IT TECH PACKAGING, INC. - Quarter Report: 2015 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

or

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-34577

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

Number of shares of the registrant’s common stock, $.001 par value, outstanding as of May 11, 2015: 20,316,400. 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ORIENT PAPER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2015 AND DECEMBER 31, 2014

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ORIENT PAPER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ORIENT PAPER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Organization and Business Background

Orient Paper, Inc. was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding Orient Paper Milling Company Limited (“Orient Paper HB”), 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.” to more accurately describe our business.

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 Orient Paper HB and such shares of Orient Paper HB were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Orient Paper HB) to exercise control over the disposition of Dongfang Holding’s shares in Orient Paper HB on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Orient Paper HB’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of Orient Paper HB’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, Orient Paper HB, became an indirectly owned subsidiary of the Company.

Dongfang Holding, as the 100% owner of Orient Paper HB, was unable to complete the registration of Orient Paper HB’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 Orient Paper HB to their original shareholders, and the original Orient Paper HB shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Orient Paper Shengde”) to transfer the control of Orient Paper HB over to Orient Paper 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. On June 1, 2009, Shengde Holdings Inc incorporated Orient Paper Shengde, a limited liability company organized under the laws of the PRC. Because Orient Paper Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as a wholly foreign-owned entity under PRC law.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

To ensure proper compliance of the Company’s control over the ownership and operations of Orient Paper HB with certain PRC regulations, on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”) with Orient Paper HB and Orient Paper HB Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Orient Paper Shengde”), a wholly foreign-owned enterprise in the PRC with an original registered capital of $10,000,000 (subsequently increased to $60,000,000 in June 2010). Orient Paper Shengde is mainly engaged in production and distribution of digital photo paper and is 100% owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Orient Paper Shengde shall provide exclusive technical, business and management consulting services to Orient Paper HB, in exchange for service fees including a fee equivalent to 80% of Orient Paper HB’s total annual net profits; (ii) Loan Agreement, which provides that Orient Paper Shengde will make a loan in the aggregate principal amount of $10,000,000 to Orient Paper HB Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Orient Paper HB; (iii) Call Option Agreement, which generally provides, among other things, that Orient Paper HB Equity Owners irrevocably grant to Orient Paper Shengde an option to purchase all or part of each owner’s equity interest in Orient Paper HB. The exercise price for the options shall be RMB1 which Orient Paper Shengde should pay to each of Orient Paper HB Equity Owner for all their equity interests in Orient Paper HB; (iv) Share Pledge Agreement, which provides that Orient Paper HB Equity Owners will pledge all of their equity interests in Orient Paper HB to Orient Paper Shengde as security for their obligations under the other agreements described in this section. Specifically, Orient Paper Shengde is entitled to dispose of the pledged equity interests in the event that Orient Paper HB Equity Owners breach their obligations under the Loan Agreement or Orient Paper HB fails to pay the service fees to Orient Paper Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Orient Paper HB Equity Owners shall irrevocably entrust a designee of Orient Paper Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Orient Paper HB or with respect to any equity owner action to be taken in accordance with the laws and Orient Paper HB’s Articles of Association. The terms of the agreement are binding on the parties for as long as Orient Paper HB Equity Owners continue to hold any equity interest in Orient Paper HB. An Orient Paper HB Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior approval of Orient Paper Shengde. As the Company had controlled Orient Paper HB since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009, and continues to control Orient Paper HB through Orient Paper Shengde and the Contractual Agreements, the execution of the Contractual Agreements is considered as a business combination under common control.

On February 10, 2010, Orient Paper Shengde and the Orient Paper HB Equity Owners entered into a Termination of Loan Agreement to terminate the above $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through Orient Paper Shengde instead of Orient Paper HB, the $10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over Orient Paper HB and its businesses in the PRC.

An agreement was also entered into among Orient Paper Shengde, Orient Paper HB and the Orient Paper HB Equity Owners on December 31, 2010, reiterating that Orient Paper Shengde is entitled to 100% of the distributable profit of Orient Paper HB, pursuant to the above mentioned Contractual Agreements. In addition, Orient Paper HB and the Orient Paper HB Equity Owners shall not declare any of Orient Paper HB’s unappropriated earnings as dividend, including the unappropriated earnings of Orient Paper HB from its establishment to 2010 and thereafter.

Orient Paper has no direct equity interest in Orient Paper HB. However, through the Contractual Agreements described above Orient Paper is found to be the primary beneficiary of Orient Paper HB and is deemed to have the effective control over Orient Paper HB’s activities that most significantly affect its economic performance, resulting in Orient Paper HB being treated as a controlled variable interest entity of Orient Paper in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”). The revenue of the Company generated from Orient Paper HB for the three months ended March 31, 2015 and 2014 were 100.00% and 95.00%, respectively. Orient Paper HB also accounted for 83.75% and 83.73% of the total assets of the Company as of March 31, 2015 and December 31, 2014, respectively. 

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of March 31, 2015 and December 31, 2014, details of the Company’s subsidiaries and variable interest entities are as follows:

* Orient Paper HB is treated as a 100% controlled variable interest entity of the Company

(2) Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014 of Orient Paper, Inc. a Nevada corporation, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “Orient Paper”, “we”, “us” or “our”).

Principles of Consolidation

Our unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of March 31, 2015 and the results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for any future period.

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.

Liquidity and Going Concern

As of March 31, 2015, the Company had current assets of $23,291,005 and current liabilities of $40,845,392 (including amounts due to related parties of $3,586,266), resulting in a working capital deficit of approximately $17,554,387; while as of December 31, 2014, the Company had current assets of $26,554,862 and current liabilities of $44,470,148 (including amounts due to related parties of $3,376,120), resulting in a working capital deficit of approximately $17,915,286. We are currently seeking to restructure the term of our liabilities by raising funds through long-term loans to pay off liabilities with shorter terms. Our ability to continue as a going concern is dependent upon obtaining the necessary financing or negotiating the terms of the existing short-term liabilities to meet our current and future liquidity needs.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On January 20, 2014, our Chairman and Chief Executive Officer (“CEO”) Mr. Zhenyong Liu agreed in writing to permit the Company to continue to postpone the repayment of the accrued interest on his loan to Orient Paper HB until the Company is able to pay its other creditors in its normal course of business. The accrued interest owned to Mr. Liu was approximately $940,563, which was recorded in other payables and accrued liabilities as part of the current liabilities in the condensed consolidated financial statement as of March 31, 2015 (see Note (11) below).

On March 9, 2015, Mr. Zhenyong Liu agreed in writing to permit the Company to postpone the repayment of the related party loan of $2,377,962 which will expire at December 31, 2015. (see Note (9) below).

On January 21, 2015, Hebei Fangsheng agreed in writing to permit the Company to continue to postpone the repayment of the accrued rental charged to Orient Paper HB until the earliest date on which the Company's quarterly or annual financial statements filed with the SEC show a satisfactory working capital level. The accrued rental owned to Hebei Fangsheng was approximately $267,741 and $227,900, which was recorded in as part of the current liabilities as of March 31, 2015 and December 31, 2014, respectively.

On March 1, 2015, the Company entered an agreement with the CEO which allows Orient Paper HB to borrow from the CEO with an amount up to $19,536,974 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due in three years from the date each amount is funded. The loan will be unsecured and carry an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. Nil amount has been drawn from the credit line as of March 31, 2015. 

Although management believes it can secure financial resources to satisfy the Company's current liabilities and the capital expenditure needs in the next 12 months, there are no guarantees that these financial resources will be secured. Therefore, there is a substantial doubt about the ability of the Company to continue as a going concern that it may be unable to realize its assets and discharge its liabilities in the normal course of business. Our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

(3) Restricted Cash

Restricted cash of $5,047,052 as of March 31, 2015 was presented for the cash deposited at the Shanghai Pudong Development Bank (“SPD Bank”) and the Commercial Bank of the City of Zhangjiakou for purpose of securing the bank acceptance notes from the bank (see Note (10)). The restriction will be lifted upon the maturity of the notes payable from April 14 through July 22 during the year of 2015.

