CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND SIXNINE MONTHS ENDED

JUNESEPTEMBER 30, 2011 AND 2010

(Unaudited)

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2011 AND 2010

(Unaudited)

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Orient Paper, Inc. (“Orient Paper” or “the Company”) was incorporated under the laws of the State of Nevada on December 9, 2005, under the name of Carlateral, Inc. Carlateral, Inc. started its business by providing financing services specializing in subprime title loans, secured primarily using automobiles (and also boats, recreational vehicles, machinery, and other equipment) as collateral.

Hebei Baoding Orient Paper Milling Company Limited (“HBOP”) was incorporated on March 10, 1996, under the laws of the People’s Republic of China (“PRC”). HBOP is mainly engaged in the production and distribution of paper products such as corrugating medium paper, offset paper and writing paper. HBOP also has capability to produce other paper and packaging-related products, such as plastic paper and craft paper. HBOP uses recycled paper as its primary raw material.

DongfangZhiye Holding Limited (“Dongfang Holding”) was formed on November 13, 2006, under the laws of the British Virgin Islands, and is an investment holding company. As such, Dongfang Holding does not generate any financial or operating transactions. On July 16, 2007, Dongfang Holding entered into an agreement to acquire the equity ownership of HBOP and placed all the equity interest in trust with Mr. Zhenyong Liu, Mr. Xiaodong Liu, and Mr. Shuangxi Zhao (the original equity owners of HBOP)HBOP, each, an “HBOP Equity Owner” and collectively, “HBOP Equity Owners”), pursuant to a trust agreement executed as ofon the same date. Under the terms of the trust agreement, the original equity owners of HBOP Shareholders would exercise control over the disposition of Dongfang Holding’s shares in HBOP on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of HBOP’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of HBOP’s equity interest.  In connection with the consummation of the restructuring transactions on June 24, 2009 as described below, Dongfang Holding directed its trustee to return its equity ownership in HBOP to their original equity owners.the HBOP Equity Owners.

On October 29, 2007, Orient Paper entered into an Agreement and Plan of Merger (“Merger Agreement”) with (i) Orient Paper wholly owned subsidiary, CARZ Merger Sub, Inc., (ii) Dongfang Holding, and (iii) all shareholders of Dongfang Holding (Zhenyong Liu, Xiaodong Liu, Chen Li, Ning Liu, Jie Liu, Shenzhen Huayin Guaranty & Investment Company Limited, Top Good International Limited, Total Giant Group Limited, Total Shine Group Limited, Victory High Investment Limited, Think Big Trading Limited, Huge Step Enterprises Limited, and Sure Believe Enterprise Limited).

Pursuant to the Merger Agreement, Dongfang Holding merged with CARZ Merger Sub, Inc. via a share exchange, with Dongfang Holding as the surviving entity. In exchange for their shares in Dongfang Holding, the Dongfang Holding shareholders received an aggregate of 7,450,497 newly-issued shares of Orient Paper’s common stock, $0.001 par value, which were distributed pro ratably among the Dongfang Holding shareholders in accordance with their respective ownership interests in Dongfang Holding.

As a result of the merger transaction, Dongfang Holding became a wholly-owned subsidiary of Orient Paper, which, in turn, has the controlling right on Dongfang Holding’s operating company, HBOP, pursuant to the terms of the trust agreement. HBOP, the entity through which the Company operates its business currently has no subsidiaries, either wholly- or partially-owned.

Prior to the completion of the reverse merger, Orient Paper only had limited operations (since its incorporation on December 9, 2005). On December 21, 2007, the name of the Company was changed from Carlateral, Inc. to Orient Paper, Inc. in order to better reflect the current business plan subsequent to the reverse merger. Accordingly, the reverse merge has been recorded as a recapitalization of Orient Paper.

On February 10, 2010, Baoding Shengde and HBOP’s original equity ownersthe HBOP 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 Baoding Shengde instead of HBOP, the $10,000,000 loan contemplated was never made prior to the point of termination.  The parties believe the termination of the loan agreementLoan Agreement does not in itself compromise the effective control of the Company over HBOP and its businesses in the PRC.

