described below:
Chenming
Paper Group, Ltd. (“Chenming”), based in Shandong Province (located in northeast China), produces primarily news
print paper and art paper (high quality, heavy and two-side coated printing paper). Chenming is believed to be the first
company to have listed on all three stock exchanges in China: Renminbi A-shares and foreign currency B-shares in Shenzhen,
the smaller of the mainland’s two stock exchanges, and H-shares in Hong Kong. Chenming has annual production capacity
of 8.5 million tonnes for its coated wood-free paper product and is believed to rank among the top 500 enterprises in
China.
Huatai Group, Ltd.
(“Huatai”), based in Shandong Province (located in the northern part of the eastern coastal region of China), primarily
produces newsprint, fine paper, special printing paper, coated board and tissue paper. Huatai is the first Shandong papermaker
to publicly list its stock and has become a famous brand in China. Its annual paper production is estimated to have reached 4 million
tonnes.
Nine Dragons Paper
(Holdings) Limited (“ND Paper”), based in Guangdong Province (located in southern China), is the largest paper manufacturer
in China and primarily produces kraft paper and high-strength corrugating medium paper with annual capacity of 13 million tonnes.
ND Paper has reported that it has five production lines in the city of Tianjin with a total designed capacity of 2.15 million tonnes,
producing products such as kraft paper, high strength corrugating medium paper and grey-back duplex board.
Sun Paper
Group, Ltd., based in Shandong Province, primarily produces card paper, whiteboard paper and art paper. It also produces
alkaline peroxide mechanical pulp, sourced in part from wood chips harvested by the company’s poplar plantations. This
company has reported that it has an aggregate annual production capacity of paper and pulp of approximately 5.7 million
tonnes and has been listed on the Shenzhen Stock Exchange since 2006.
With the exceptions
of Chenming and ND Paper, which may compete directly with us in the offset printing paper market and the corrugating medium paper
market, respectively, in the Beijing/Tianjin/greater Hebei regions, we believe that we face only indirect competition from the
above-listed companies, either because we have a different product assortment from these companies, or because, to the extent they
do offer products similar to ours, the transportation costs and storage costs make it difficult for these companies to compete
effectively with us on pricing.
Our Competitive Edge
Regional
advantage (Northern China). We believe that Dongfang Paper is one of the leading papermaking enterprises in Hebei
Province. Our proximity to large urban centers in northern China, Beijing and Tianjin, gives us access to a large market to
sell our products.
There are other paper
manufacturers that are also located in Hebei Province (and close to metropolitan Beijing and Tianjin areas), but most of these
other manufacturers are small in scale and unable to compete with us effectively. We also compete with other large printing paper
manufacturers for Beijing printing company customers. We believe that we have cost and geographical advantages over these larger
competitors.
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Cost
advantage. Unlike some of our out-of-province competitors who must set up interim warehouses and ship products from their
production base to such interim warehouses close to their customer base in Beijing, there is no need for us to set up interim
warehouses, because we are approximately 60 miles (100 kilometers) from Beijing, the cultural center of China and our largest
target market. While we do not separately pay for transportation cost on raw material purchases, the transportation cost
included in the raw material purchase prices from our recycled paper suppliers is lower than the transportation cost paid by
our competitors in the province of Shandong. We also enjoy lower transportation costs for coal, a major source of energy used
in our production process. Similarly, our customers pay lower transportation cost to pick up their orders from our finished
goods warehouse in Baoding than what they would pay if they had to pick up goods from locations further away from Beijing.
Tianjin, another large urban center, is also approximately 60 miles from our facilities. Baoding city itself is also home to
numerous printing and packaging companies. Our geographical advantage and easy access to low-cost raw materials allow us to
implement a more flexible inventory purchase policy, lower our purchase prices and inventory management expenses and reduce
our production cost. As such, we have lower freight costs and other associated costs of sales, which enable us to charge
lower prices, if necessary, for our products. Additionally, because we buy all recycled paper raw materials from Beijing and
Tianjin, rather than from the United States or Japan, our purchase lead time is shorter as compared to manufacturers who rely
on imported recycled paper.
Research and Development
Our
R&D activities are carried out by a task force led by a group of senior managers (in charge of product development and
quality control) and by a group of selected engineers and technicians. The Company charged the time spent on the R&D
projects (manufacturing waste discharge recycling, digital photo paper and tissue paper manufacturing) to R&D expenses.
Our R&D efforts in 2020 has focused on evaluating and developing new products that are in the pipeline for 2020 and
included developing and improving the manufacturing process of Light-Weight CMP and the production and packaging technology
of tissue paper.
One of our production
lines, PM7, is under renovation. Since the fourth quarter of 2010, we have spent approximately $1.57 million in machine parts and
new components to renovate this production line, with which we expect to produce certain specialty papers, including wood-grain
deco and furniture paper, wallpaper and paper with security features (for anti-counterfeiting purposes). While we are optimistic
about the prospect of the specialty papers, we cannot guarantee the launch of the specialty paper production (which is tentatively
scheduled by the end of 2020) or the success of such renovation.
Intellectual Property
The
company has registered nine trademarks with the Trademark Bureau under the State of Administration for Industry &
Commerce.
Trademark Certificate No. Category Registrant Valid Term
Domain names