Restricted cash of $8,873,999 as of December 31, 2014 was presented for the cash deposited at the Bank of Hebei, SPD Bank and the Commercial Bank of the City of Zhangjiakou for purpose of securing the bank acceptance notes from these banks (see Note (10)). The restriction will be lifted upon the maturity of the notes payable from January 7, 2015 through April 23, 2015.

(4) Inventories

Raw materials inventory includes mainly recycled paper and coal. Finished goods include mainly products of corrugating medium paper and offset printing paper. Inventories consisted of the following as of March 31, 2015 and December 31, 2014:

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) Prepayments and other current assets

Prepayments and other current assets consisted of the following as of March 31, 2015 and December 31, 2014:

(6) Prepayment on property, plant and equipment

As of March 31, 2015 and December 31, 2014, prepayment on property, plant and equipment consisted of $1,484,810 and $1,490,440, respectively in respect of prepaid land use right prepayment made on October 26, 2012 for the entitlement of land use right for some 65,023 square meters of land located in our Xushui County, Baoding plant. The purchase is expected to be completed in year 2016.

(7) Property, plant and equipment, net

As of March 31, 2015 and December 31, 2014, property, plant and equipment consisted of the following:

As of March 31, 2015 and December 31, 2014, land use rights represented a parcel of state-owned land located in Xushui County of Hebei Province in China, with lease terms of 50 years expiring in 2061.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company entered into a sale-leaseback arrangement with a leasing company in China on June 16, 2013 for a total financing proceeds in the amount of RMB 150 million (approximately US$24 million). Under the sale-leaseback arrangement, Orient Paper HB sold certain of its paper manufacturing equipment to the leasing company for an amount of RMB 150 million (approximately US$24 million). Concurrent with the sale of equipment, Orient Paper HB leases back all of the equipment (“Leased Equipment”) sold to the leasing company for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,400) to the leasing company and buy back all of the Leased Equipment. The sale-leaseback is treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment are included as part of the property, plant and equipment of the Company as of March 31, 2015 and December 31, 2014. As a result of the sale, a deferred gain on sale of Leased Equipment in the amount of $1,379,282 was created at the closing of the transaction and presented as a non-current liability. The deferred gain would be amortized by the Company during the lease term and would be used to offset the depreciation of the Leased Equipment, which are recorded at the new cost of $25,866,717 and $25,964,790 as of March 31, 2015 and December 31, 2014, respectively. See “Financing with Sale-Leaseback” under Note (8), Loans Payable, for details of the transaction and asset collaterals. The depreciation of Leased Equipment has started in July 2013 and was included with the depreciation expense of the Company’s own assets in the consolidated statement of income. During the three months ended March 31, 2015 and 2014, depreciation of Leased Equipment were $412,870 and $414,524, respectively. The accumulated depreciation of the leased asset were $2,890,093 and $2,486,615 as of March 31, 2015 and December 31, 2014. During the three months ended March 31, 2015 and 2014, the gain realized on sale-leaseback transaction were $115,460 and $115,923, respectively. The gain realized was recorded in cost of sales as a reduction of depreciation expenses. The unamortized deferred gains on sale-lease back are $577,302 and $695,389 as of March 31, 2015 and December 31, 2014, respectively.

Construction in progress mainly represents payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue paper workshops and general infrastructure and administrative facilities in the Wei County industrial park. The tissue paper development project at the Wei County Industrial Park is expected to be completed in the second half of 2015. Upon completion, it will bring about an addition of $65,860,783 to the Company’s building and improvements, and machinery and equipment. For the three months ended March 31, 2015 and 2014, the amount of interest capitalized is $17,739 and $261,433, respectively.

As of March 31, 2015 and December 31, 2014, certain property, plant and equipment of Orient Paper HB with net values of $15,715,157 and $19,300,765 have been pledged for the long-term loan from credit union of Orient Paper HB, respectively. As of December 31, 2014, certain of the Company’s property, plant and equipment in the amount of $29,995 have been pledged for the facility obtained from Bank of Hebei. See “Notes Payable” under Note (10) for details. In addition, land use right with net values of $7,273,059 and $7,339,399 as of March 31, 2015 and December 31, 2014 was pledged for the sale-leaseback financing. See “Financing with Sale-Leaseback” under Note (8), Loans Payable, for details of the transaction and asset collaterals.

As of March 31, 2015 and December 31, 2014, essentially all production equipment of Orient Paper Shengde with net value of $32,468,616 and $33,287,324 has been pledged for the guarantee of Orient Paper HB’s performance under the capital lease.

Depreciation and amortization of property, plant and equipment was $2,514,884 and $1,938,794 for the three months ended March 31, 2015 and 2014, respectively.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8) Loans Payable

Short-term bank loans

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of March 31, 2015, there were guaranteed short-term borrowings of $3,256,162 and secured bank loans of $6,512,325. As of December 31, 2014, there were guaranteed short-term borrowings of $3,268,508 and secured bank loans of $6,537,016. The factoring facility was secured by the Company’s accounts receivable in the amount of $3,820,506 and $3,730,123 as of March 31, 2015 and December 31, 2014, respectively.

The average short-term borrowing rates for the three months ended March 31, 2015 and 2014 were approximately 8.21% and 6.79%, respectively.

Long-term loans from credit union

As of March 31, 2015 and December 31, 2014, loans payable to Rural Credit Union of Xushui County, amounted to $5,885,513 and $5,907,828, respectively.

On April 16, 2014, the Company entered into an agreement with the Rural Credit Union of Xushui County for an amount that is $1,603,660 and $1,609,740 as of March 31, 2015 and December 31, 2014. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.72% per month. The loan balance would be repayable by various installments from June 21, 2014 to November 18, 2018. As of March 31, 2015, total outstanding loan balance was $1,603,660 with $65,123 becoming due within one year and presented as current portion of long term loans from credit union in the condensed consolidated balance sheet. As of December 31, 2014, total outstanding loan balance was $1,609,740 with $65,370 becoming due within one year and presented as current portion of long term loans from credit union in the consolidated balance sheet

On July 15, 2013, the Company entered into a new agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is due and payable on various scheduled repayment dates between December 21, 2013 and July 26, 2018. The loan is secured by certain of the Company’s manufacturing equipment in the amount of $15,715,157 and $19,300,765 as of March 31, 2015 and December 31, 2014, respectively. Interest payment is due quarterly and bears a fixed rate of 0.72% per month. As of March 31, 2015, the total outstanding loan balance was $4,281,853, with $81,404 becoming due within one year and presented as current portion of long term loans from credit union in the condensed consolidated balance sheet. As of December 31, 2014, the total outstanding loan balance was $4,298,088, with $81,713 becoming due within one year and presented as current portion of long term loans from credit union in the consolidated balance sheet. 

Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2015 and 2014 were $327,707 and $238,585, respectively.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financing with Sale-Leaseback

The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with China National Foreign Trade Financial & Leasing Co., Ltd ("CNFTFL") on June 16, 2013, for a total financing proceeds in the amount of RMB 150 million (approximately US$24 million). Under the sale-leaseback arrangement, Orient Paper HB sold the Leased Equipment to CNFTFL for RMB 150 million (approximately US$24 million). Concurrent with the sale of equipment, Orient Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,400) to CNFTFL and buy back all of the Leased Equipment. The sale-leaseback is treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment are included as part of the property, plant and equipment of the Company for the periods presented; while the net present value of the minimum lease payment (including a lease service charge equal to 5.55% of the amount financed, i.e. approximately US$1.36 million) was recorded as obligations under capital lease and was calculated with CNFTFL’s implicit interest rate of 6.15% per annum and stated at $25,750,170 at the inception of the lease on June 16, 2013. The balance of the long-term obligations under capital lease were $4,072,946 and $4,090,413 as of March 31, 2015 and December 31, 2014, which is net of its current portion in the amount of $11,898,798 and $12,258,488, respectively.