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

As of JuneSeptember 30, 2011 and December 31, 2010, details of the Company’s subsidiaries and variable interest entities are as follows:

* HBOP is treated as a 100% controlled variable interest entity of the Company

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC)(“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by the United States of America generally accepted accounting principles (GAAP)(“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, 2010 of Orient Paper, Inc. a Nevada corporation, and its subsidiaries and affiliatesvariable interest entity (which we sometimes refer to collectively as Orient Paper, we, us“Orient Paper”, “we”, “us” or our)“our”).

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 JuneSeptember 30, 2011 and the results of operations for the three and sixnine month periods ended JuneSeptember 30, 2011 are not necessarily indicative of the results to be expected for any future period.

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Raw material inventory includes mainly recycled paper and coal.  Finished goods include mainly products of medium-grade offset printing paper and corrugating medium paper.  Inventories consisted of the following as of JuneSeptember 30, 2011 and December 31, 2010:

(5) Prepayment on property, plant and equipment

As of JuneSeptember 30, 2011 and December 31, 2010, prepayment on property, plant and equipment consisted of $7,117,438$7,200,438 and $6,957,258, respectively, in respect of prepaid land use right.

As of JuneSeptember 30, 2011 and December 31, 2010, property, plant and equipment consisted of the following:

Land use rights represent state-owned land located in China with lease terms of 50 years expiring in 2053.

Construction in progress mainly represents payments for the new5600new 5600 corrugating medium paper production line under construction.

Property, plant and equipment with net values of $10,573,729$10,122,779 and $4,928,033 have been pledged for short-termlong-term bank loans of HBOP as of JuneSeptember 30, 2011 and December 31, 2010, respectively. Depreciation and amortization of property, plant and equipment during the three months ended JuneSeptember 30, 2011 and 2010 were $1,104,155$1,122,519 and $1,078,337,$1,077,868, respectively, while the depreciation and amortization were $2,189,099$3,311,618 and $2,022,597$3,100,465 during the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

As of JuneSeptember 30, 2011 and December 31, 2010, the Company had no unutilized credit facility with the banks. The average short-term borrowing rates for the sixnine months ended JuneSeptember 30, 2011 and 2010 were approximately 5.85%6.07% and 5.81%, respectively.  The average short-term borrowing rates for the three months ended September 30, 2011 and 2010 were approximately 6.46% and 5.71%, respectively.

As of December 31, 2010, loan payable to Rural Credit Cooperative of Xushui County, amounted to $2,008,530. The loan is guaranteed by an unrelated third party company. The entire principal is due and payable at maturity on September 16, 2011 and thus the entire principal amount was reclassified as current portion of long-term loan and recorded under current liabilities as of December 31, 2010. Interest is paid monthly at the rate of 0.774% per month.

On March 31, 2011 the Company prepaid the entire principal and accrued interest of the Rural Credit Cooperative of Xushui County loan and entered into a new three-year term loan agreement with the Xushui County Rural Credit Union for $1,524,060.$1,541,833.  The new loan is guaranteed by an independent third party.  Interest payment is due quarterly and bears the rate of 0.72% per month.

On June 10, 2011 the Company entered into a new term loan agreement with the Xushui County Rural Credit Union for $4,069,318.$4,116,772.  The new loan is guaranteedsecured by an independent third partyits manufacturing equipment of $10,122,779 and will mature on June 9, 2013.  Interest payment is due quarterly and bears the rate of 0.72% per month.

Future maturities of short term and long term loans payable were as follows as of JuneSeptember 30, 2011:

Mr. Zhenyong Liu is thea director, principal stockholder and chief executive officer of the Company.  He loaned money to HBOP for working capital purposes over a period of time.  As of JuneSeptember 30, 2011 and December 31, 2010, net amount due to Mr. Liu were $2,259,928$2,286,283 and $2,209,068, respectively.

The loan of Mr. Liu is interest bearing and the interest rate is equal to the rate established by the People’s Bank of China, which was 5.85% and 5.85% per annum as of JuneSeptember 30, 2011 and December 31, 2010.  The termloan is for 3 years and starts fromdue January 1, 2010.2013 and accordingly has been classified as a long-term liability at September 30, 2011 and December 31, 2010, respectively.