Total interest expenses for the sale-leaseback arrangement for the three months ended March 31, 2015 and 2014 were $156,054 and $261,433, respectively.

As a result of the sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The deferred gain is being amortized over the lease term of three years and as an offset to depreciation of the Leased Equipment.

As part of the sale-leaseback transaction, Orient Paper HB entered into a Collateral Agreement with CNFTFL and pledged the land use right in the amount of approximately $7,273,059 on some 58,566 square meters of land as collateral for the lease. In addition to Orient Paper HB’s collateral, Orient Paper Shengde also entered into a Guarantee Contract with CNFTFL on June 16, 2013. Under the Guarantee Contract, Orient Paper Shengde agrees to guarantee Orient Paper HB’s performance under the lease and to pledge all of its production equipment as additional collateral. The net book value of Orient Paper Shengde’s asset guarantee was $32,468,616 and $33,287,324 as of March 31, 2015 and December 31, 2014, respectively.

The future minimum lease payments of the capital lease as of March 31, 2015 were as follows:

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9) Related Party Transactions

The Company’s CEO loaned money to Orient Paper HB for working capital purposes over a period of time. On January 1, 2013, Orient Paper HB and Mr. Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. The balance was $2,377,962 and $2,386,978 as of March 31, 2015 and December 31, 2014, respectively. The unsecured loan carries an annual interest rate based on the People’s Bank of China and was set at 6.15% per annum. The entire balance is presented as current portion of long term loan from a related party in the condensed consolidated balance sheet as of March 31, 2015.

On December 10, 2014, Mr. Liu loaned $9,768,487 and $9,805,524 as of March 31, 2015 and December 31, 2014, to Orient Paper HB for working capital purpose with an annual interest rate based on the People’s Bank of China and was set at 6.00% per annum. The unsecured loan will expire on December 10, 2017.

As of March 31, 2015 and December 31, 2014, total amount of loans due to Mr. Liu were $12,146,449 and $12,192,502, respectively. The interest expenses incurred for above related party loans are $182,196 and $36,707 for the three months ended March 31, 2015 and 2014, respectively. On January 20, 2015, the Company’s CEO agreed in writing to permit the Company to postpone the repayment of the loan and accrued interest on his loan to Orient Paper HB until the earliest date on which the Company's quarterly or annual financial statements filed with the SEC show a satisfactory working capital level. The accrued interest owned to Mr. Liu was approximately $940,563 and $761,242, which was recorded in other payables and accrued liabilities (see Note (11) below) as part of the current liabilities as of March 31, 2015 and December 31, 2014, respectively.

During the three months ended March 31, 2015 and 2014, the Company borrowed $80,000 and $123,500, respectively, from a shareholder to pay for various expenses incurred in the U.S. The amount was repayable on demand with interest free. The Company repaid the entire balance by the end of the period.

Sale of Headquarters Compound Real Properties to a Related Party

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. 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 $162,808 (RMB1,000,000). On January 21, 2015, Hebei Fangsheng agreed in writing to permit the Company to continue to postpone the repayment of the accrued rental charged to Orient Paper HB until the earliest date on which the Company's quarterly or annual financial statements filed with the SEC show a satisfactory working capital level. The accrued rental owned to Hebei Fangsheng was approximately $267,741 and $227,900, which was recorded as part of the current liabilities as of March 31, 2015 and December 31, 2014, respectively.

Land Use Right Pledged by Hebei Fangsheng

Independent from the above related party sale transaction, on March 3, 2014, Hebei Fangsheng entered into a Collateral Agreement with SPD Bank in connection with the Company’s bank acceptance note obtained from the SPD Bank (see Note (10) below). Under the Collateral Agreement, Hebei Fangsheng pledged certain land-use-right on a parcel of land located in Wei County, Hebei for the benefit of the SPD Bank as collateral to secure the credit facility of the bank acceptance note during the period of March 3, 2014 and March 2, 2016. As explained above, Hebei Fangsheng is controlled by the Company’s CEO.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10) Notes payable

As of March 31, 2015, the Company had four bank acceptance notes that totaled of $6,512,325 and $3,581,778, respectively, from the Commercial Bank of the City of Zhangjiakou and SPD Bank, respectively, to one of its major suppliers for settling purchase of raw materials. These acceptances notes are used to essentially extend the payment of accounts payable and are issued under the banking facilities obtained from these two banks as well as the restricted bank deposit of $5,047,052 in these two banks as mentioned in Note (3). The banking facility obtained from SPD Bank was secured by land use right from a related party as mentioned in Note (9). The banking facility obtained from the Commercial Bank of the City of Zhangjiakou was guaranteed by the Company’s CEO and Shijiazhuang Baode Guarantee Service Company as mentioned in Note (8). The bank acceptance notes from those two banks bear interest rate at nil% per annum and 0.05% of notes amount as handling change. They will become due and payable on various dates starting from April 14, 2015 to July 22, 2015.

As of December 31, 2014, the Company had eleven bank acceptance notes that totaled of $1,405,458, $6,537,016 and $8,171,270, respectively, from Bank of Hebei, SPD Bank and the Commercial Bank of the City of Zhangjiakou, respectively, to one of its major suppliers for settling purchase of raw materials. These acceptances notes were used to essentially extend the payment of accounts payable and were issued under the banking facilities obtained from these three banks as well as the restricted bank deposit of $8,873,999 in these three banks as mentioned in Note (3). In particular, the banking facility obtained from Bank of Hebei was secured by certain of the Company’s property, plant and equipment in the amount of $29,995 and guaranteed by the Company’s CEO and Hebei Fangsheng and two independent third parties. The banking facility obtained from SPD Bank was secured by land use right from a related party as mentioned in Note (9). The banking facility obtained from the Commercial Bank of the City of Zhangjiakou was guaranteed by the Company’s CEO and Shijiazhuang Baode Guarantee Service Company as mentioned in Note (8). The bank acceptance notes from those three banks bore interest rate at nil% per annum and 0.05% of notes amount as handling change. They become due and payable on various dates starting from January 7, 2015 to April 23, 2015.

(11) Other payables and accrued liabilities

Other payables and accrued liabilities consist of the following:

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) Common Stock

Issuance of common stock to investors 

On August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our common stock (the “Offering”). Each share of common stock and accompanying warrant was sold at a price of $1.60. Please refer to Note (13), Stock Warrants, for details. 

(13) Stock warrants

On August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our common stock. The warrants have an exercise price of $1.70 per share. These warrants are exercisable immediately upon issuance on September 3, 2014 and have a term of exercise equal to five years from the date of issuance till September 2, 2019. The fair value of these shares amounted to $780,000, is classified as equity at the date of issuance. 

The fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:

In connection with the Offering, the Company issued warrants to its placement agent of this Offering, which can purchase an aggregate of up to 2.50% of the aggregate number of shares of common stock sold in the Offering, i.e. 39,062 shares. These warrants have substantially the same terms as the warrants issued to purchaser in the Offering, except that the exercise price is $2.00 per share and the expiration date is from September 3, 2014 to June 26, 2019. The fair value of these shares amounted to $35,191, is classified in the equity at the date of issuance to net off the proceeds from the issuance of the shares and warrants.  

The fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:

The Company applied judgment in estimating key assumptions in determining the fair value of the warrants on the date of issuance. The Company used historical data to estimate stock volatilities and expected dividend yield. The risk-free rates are consistent with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.

A summary of stock warrant activities is as below:

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

No warrants were issued, exercised, cancelled or expired during the three months ended March 31, 2015 and 2014. As of March 31, 2015, the aggregated intrinsic value of warrants outstanding and exercisable was $117,188.

(14) Earnings Per Share

For the three months ended March 31, 2015 and 2014, basic and diluted net income per share are calculated as follows:

For the three months ended March 31, 2014, there were no securities with dilutive effect issued and outstanding. For the three months ended March 31, 2015, 820,312 warrants shares are excluded from the calculations of dilutive net income per share as their effects would have been anti-dilutive since the average share price for the three months ended March 31, 2015 were lower than the warrants exercise price.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(15) Income Taxes

United States

Orient Paper and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively.

PRC

Orient Paper HB and Orient Paper Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.

The provisions for income taxes for three months ended March 31, 2015 and 2014 were as follows:

During the three months ended March 31, 2015 and 2014, the effective income tax rate was estimated by the Company to be 27.7% and 27.5%, respectively. The effective tax rate is lower than the U.S. statutory rate of 35% primarily because the undistributed earnings of our PRC subsidiary Orient Paper Shengde and the VIE, Orient Paper HB are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. 

The Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of March 31, 2015 and December 31, 2014, management considered that the Company had no uncertain tax positions affecting its condensed consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s condensed consolidated financial statements for the three months ended March 31, 2015 and 2014, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority. 

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(16) Stock Incentive Plans

Issuance of common stock pursuant to the 2012 Incentive Stock Plan

On September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of Orient Paper, Inc. (the “2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012 ISP's administration. 

On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which 265,416 shares were granted under the 2011 Incentive Stock Plan and 31,584 shares under the 2012 ISP, to certain officers, directors and employees of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $790,020 as of the date of grant. No stock or option was issued under the 2012 ISP subsequently.

(17) Commitments and Contingencies

Operating Lease

Orient Paper leases 32.95 acres of land from a local government in Xushui County, Baoding City, Hebei, China through a real estate lease with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $19,537 (RMB 120,000). This operating lease is renewable at the end of the 30-year term.

On November 27, 2012, Orient Paper entered into a 49.4 acres land lease with an investment company in the Economic Development Zone in Wei County, Hebei Province, China. The lease term of the Wei County land lease commences on the date of the lease and lasts for 15 years. The lease requires an annual rental payment of $586,109 (RMB 3,600,000). The Company will be building two new tissue paper production lines and future production facilities in the leased Wei County land. 

As mentioned in Note (9) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial Buildings back to Orient Paper at an annual rental of $162,808 (RMB 1,000,000), for a term of up to three years. The Company will continue its operations in the current location for a maximum of three years while looking for a new location to relocate its offices currently located in the headquarters compound.

Future minimum lease payments of all operating leases are as follows:

Capital commitment

As of March 31, 2015, the Company has signed several contracts for construction of equipment and facilities, including a new tissue paper production line PM8. Total outstanding commitments under these contracts were $20,205,927 and $24,561,228 as of March 31, 2015 and December 31, 2014, respectively. The Company expected to pay off all the balances within 1 year.

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

(18) Segment Reporting

Since March 10, 2010, Orient Paper Shengde started its operations and thereafter the Company manages its operations through two business operating segments: Orient Paper HB, which produces offset printing paper and corrugating medium paper, and Orient Paper Shengde, which produces digital photo paper. They are managed separately because each business requires different technology and marketing strategies. 

The Company evaluates performance of its operating segments based on net income. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui County, Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC. 

Summarized financial information for the two reportable segments is as follows: 

ORIENT PAPER, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(19) Concentration and Major Customers and Suppliers

For the three months ended March 31, 2015 and 2014, the Company had no single customer contributed over 10% of total sales. For the three months ended March 31, 2015, the Company had three major suppliers accounted for 66%, 18% and 8% of total purchases. For the three months ended March 31, 2014, the Company had two major suppliers accounted for 78% and 8% of total purchases.

(20) Concentration of Credit Risk

Financial instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of March 31, 2015 and December 31, 2014. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB500,000 (US$81,404) per depositor per insured financial intuition, including both principal and interest. For the cash placed in financial institutions in the United States, the Company’s U.S. bank accounts are all fully covered by the FDIC insurance as of March 31, 2015 and December 31, 2014, respectively. 

(21) Risks and Uncertainties

Orient Paper is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various laws and restrictions. 

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, 2015 and 2014 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 “Orient Paper,” “ONP,” “the Company,” “we,” “our” and “us” refer to Orient Paper, Inc. and its PRC subsidiary and variable interest entities 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. 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 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 profitable operations, (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 requirements for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities laws.

Results of Operations

Revenue for the three months ended March 31, 2015 was $26,504,344, an increase of $750,480, or 2.91%, from $25,753,864 for the three months ended March 31, 2014.

Revenue of Offset Printing Paper and Corrugating Medium Paper

Revenue from sales of offset printing paper and corrugating medium paper (“CMP”) for the three months ended March 31, 2015 was $26,504,344, an increase of $2,044,636, or 8.36%, from $24,459,708 for the first quarter of 2014. The increase was primarily attributable to sales of our 40 gram-square-meter (g/s/m) to 80 g/s/m special specification CMP (the “Light-Weight CMP”) produced by the renovated PM1 production line, which commenced production in May 2014.

Total offset printing paper and CMP sold during the three months ended March 31, 2015 amounted to 63,145 tonnes, an increase of 6,950 tonnes, or 12.37%, compared to 56,195 tonnes sold in the comparable period in the previous year. This was mainly attributable to the sales of Light-Weight CMP. The quantity of Light-Weight CMP produced and sold in the first quarter of 2015 was 8,501 tonnes. The quantities of our 110 g/s/m CMP (the “Regular CMP”) and offset printing paper produced and sold dropped by 565 tonnes and 986 tonnes, respectively, as compared to the first quarter of 2014. This was mainly due to the interruption in production resulting from maintenance performed on our PM3 production line (one of the offset printing paper production lines) in March 2015. The changes in revenue dollar amount and in tonnage for the three months ended March 31, 2015 and 2014 are summarized as follows:

Monthly sales revenue (excluding revenue of digital photo paper) for the 24 months ended March 31, 2015, are summarized below:

The ASPs (Average Selling Prices) for our main products in the three months ended March 31, 2014 and 2015 are summarized as follows:

The following is a chart showing the month-by-month ASPs (excluding the ASPs of the digital photo paper) for the 24 month period ended March 31, 2015:

Corrugating Medium Paper

Revenue from CMP amounted to $19,703,133 (or 74.34% of total offset printing paper and CMP revenue) for the three months ended March 31, 2015, representing an increase of $2,602,057, or 15.22%, from revenue of $17,101,076 for the comparable period in 2014.  We sold 53,271 tonnes of CMP in the three months ended March 31, 2015, as compared to 45,335 tonnes for the same period in 2014, representing a 17.51% increase in quantities sold. As explained above, the increase is mainly due to the sales of Light-Weight CMP. ASP for Regular CMP slightly dropped from $377/tonne for the three months ended March 31, 2014 to $369/tonne for the three months ended March 31, 2015, representing a 2.12% decrease over the comparable period.  The quantity of Regular CMP produced and sold decreased by 565 tonnes from 45,335 tonnes in the first quarter of 2014 to 44,770 tonnes in the first quarter of 2015. We produced and sold 13,444 tonnes of Regular CMP in March 2015, representing a monthly utilization of 90% of the design capacity after taking into account the two week suspension for maintenance.

Our quarter-over-quarter ASP for Regular CMP dropped slightly from $377/tonne for the quarter ended March 31, 2014 to $369/tonne (or 2.12%) for the quarter ended March 31, 2015. We believe that the 2.12% drop was largely related to the continuing slowdown of China’s economic growth starting that began at the end of 2011.

For the first quarter of 2015, the ASP for Light-Weight CMP was $376/tonne, slightly higher than the ASP of $369/tonne for the Regular CMP.

The government has been requiring outdated paper facilities to close since 2010 and is expected to continue to strictly reinforce the mandatory closure of outdated capacity in the next few years. As a result, we estimate that the ASPs for CMP and other packaging paper will remain relatively stable for the rest of 2015 as a result of elimination of outdated paper capacities, and the paper industry will witness increased competition and higher standards for environmental protection measures.