On August 1 and August 5, 2008, two members of the Board of Directors of HBOP loaned money to the Company for working capital purposes.  The amounts owed bear interest equal the rate established by the People’s bankBank of China and arewere due on July 31 and August 4, 2011, respectively.  As of June 30, 2011 and December 31, 2010, the total loan amount payable was $2,088,813 and $2,041,804, respectively.$2,041,804.  The interest rate as of June 30, 2011 and December 31, 2010 was 5.85% and 5.85% per annum, respectively.See Note (19), Subsequent Events, for informationannum.  The Company paid off the loan balance to both directors of repayments of both loans inHBOP by August 4, 2011.

The interest expenses incurred for the above related party loans were $63,485$44,057 and $55,525$55,963 for the three months ended JuneSeptember 30, 2011 and 2010, while the interest expenses were $125,865$169,923 and $111,030$166,993 for the sixnine months ended JuneSeptember 30, 2011 and 2010.

Other payables and accrued liabilities consisted of the following:

In July, 2009, the Company entered into an agreement with CCG Investor Relations Partners LLC (“CCG”), who provides service related to investor relationship activities for the Company for one year. In consideration for CCG’s service and a cash payment of $7,000 per month, at the same date, the Company issued a warrant to CCG to purchase 25,000 shares of the Company’s common stock at the price of $4.00 per share. The warrant is exercisable for two years after grant and has a “cashless” exercise provision and a piggyback registration right. The value of the warrant issued for the service should be measured at the service completion date according to ASC Topic 505-50 (formerly EITF 96-18). Throughout the period of the contracted services, the fair value of the warrants was estimated using the Black-Scholes option pricing model.

On October 7, 2009, the Company entered into a Securities Purchase Agreement with Access America Fund, LP, Renaissance US Growth Investment Trust Plc, RENN Global Entrepreneurs Funds, Inc., Premier RENN Entrepreneurial Fund Limited, Pope Investments II, LLC and Steve Mazur (collectively, the “Buyers”) to sell to the Buyers 2,083,333 shares of the Company’s common stock for an aggregate purchase price of $5,000,000 (the “Private Placement”). The Private Placement was closed on October 7, 2009.  In connection to the Private Placement, the Company entered into a Make Good Securities Escrow Agreement with the Buyers of the Private Placement and Mr. Liu, the Company’s Chief Executive Officer and the major shareholder.  As an inducement for the Buyers to enter and consummate the Private Placement, Mr. Liu agreed to place 750,000 shares of common stock (the “Escrow Shares”) into escrow for the benefit of the Buyers in the event the Company fails to achieve the following financial performance thresholds for the 12-month periods ended December 31, 2009 (“2009”) and December 31, 2010 (“2010”):

The 2009 Performance Threshold shall equal or exceed the Company’s 2009 Net Income (as defined in accordance with the United States GAAP and subject to carve-outs of certain loss or expense) of $10,000,000 and the 2010 Performance Threshold shall equal or exceed the Company’s 2010 Net Income (as defined in accordance with the United States GAAP and subject to carve-outs of certain loss or expense) of $18,000,000. Pursuant to the agreement, no 2009 or 2010 escrow shares should be transferred to any Buyer in the event the Company fails to achieve the 2009 or 2010 Performance Threshold by less than 10%.  The number of escrow shares to be transferred to Buyer shall be equivalent to the percentage by which the Company missed the 2009 or 2010 Performance Threshold.  For example, if the Company were to miss the 2009 Performance Threshold by 15%, 112,500 shares of common stock should be transferred to the Buyers.

During the period that the shares are held under escrow (the “Period”), Mr. Liu, as the original shareholder of the escrow shares retains all rights of ownership, including voting rights and the right to receive any dividends that may be declared during the Period.

The Company has achieved the financial performance threshold for 2009.  For 2010, the Company’s net income determined in accordance with the US GAAP for the year 12-month period ended December 31, 2010 was $15,551,536, which failed the 2010 Performance Threshold of $18 million by more than 10%.  However, the Buyers and the Company have agreed to reduce the 102,019 Escrow Shares that are otherwise transferable to the Buyers by 50% to 51,011 Escrow Shares pursuant to a carve-out term under Article 1.6 (vii) of the Make Good Securities Escrow Agreement for items that are “whatsoever beyond the Company’s reasonable control,” including part of the $1,041,452 of 2010 legal and professional fees related to (1) the internal independent investigation conducted by the Company’s Audit Committee during 2010 in response to certain allegations against the Company and its financial positions and operations, and (2) defending the shareholder class action lawsuit filed on August 6, 2010 (see Pending Litigation in Note (13) Commitments and Contingencies, below).  The delivery of the transferable escrowed shares was made on June 30, 2011 and had no effect on the Company’s financial statements.