We launched our PM6 production line in December 2011 and have been improving its output capacity in the past few years. The PM6 production line has a designated capacity of 360,000 tonnes/year. The utilization rates for the first quarter of 2015 and 2014 were 49.46% and 50.37%, respectively, representing a decrease of 0.91%.

Quantities sold for Regular CMP that was produced by the PM6 production line from April 2013 to March 2015 are as follows:

Offset Printing Paper

Revenue from offset printing paper amounted to $6,801,211 (or 25.66% of total offset printing paper and CMP revenue) for the three months ended March 31, 2015, which represents a decrease of $557,421, or 7.58%, from the offset printing paper revenue of $7,358,632 for the comparable period in 2014. We sold 9,874 tonnes of offset printing paper in the three months ended March 31, 2015 compared to 10,860 tonnes in the comparable period in 2014, a decrease of 986 tonnes, or 9.08%.  This was mainly due to the interruption in production resulting from maintenance performed on our PM3 production line (one of the offset printing paper production lines) in March 2015. A higher expected price for offset printing paper ASP in 2015 is expected to increase the offset printing paper revenue in the rest of 2015. We sold offset printing paper at an ASP of $689/tonne in the first quarter of 2015, which is 1.62% higher than the ASP of $678/tonne in the first quarter of 2014.

Revenue of Digital Photo Paper

Revenue generated from selling digital photo paper was $1,294,156, or 326 tonnes at an ASP of $3,970/tonnes for the three months ended March 31, 2014. In October 2014, we shut down and disassembled our digital photo paper production facilities (our PM4 and PM5 production lines) for the relocation mandated by the local County government, and began to move them to a new workshop that we built across the street from our main production base, Xushui Paper Mill. No digital photo paper was produced and sold in the first quarter of 2015. We expect to resume our digital photo paper production in the second half of 2015.

Changes in revenue and quantities sold of our digital photo paper for the three months ended 2015 and 2014 are summarized as follows:

In 2014, we produced (and expect to produce again once our production lines are assembled at the new location) glossy and semi-matte photo paper in various weights (from 120g/m ² to 260g/m ²).  Digital photo paper products’ monthly ASPs, sales quantity (in tonnes) and sales revenue for the 24 months from April 2013 to March 2015 are summarized as follows:

Cost of Sales

Total cost of sales for CMP and offset printing paper for the quarter ended March 31, 2015 was $21,517,611, an increase of $1,372,774, or 6.81%, from $20,144,837 for the comparable period in 2014.  Cost of sales for CMP amounted to $15,949,474 for the quarter ended March 31, 2015, as compared to $14,362,746 for the same period in 2014. The increased cost of sales of $1,586,728 was mainly a result of the addition of the cost of sales of Light-Weight CMP of $2,309,665 for the first quarter of 2015. Average cost of sales per tonne of Regular CMP decreased from $317 in the first quarter of 2014 to $305 in the first quarter of 2015, representing a decrease of 3.79%, mainly attributable to the declining raw material price (see details below) in the first quarter of 2015; average cost of sales per tonne of offset printing paper went up from $532 in the first quarter of 2014 to $564 during the quarter ended March 31, 2015, representing an increase of 6.02%. Changes in cost of sales and cost per tonne by product for the quarters ended March 31, 2015 and 2014 are summarized below:

Our average unit purchase costs (net of applicable value added tax) of recycled paper board (or Old Corrugated Cardboard or “OCC”) and recycled white scrap paper in the first quarter of 2015 were RMB 969/tonne and RMB 2,222/tonne (approximately $158/tonne and $362/tonne) respectively, compared to RMB 1,088/tonne and RMB 2,052/tonne (approximately $177/tonne and $334/tonne) for the same period of 2014. These changes (in US dollars) represent a year-over-year decrease of 10.73% for the OCC, and an increase of 8.38% for the recycled white scrap paper, respectively. Our production uses entirely domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area). Though we do not rely on imported recycled paper, which tends to have more volatile pricing than the domestic recycled paper, our experience suggests that the pricing of domestic recycled paper bears some correlation to the price of imported recycled paper. The “Operation Green Fence” policy, a strict inspection policy implemented by Chinese Customs for ten months from February to the end of 2013, that we had previously expected to be continued, was repealed by the Chinese government in January 2015. As a result, a portion of the consumption of recycled paper board by paper mills went back to imported OCC, which caused the drop in domestic OCC price in the first quarter of 2015 as compared to the previous comparable period. On the other hand, the price of recycled white scrap paper went up in the first quarter of 2015 as compared to the previous comparable period. We believe that as the demand for wood pulp rises in China (possibly due to an increased demand for tissue paper), the demand for white recycled paper, which can be used as a substitute for wood pulp (and to a certain extent for tissue paper of lower grade), may increase and as a result the price for white scrap may further increase in the future. Given to the uncertainty of the regional economic outlook for the rest of the year of 2015 and the government’s future policies, we believe that the short-term recycled paper raw material costs, including the cost of OCC, may become volatile in the next few months and may affect our gross profit margin.

The pricing trends of our major raw materials for the 24-month period from April 2013 to March 2015 are shown below:

Electricity and coal are the two main energy sources of our paper manufacturing activities.  The price of coal has been subject to seasonal fluctuations in China, with the peaks often occurring in the winter months.  Historically, electricity and coal accounted for approximately 12% and 16% of total sales, respectively.  Because the average cost per tonne of coal went down from approximately $94.32 in first quarter of 2014 to approximately $81.73 in the first quarter of 2015, coal only accounted for approximately 4.53% of total sales in the first quarter of 2015. The monthly energy cost for electricity and coal as a percentage of total monthly sales of our main paper products for the 24 months ended March 31, 2015 are summarized as follows:

Gross Profit

Gross profit for the three months ended March 31, 2015 was $4,986,733 (18.81% of total revenue), representing an increase of $315,897, or 6.76%, from the gross profit of $4,670,836 (18.14% of total revenue) for the three months ended March 31, 2014. This was mainly driven by the sales of Light-Weight CMP beginning in May 2014.

Corrugating Medium Paper and Offset Printing Paper

Gross profit for CMP and offset printing paper for the first quarter ended March 31, 2015 was $4,986,733, an increase of $671,862, or 15.57%, from $4,314,871 for the same period in 2014.  The increase in gross profit of CMP and offset printing paper for the first quarter of 2015 was a direct result of (1) the 8.36% increase in gross sales revenue accompanied by a relatively small increase of 6.81% in costs of sales, (2) the sale of Light-Weight CMP that contributed $884,427 gross profit in the current period, and (3) the maintenance performed on our PM3 production line in March 2015. The overall gross profit margin for CMP and offset printing paper increased by 15.57%, or 1.17 percentage points, from 17.64% in the first quarter in 2014 to 18.81% for the first quarter of 2015.

Gross profit margin for Regular CMP for the quarter ended March 31, 2015 was 17.38% (1.37 percentage points higher) compared to gross profit margin of 16.01% for the quarter ended March 31, 2014. Such increase was primarily the result of a decline in the unit price of the recycled paper board, which is the raw material for the Regular CMP.

The gross profit margin for Light-Weight CMP for the quarter ended March 31, 2015 was 27.69%.

Our offset printing paper has seen a moderate 7.58% decrease in revenue for the quarter ended March 31, 2015 as compared to the quarter ended March 31, 2014 and an increase in the unit price of the white scrap paper, which is the raw material for the offset printing paper. Gross profit margin for offset printing paper was 18.13% for the quarter ended March 31, 2015, a decrease of 3.29 percentage points, as compared to 21.42% for the quarter ended March 31, 2014.

 Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended March 31, 2015 are as follows:

Digital Photo Paper

Gross profit from the sales of digital photo paper for the quarter ended March 31, 2014 amounted to $355,965, or 27.51% as a percentage of total digital photo paper sales. As discussed above, we started the relocation of our PM4 and PM5 production lines in October 2014, so no digital photo paper was produced and sold in the first quarter of 2015. We expect to resume the digital photo paper production in the second half of 2015.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended March 31, 2015 were $1,706,392, an increase of $797,476, or 87.74%, from $908,916 for the first quarter of 2014. The increase was mainly attributable to the increase in the depreciation expenses for digital photo paper production line (which was dissembled in October 2014) that was charged to the cost of sales previously and the increase in the depreciation expenses for the property, plant and equipment in our Wei County Industrial Park.

Income from Operations 

Operating income for the quarter ended March 31, 2015 was $3,280,341, a decrease of $481,579, or 12.80%, from $3,761,920 for the same period in 2014.  The decrease was primarily due to the increase in selling and general administrative expenses as discussed above.

Other Income and Expenses

Interest expense in the quarter ended March 31, 2015 increased by $372,926 from $275,292 in the first quarter of 2014 to $648,218 in the first quarter of 2015. The Company had total short-term and long-term interest-bearing loans, related party loan and leasing obligations in the amount of $43,772,193 as of March 31, 2015, as compared to a total of $35,109,725 of such loans as of March 31, 2014. Of all interest incurred on the interest-bearing loans, $17,739 (which was related to the sale-leaseback obligation with China National Foreign Trade Financial & Leasing Co., Ltd (“CNFTFL”)) and $261,433 was capitalized as soft-cost of construction-in-progress during the first quarter of 2015 and 2014, respectively.

Provision for Income Taxes 

Provision for income tax was $805,485 for the quarter ended March 31, 2015, a decrease of $153,246, or 15.98%, from the amount of $958,731 for the comparable quarter for the previous year. The decrease was a result of the low income before income tax caused by the relocation of digital photo paper production line and the depreciation for the property, plant and equipment in Wei County charged.

Net Income

As a result of the above, net income was $2,105,489 for the quarter ended March 31, 2015, a decrease of $427,805, or 16.89%, from $2,533,294 for the comparable period in the year of 2014.

Accounts Receivable

Net accounts receivable increased by $90,383 (or 2.42%) to $3,820,506 as of March 31, 2015, compared with $3,730,123 as of December 31, 2014. We usually collect accounts receivable within 30 days of delivery and completion of sales.

Inventories

Inventories consist of raw materials (accounting for 93.38% of total value of ending inventory as of March 31, 2015) and finished goods. As of March 31, 2015, the recorded value of inventory increased by 53.11% to $10,931,611 from $7,139,599 as of December 31, 2014. Inventory of recycled paper board, which is the main raw material for the production of CMP, was $8,202,491 as of March 31, 2015. The ending inventory balance of recycled paper board as of March 31, 2015 was approximately $3,864,422 (or 89.08%) higher than the balance as of December 31, 2014, primarily due to the ramp up of our CMP production lines PM1 and PM6.

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

Accounts Payable and Notes Payable

Accounts payable and notes payable was $10,933,358 as of March 31, 2015, a decrease of $5,180,386, or 32.15%, from $16,113,744 as of December 31, 2014. Accounts payable was nil as of December 31, 2014 and $839,255 as of March 31, 2015. We have been relying on the bank acceptance notes issued under our credit facilities with Bank of Hebei, Commercial Bank of the City of Zhangjiakou (the “CBCZ Bank”) and Shanghai Pudong Development Bank (“SPD Bank”) to make most of our raw materials payments to our vendors. Our notes payable to Bank of Hebei, CBCZ Bank and SPD Bank were $10,094,103 and $16,113,744 as of March 31, 2015 and December 31, 2014, respectively. 

Liquidity and Capital Resources

Overview

As of March 31, 2015, we had a net working capital deficit of $17,554,387, a decrease of $360,899 from the net working capital deficit of $17,915,286 at December 31, 2014. Total current assets as of March 31, 2015 amounted to $23,291,005. Substantially all cash and cash equivalents are cash deposits in bank accounts. Restricted cash of $5,047,052 was included in our current assets as of March 31, 2015 and was deposited at the Commercial Bank of the City of Zhangjiakou (“CBCZ Bank”) and Shanghai Pudong Development Bank (“SPD Bank”) for purpose of securing the bank acceptance notes issued by these banks that are due on various dates starting from April 14, 2015 to July 22, 2015.

We have been reporting lower balances in current liabilities on our balance sheet since we had paid off the bank acceptance notes issued by the bank mentioned above which became due during the first quarter of 2015. We entered into a three-year sale-leaseback financing on June 16, 2013 (see details below), which features a three-year fully amortization schedule with periodic principal payments every six months. Essentially all proceeds of the sale-leaseback were used to finance the construction cost of the Wei County tissue paper expansion project (see below). Current liabilities as of March 31, 2015 totaled $40,845,392, a decrease of $3,624,756 over the December 31, 2014 balance of $44,470,148 and included the current portion of the capital lease payable in the amount of $11,898,798. We have also been using bank acceptance notes, which are typical 6-to-12 month notes, to guarantee the payments to our vendors. Notes payable was stated at $10,094,103 as of March 31, 2015, representing a decrease of $6,019,641, or 37.36%, from the balance of $16,113,744 as of December 31, 2014. Most of our current short-term bank loans are either revolving or term loans. We expect to renew the loans with the banks on similar terms at or before maturity. All of our short-term loans (with the exception of the notes payables, which carry no interest but require a certain portion of the credit facilities to be deposited at the issuing banks) feature interest-only monthly payments with a balloon payment for the entire principal upon the maturity of the loan. In addition to the quarterly interest payments, the long term loans from credit union require semi-annual principal repayment with one large balloon payment upon maturity. The CNFTFL lease financing requires quarterly payments of interest and every-six-month payments of principal, ranging from approximately $4.4 million to approximately $63,000 during the entire three-year term.

Efforts to Mitigate the Net Working Capital Deficit

Amounts due to related parties included in current liabilities were $3,586,266 as of March 31, 2015, including rent payable due to a related party of $267,741 (see “Relocation of Facilities and Sale of Headquarters Compound Real Properties” below), loan from our Chairman and Chief Executive Officer Mr. Zhenyong Liu of $2,377,962 and accrued interest payable included in other payables and accrued liabilities of $940,563 to Mr. Liu (see “Moratorium on interest for Related Party Loan Collection” below). Excluding the related party payables, the net working capital deficit as of March 31, 2015 was $13,968,121.

Moratorium of interest for Related Party Loan Collection

On March 25, 2014, our Chairman and Chief Executive Officer, Mr. Zhenyong Liu, agreed in writing to allow the Company to continue to postpone the repayment of the accrued interest on his loan to Orient Paper HB until the Company’s financial statements show a satisfactory working capital level. The accrued interest owned to Mr. Liu was approximately $940,563, which was recorded in other payables and accrued liabilities as part of the current liabilities in the condensed financial statement as of March 31, 2015.

Our loan-to-equity ratio was 34.59% as of March 31, 2015. Our debt-asset ratio was 25.70% as of March 31, 2015. The industry average of debt-asset ratios for 2014 was over 50% according to ww.wenku.baidu.com, and according to a search on www.finance.ifeng.com, two largest paper mills publicly listed on the Chinese stock exchanges each had a debt-asset ratio exceeding 60% at the end of the first quarter of 2015. As long as we are able to manage our short-term liquidity through various efforts described above, we believe that our overall financial condition, compared to our Chinese peers, is reasonably healthy and should allow us to reasonably further leverage our assets to provide capital for future growth.

From time to time, we investigate financing opportunities with banks and other financial institutions and investors both inside and outside of China, and we may seek long-term financings to pay off liabilities with shorter terms. We cannot guarantee that our efforts will be successful. As of the date of this report, we have not entered into any material binding agreement for additional long-term financing. There can be no assurance that we will be able to secure such financing either from banks or through debt or equity investments from investors. If we are unable to obtain sufficient outside financing, whether short-term or long-term, or generate sufficient operating cash flow internally, the progress of our construction or renovation projects may be slowed down or otherwise negatively affected. We may also have to curtail the scope of our capital expenditure projects or shelve some components of such projects (for example, delaying the installation of the PM9 production line) until additional capital resources are available.