On March 31, 2010, the Company entered into an Underwriting Agreement with Roth Capital Partners, LLC (the “Underwriter”), under which the Company agreed to sell the Underwriter an aggregate of 3,000,000 shares of common stock with an option for the Underwriter to purchase an additional 450,000 shares to cover its over-allotment within 45 days of the date of the Underwriting Agreement.  All of these shares, which are offered to the public at $8.25 per share by the Underwriter, are issued and sold to the Underwriter at $7.7962 per share net of discounts and commissions.  The first closing for the sale of 3,000,000 shares was closed on April 6, 2010.  The Underwriter exercised its option for the purchase of the additional 450,000 shares on April 14, 2010.  The Company received total proceeds, net of expenses, in the amount of $26,570,162.$26,570,161.

 

Orient Paper, Inc

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

HBOP and Baoding 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 provision for income taxes for the three months ended JuneSeptember 30, 2011 and 2010 was as follows:

During the three months ended JuneSeptember 30, 2011 and 2010, the effective income tax rate was estimated by the Company to be 26.4%25.8% and 26.7%32.9%, respectively, while during the sixnine months ended JuneSeptember 30, 2011 and 2010, the effective income tax rate was estimated by the Company to be 27.1%26.6% and 26.7%27.8%, respectively.

Orient Paper leases 32.95 acres of land from a local government 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 $18,567.$18,784.  This operating lease is renewable at the end of the 30-year term. The rental expenses for the three months ended JuneSeptember 30, 2011 and 2010 were $4,633$4,685 and $4,390,$4,425, while the rental expenses were $9,186$13,871 and $8,779$13,203 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

Future minimum lease payments are as follows:

The Company has signed several contracts for constructing plants and purchase of equipment. The outstanding commitments are $4,289,958$5,077,171 and $7,628,331 as of JuneSeptember 30, 2011 and December 31, 2010, respectively. The Company expects to pay off all the balances bywithin the end of 2011.next twelve months.

On August 20,6, 2010, the Company was served notice of a stockholder class action lawsuit was filed on August 6, 2010 in the U.S. District Court for the Central District of California against the Company, certain current and former officers and directors of the Company, and Roth Capital Partners, LLP.  The complaint in the lawsuit, Mark Henning v. Orient Paper et al., CV-10-5887 RSWL (AJWx), alleges, among other claims, that the Company issued materially false and misleading statements and omitted to state material facts that rendered its affirmative statements misleading as they related to the Company’s financial performance, business prospects, and financial condition, and that the defendants failed to prevent such statements from being issued or corrected.  The complaint seeks, among other relief, compensatory damages and plaintiff’s counsel’s fees and experts’ fees.  Mr. Henning purports to sue on his own behalf and on behalf of a class consisting of the Company’s stockholders (other than the defendants and their affiliates).  One group of three shareholders with a total alleged loss of approximately $150,000 has filed a motion to be appointed as lead plaintiff and has been so appointed by the court.  The Company and the defendant officers and directors have retained the law firm DLA Piper US LLP to represent them in connection with the lawsuit.  The Company believes that the lawsuit has no merit and intends to mount a vigorous defense. The plaintiffs filed an amended complaint on January 28, 2011, and the Company filed a motion to dismiss with the court on March 14, 2011.  The plaintiffs subsequently filed their opposition to the Company’s motion to dismiss on April 28, 2011. On July 20, 2011 the court denied the Company’s motion to dismiss, thus allowing the litigation to proceed.proceed to discovery. Nevertheless, at this stage of the proceedings, management cannot opine that a favorable outcome for the company is probable or that an unfavorable outcome to the company is remote. While certain legal defense costs may be later reimbursed by the Company’s insurance carrier, no reasonable estimate of any impact of the outcome of the litigation or related legal fees on the financial statements can be made as of the date of this statement.