Financing with Sale-Leaseback

The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with CNFTFL on June 16, 2013, for a total financing proceeds in the amount of RMB150 million (approximately US$24 million). Under the sale-leaseback arrangement, Orient Paper HB sold certain of its paper manufacturing equipment (the “Leased Equipment”) to CNFTFL for RMB 150 million (approximately US$24 million). Concurrent with the sale of equipment, Orient Paper HB leased back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,400) to CNFTFL and buy back all of the Leased Equipment. The sale-leaseback is treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment is included as part of the property, plant and equipment of the Company as of March 31, 2015; while the net present value of the minimum lease payment (including a lease service charge equal to 5.55% of the amount financed) was recorded as obligations under capital lease and was calculated with CNFTFL’s implicit interest rate of 6.15% per annum and stated at $25,750,170 at the inception of the lease on June 16, 2013. As of March 31, 2015, the balance of the long-term obligations under capital lease was $4,072,946, which is net of its current portion in the amount of $11,898,798.

Total interest expenses for the sale-leaseback arrangement for the three months ended March 31, 2015 and 2014 were $156,054 and $261,433, respectively.

As a result of the sale and leaseback of equipment on June 16, 2013, a deferred gain in the amount of $1,379,282 was recorded. The deferred gain is being amortized over the lease term of three years and as an offset to depreciation of the Leased Equipment.

As part of the sale-leaseback transaction, Orient Paper HB entered into a Collateral Agreement with CNFTFL and pledged the land use right in the amount of approximately $7,273,059 on some 58,566 square meters of land as collateral for the lease. In addition to Orient Paper HB’s collateral, Orient Paper Shengde also entered into a Guarantee Contract with CNFTFL on June 16, 2013. Under the Guarantee Contract, Orient Paper Shengde agrees to guarantee Orient Paper HB’s performance under the lease and agrees to pledge essentially all of its production equipment as additional collateral. The net book value of Orient Paper Shengde’s asset guarantee was $32,468,616 and $33,287,324 as of March 31, 2015 and December 31, 2014, respectively.

Relocation of Facilities and Sale of Headquarters Compound Real Properties

A Xushui County urban redevelopment plan mandates that the current site of our Headquarters Compound and its neighboring area be reserved for residential use only and that, like other manufacturers in the covered area, we were required to eventually cease all operations currently conducted on our Headquarters Compound site. As discussed under the “Properties” in our 2014 Annual Report on Form 10-K, on August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the LUR, the Industrial Buildings, and the Dormitories to Hebei Fangsheng, a real estate development company owned by Mr. Zhenyong Liu, our Chairman and Chief Executive Officer and his family, for cash of approximately $2.77 million, $1.15 million, and $4.28 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 $162,808 (RMB1,000,000). On May 8, 2015, Hebei Fangsheng agreed in writing to allow the Company to continue to postpone the repayment of the accrued rental charged to Orient Paper HB until the Company’s financial statements show a satisfactory working capital level. The accrued rental owned to Hebei Fangsheng was approximately $267,741 and $227,900, which was recorded as part of the current liabilities as of March 31, 2015 and December 31, 2014, respectively. As a condition for the sale of the Dormitories, Hebei Fangsheng agreed that it would act as an agent for the Company, which is not qualified to sell residential housing units in China, and that it is obligated to sell all of the 132 apartment units in the Dormitories to qualified employees of the Company at its acquisition price. Hebei Fangsheng further agreed that it would not seek to profit from the resale of the Dormitories units and would allow the Company to inspect the books and records of the sale upon completion of the resale of the Dormitories units to ensure the objectives are achieved.

The sale was conducted on an arms-length basis, and was reviewed by the Company’s Audit Committee and approved by the Board of Directors. The $2.77 million sale price of the industrial land use right was based on a government designated appraisal, which was 3.35% higher than a second independent appraisal commissioned by the Company. The $1.15 million sale price of the Industrial Buildings was determined by negotiation between the Company and Hebei Fangsheng and is equal to the appraised value based on the assumption that the use of the buildings would be continued until they are retired. Based on the assumption that such buildings would have to be torn down to comply with the re-zoning, a second independent appraisal obtained by the Company put the value at $0.4 million. Although the Company and Hebei Fangsheng agreed to set the sale price of the Dormitories at the Company’s original construction cost of $4.28 million, an independent appraisal shows that the value for the three buildings as employee dormitories was $4.61 million.

Sales of the LUR and the Industrial Buildings were completed in 2013, with a gain on disposal of approximately $84,972. We sold the dormitories on August 15, 2014, with a gain on disposal of approximately $203,620 that was recognized for the year ended December 31, 2014.

Capital Expenditure Commitment as of March 31, 2015

We finance our daily operations mainly by cash flows generated from our business operations and loans from banking institutions (including leasing companies) and our major shareholders. Major capital expenditures in the three months ended March 31, 2015 were primarily financed by cash flows generated from financing activities. As of March 31, 2015, we had approximately $20.2 million in capital expenditure commitments that were mainly related to the construction costs of manufacturing equipment and other facilities in a new industrial park in Wei County of Hebei, China, where we expect to build two tissue paper production lines (PM8 and PM9), and install other paper production machinery.

Capital Expenditures

Our committed capital expenditures for the next 18 months are approximately $20.2 million, which mainly includes budgeted costs for the projects below:

New Production Lines at the Wei County Industrial Park

In November 2012, we entered into a 15-year land lease with a land investment company in Wei County for the purpose of developing the 49.4 acres of land into the base of our next capacity expansion. In December 2012, we signed a contract with an equipment contractor in Shanghai to build the first of our two tissue paper production lines in Wei County. The two production lines, each having production capacity of 15,000 tonnes/year, will be designated as PM8 and PM9 upon completion. Total estimated cost of the Wei County tissue paper project may be up to approximately $130 million (of which $97.4 million has been incurred thus far), including the estimated costs of general infrastructure and administrative facilities such as warehouses, offices, dorms and landscaping, of up to $79 million (of which $76.6 million has been incurred thus far) and the estimated costs for the two paper machines and related packaging equipment of up to $51 million (of which $20.8 million has been incurred thus far). We had previously estimated that the installation and test operations of the PM8 production line could be completed in the second half of 2014. Our current estimated completion time of the PM8 production line is the second half of 2015, as we have experienced construction and budget funding delays. The delay of completion of the PM8 production line did not cause any major financial impact on our current period earnings, as we had previously budgeted no significant revenue or net earnings from the PM8 production line tissue paper for the first quarter in 2015. 

By the end of 2014, the capital expenditure projects finished in the Wei County Industrial Park included: an office building, employee cafeteria, and two employee dormitory buildings. The projects finished in the first quarter of 2015 include: three workshops, four warehouses, as well as infrastructure and landscaping projects in the Wei County Industrial Park at a cost of $36.18 million. We plan to build the second 15,000 tonnes/year tissue paper production line (designated as PM9) at an estimated cost of $7.8 million after the PM8 production line is put into production.

Relocation of Digital Photo Paper PM4 and PM5 Production Lines

We have begun to relocate our digital photo paper production lines (PM4 and PM5), as well as related chemical and packaging equipment, from the workshops currently located in our Headquarters Compound to a new location that is across the street from our Xushui Paper Mill, Xushui Mill Annex. We purchased the land use rights of the 58,566 square meters at Xushui Mill Annex for approximately $7.7 million in April 2012 and are in the process of constructing three industrial buildings for the digital photo paper operations, a dormitory for factory workers, and offices to consolidate our Xushui County operations. As of March 31, 2015, the disassembled PM4 and PM5 production lines were being moved to the Xushui Mill Annex for installation.

Total cost of the relocation of the PM4 and PM5 production lines is estimated to be approximately $1.6 million. Building construction costs at the Xushui Mill Annex is estimated to be an additional $7.5 million for 2015 and 2016. As of March 31, 2015, we have already entered into contracts related to the PM4 and PM5 production line relocation project for approximately $5.9 million.

Cash and Cash Equivalents

Our cash and cash equivalents as of March 31, 2015 was $2,544,567, a decrease of $1,346,906 from $3,891,473 as of December 31, 2014. The decrease of cash and cash equivalents for the three months ended March 31, 2015 was caused by a number of factors including:

i. Net cash used in operating activities

Net cash used in operating activities was $1,975,542 for the quarter ended March 31, 2015. The balance represented a decrease of $9,801,464, or 125.24%, from $7,825,922 provided by for the same period of 2014.  The net income of the quarter ended March 31, 2015 was $2,105,489, representing a decrease of $427,805, or 16.89%, from $2,533,294 for the first quarter of 2014.  Changes in various asset and liability account balances throughout the first quarter of 2015 also contributed to the net change in cash generated from operating activities in the first quarter of 2015. Chief among such changes is the additional notes payable in the amount of $5,958,777 that we paid during the quarter ended March 31, 2015. There was also an increase of $3,818,979 in the ending inventory balance as of March 31, 2015 (and as a decrease to net cash for the first quarter 2014 cash flow purposes). In addition to the decrease in cash from the net change in the first quarter 2015 inventory balance, the Company had non-cash expenses in depreciation and amortization in the amount of $2,514,884 in the first quarter of 2015. The Company also had a net decrease of $2,093,569 in prepayment and other current assets (as an increase to net cash) and a net decrease of $315,737 in other payables and accrued liabilities (as a decrease to net cash), as well as an increase in income tax payable of $956,456 (as an increase to net cash) during the quarter ended March 31, 2015. 

ii. Net cash used in investing activities

We incurred $2,671,647 in net cash expenditures for investing activities during the quarter ended March 31, 2015, compared to $2,965,044 for the same period of 2014. Essentially, all expenditures in the quarter ended March 31, 2015 were for the progress payments for the construction of our first tissue paper production line PM8 and related facilities, including three paper mill workshops and maintenance workshops, and four warehouses at the Wei County industrial park in Wei County, Hebei province.

iii. Net cash provided by financing activities

Net cash provided by financing activities was $3,321,970 for the quarter ended March 31, 2015, as compared to net cash used in financing activities in the amount of $2,081,982 for the same period of 2014. During the quarter ended March 31, 2015, we obtained a cash inflow of $3,793,429 from the release of restricted deposit upon the payoff of notes payables in Bank of Hebei, CBCZ Bank and SPD Bank.

Short-term bank loans

As of March 31, 2015, there were guaranteed short-term borrowings of $3,256,162 and secured bank loans of $6,512,325. As of December 31, 2014, there were guaranteed short-term borrowings of $3,268,508 and secured bank loans of $6,537,016. The factoring facility was secured by the Company’s accounts receivable in the amounts of $3,820,507 and $3,730,123 as of March 31, 2015 and December 31, 2014, respectively.

The average short-term borrowing rates for the three months ended March 31, 2015 and 2014 were approximately 8.21% and 6.79%, respectively.

Long-term loans from credit union

As of March 31, 2015 and December 31, 2014, loans payable to Rural Credit Union of Xushui County, amounted to $5,885,513 and $5,907,828, respectively.

On April 16, 2014, the Company entered into an agreement with the Rural Credit Union of Xushui County for an amount that is $1,603,660 and $1,609,740 as of March 31, 2015 and December 31, 2014. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.72% per month. The loan balance would be repayable by various installments from June 21, 2014 to November 18, 2018. As of March 31, 2015, total outstanding loan balance was $1,603,660, with $65,123 becoming due within one year and presented as current portion of long term loans from credit union in the condensed consolidated balance sheet. As of December 31, 2014, the total outstanding loan balance was $1,609,740, with $65,370 becoming due within one year and presented as current portion of long term loans from credit union on the consolidated balance sheet.

On July 15, 2013, the Company entered into a new agreement with the Rural Credit Union of Xushui County for a term of 5 years, which is due and payable on various scheduled repayment dates between December 21, 2013 and July 26, 2018. The loan is secured by certain of the Company’s manufacturing equipment in the amount of $15,715,157 and $19,300,765 as of March 31, 2015 and December 31, 2014, respectively. Interest payment is due quarterly and bears a fixed rate of 0.72% per month. As of March 31, 2015, the total outstanding loan balance was $4,281,853, with $81,404 becoming due within one year and presented as current portion of long term loans from credit union on the condensed consolidated balance sheet. As of December 31, 2014, the total outstanding loan balance was $4,298,088, with $81,713 becoming due within one year and presented as current portion of long term loans from credit union in the consolidated balance sheet. 

Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2015 and 2014 were $327,707 and $238,585, respectively.

Shareholder Loans

The Company’s CEO loaned money to Orient Paper HB for working capital purposes over a period of time. On January 1, 2013, Orient Paper HB and Mr. Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. The balance was $2,377,962 and $2,386,978 as of March 31, 2015 and December 31, 2014, respectively. The unsecured loan carries an annual interest rate based on the People’s Bank of China and was set at 6.00% per annum. The entire balance is presented as current portion of long term loan from a related party in the condensed consolidated balance sheet as of March 31, 2015.

On December 10, 2014, Mr. Liu had loaned $9,768,487 and $9,805,524 as of March 31, 2015 and December 31, 2014, respectively, to Orient Paper HB for working capital purpose with an annual interest rate that was based on the People’s Bank of China and set at 6% per annum. The unsecured loan matures on December 10, 2017.

As of March 31, 2015 and December 31, 2014, total amount of loans due to Mr. Liu were $12,146,449 and $12,192,502, respectively. The interest expenses incurred for above related party loans are $182,196 and $36,707 for the three months ended March 31, 2015 and 2014, respectively. On January 20, 2015, our CEO agreed in writing to permit the Company to postpone the repayment of the loan and accrued interest on his loan to Orient Paper HB until the Company's financial statements show a satisfactory working capital level. The accrued interest owned to Mr. Liu was approximately $940,563 and $761,242, which was recorded in other payables and accrued liabilities as part of the current liabilities as of March 31, 2015 and December 31, 2014, respectively.

During the three months ended March 31, 2015 and 2014, the Company borrowed $80,000 and $123,500, respectively, from a shareholder to pay for various expenses incurred in the United States. The amount was repayable on demand with interest free. The Company has repaid the entire balance by the end of the period.

Critical Accounting Policies and Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates. The most critical accounting policies are listed below:

Revenue Recognition Policy

The Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured.  Goods are considered delivered when the customer’s truck picks up goods at our finished goods inventory warehouse.

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry. For the quarter ended March 31, 2015, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record such impairment in the future.

Foreign Currency Translation

The functional currency of Orient Paper HB and Orient Paper Shengde is the Chinese Yuan Renminbi (“RMB”).  Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of March 31, 2015 and December 31, 2014 to translate the Chinese RMB to the U.S. Dollars are 6.1422:1 and 6.1190:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.1422:1, and 6.1177:1 for the quarters ended March 31, 2015 and 2014, respectively. Translation adjustments are included in other comprehensive income (loss).

Off-Balance Sheet Arrangements

None.

Foreign Exchange Risk

While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Inflation

Although we are generally able to pass along minor incremental cost inflation to our customers, inflationary factors such as increases in the costs of our products and overhead costs may adversely affect our operating results. We do not believe that inflation in China has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase to cope with these increased costs.

As required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Securities Act”), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, which were designed to provide reasonable assurance of achieving their objectives. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of March 31, 2015, our disclosure controls and procedures were effective at the reasonable assurance level to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the quarterly period ended March 31, 2015.

PART II - OTHER INFORMATION

None.

Information about risk factors for the three months ended March 31, 2015, does not differ materially from that set forth in Part I, Item 1A of the Company’s 2014 Annual Report on Form 10-K.

None.

None.

Not applicable.

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

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