(14) Segment Reporting

 

Since March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business operating segments: HBOP, which produces printing paper and corrugating medium paper, and Baoding 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, China. All sales were sold to customers located in the PRC.

Summarized financial information for the two reportable segments for the three months ended JuneSeptember 30, 2011 and 2010 is as follows:

 

 

Summarized financial information for the two reportable segments for the sixnine months ended JuneSeptember 30, 2011 and 2010 is as follows:

For the three months ended JuneSeptember 30, 2011, the Company had two major suppliers which primarily accounted for 74%75% and 16%5% of the total purchases. For the three months ended JuneSeptember 30, 2010, the Company had threetwo major suppliers accounted for 48%, 29%79% and 16%15% of the total purchases.

For the sixnine months ended JuneSeptember 30, 2011, the Company had two major suppliers which primarily accounted for 77% and 12%10% of total purchases.  For the sixnine months ended JuneSeptember 30, 2010, the Company had three major suppliers which accounted for 53%57%, 25%22% and 15%13% of total purchases.

Financial instruments which the Company is potentially subject to concentrations of credit risk consist principally of cash. The Company places its temporary cash investments 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)(“FDIC”) of the United States.  The Company’s U.S. bank accounts are all covered by the FDIC insurance but carry a balanceinsurance. The balances exceeding the maximum coverage of $250,000 by $11,697 andare nil as of JuneSeptember 30, 2011 and December 31, 2010, respectively.2010.

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.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which is a new accounting guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for the Company’s fiscal year beginning January 1, 2012. The Company is currently evaluating the impact of this guidance but believes the adoption of it will have no material effect on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which is a new guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. It is applicable to the Company’s fiscal year beginning January 1, 2012. TheCurrently, the Company is currently evaluating this guidance, but does not expect its adoption will have a materialevaluated the effect of ASU 2011-05 on its consolidated financial statements.

Revenue from corrugating medium paper amounted to $11,028,373$10,742,793 (or 28.07%30.60% of total offset printing paper and corrugating medium paper revenue) for the three months ended JuneSeptember 30, 2011, representing a $515,740$4,615,571 (or 4.47%75.33%) decreaseincrease over the corrugating medium paper revenue of $11,544,113$6,127,222 for the comparable period in 2010.  We sold 27,00125,989 tons of corrugating medium paper in the three months ended JuneSeptember 30, 2011 versus 35,59919,452 tons for the same period sold a year ago, representing a 24.15% drop33.61% increase in quantities sold, due to the disposal of one of our corrugating medium paper production lines in late June 2010.  Despite the decrease in sales quantity sold.  ASP for corrugating medium paper rose from $324/$315/ton in the three months ended JuneSeptember 30, 2010 to $408/$413/ton in the three months ended JuneSeptember 30, 2011, representing a 25.93%31.11% increase over the comparable period.  We believe the increase in ASP is primarily attributable to (1) increasing customer demand, and more importantly (2) a regional shortage in paper products supply, caused by mandatory closures of other smaller paper manufacturers under government mandates in 2010 and 2011.  For example, the provincial government of Hebei announced on June 12, 2010 that it was working on closing 64 inefficient paper production lines with 26 local paper mills by the end of the year 2010, accounting for an elimination of annual capacity of approximately 400,000 tons in 2010, while the neighboring province of Henan announced that it was closing more than 100 local paper mills with an aggregate capacity of over 2 million tons of paper production. The Ministry of Industry and Information Technology of the People’s Republic of China announced on July 11, 2011 that 8.2 million tons of outdated paper milling capacities located inand 599 paper companies across China will be forced to close down in the year 2011 (the “2011 Mandatory Closure”). Of all of the paper mills affected by the 2011 Mandatory Closure, 82 companies with total capacities of 1.07 million tons (or 13% of total closure) are located in the province of Hebei, where many of the old paper mills only have capacities under 50,000 tons. Our neighboring province of Henan will also see 1.84 million tons capacities (or 22% of total 2011 closure), currently owned by 84 companies, eliminated before the end of the year.  Many industry commentators believe that the 2011 Mandatory Closure will impactimpacted mostly packaging paper, printing paper and household paper supplies in China in 2011 and will drivehas driven up selling prices of these products.  However, as of September 30, 2011, we have seen ASP increases leveling out and stabilized.

Beginning in late June 2010, we shut down and later demolished one of our two corrugating medium paper production lines.  We had originally planned to build a new 360,000 ton/year new corrugating medium paper production line and other facilities on someapproximately 667,000 square meters of land across the street from our current main manufacturing compound, but due to certain changes in thewe changed plan we decided to instead, build the new production line in our current manufacturing compound.  To make room for the new production line and the related pulping facilities, we toretook down two existing buildings and an existing corrugating medium paper production line. We estimate the lost capacity wasto be approximately 34,000 tons per year.  The new corrugating medium paper production line is under testing and is expected to begin commercial production in the thirdlast quarter of 2011.

Revenue from medium-grade offset printing paper amounted to $28,258,604(or 71.93%$24,361,115 (or 69.40% of total offset printing paper and corrugating medium paper revenue) for the three months ended JuneSeptember 30, 2011, which represents a $2,685,573(or 10.50%an $8,777,531 (or 56.33%) increase over the medium-grade offset printing paper revenue of $25,573,031$15,583,584 for the comparable period in 2010.  We sold 34,866tons29,653 tons of medium-grade offset printing paper in the secondthird quarter of year 2011 compared to 34,36521,374 tons of medium-grade offset printing paper in the comparable period in year 2010, an increase of 5018,279 tons or 1.46%38.73%.  We believe that theThe factors contributing to the yearthird quarter 2011 first quarter increase in both total quantity and dollar amount sold include (1) lower production quantity in the third quarter 2010, due to the installation of new boilers to replace the two old ones, (2) the increase in ASP for offset printing paper products from $744/$729/ton in the secondthird quarter of year 2010 to $810/$821/ton in the secondthird quarter of 2011, representing an increase of 8.87%12.62%, (2)and (3) a regional shortage in paper products supply, caused by the 2011 Mandatory Closure, and (3) additional revenue from the sales of offset printing paper finished goods purchased from other paper manufacturers in the second quarter of 2011.Closure. Absent further government-mandated capacity closure and substantial industry-wide pricing adjustments to reflect inflating costs, we believe the ASP of major printing paper products may stabilizeare being stabilized and will remain so in the second half of fiscal year 2011,next few reporting periods, especially after the stabilization of the cost of wood pulp and the possible additional suppliessupply produced by other major paper manufacturers in the third quartersecond half of 2011.

As a partial remedy for the lost production due to the aforementioned disposal and temporary removal of two old boilers in the second half of 2010, starting in August 2010 the Company entered into four offset printing paper supply agreements and one corrugating medium paper supply agreement with paper manufacturers in Hebei Province and the neighboring Shandong province (the “Supply Agreements”).   As of June 30, 2011, we still had four Supply Agreements (all for offset printing paper products) in effect until June 30, 2011.  During the three months ended JuneSeptember 30, 2011, revenue generated from sales of finished offset printing paper finished goods purchased from these vendors pursuant to the Supply Agreements was in the amount of $9,258,035(or 11,432$5,038,357 (or 6,089 tons), representing 32.76%20.68% of total sales revenue of medium-grade offset printing paper during the three months ended JuneSeptember 30, 2011.  The sales of finished goods during the three months ended September 30, 2011 also represent an increase of $73,769 (1.49%) from such sales in the amount of $4,964,588 for the three-month period a year ago. Although gross profit margin of sales of paper purchased under these Supply Agreements registers significantly less than that of our own products (see discussions at “Gross Profit” below), we intend to extend these Supply Agreements past their expiration as long as market conditions permit.

The following is a chart showing the month-by-month ASPs (except for the ASPs of the digital photo paper) for the 24 month15-month period ended JuneSeptember 30, 2011:

Monthly sales revenue, including revenue from the sales of purchased paper finished goods purchased under the Supply Agreements and excluding revenue of digital photo paper, for the 12 month15-month period ended JuneSeptember 30, 2011, are summarized below.  Monthly sales in July/August 2010 and February 2011 were substantially lower than average mainly because of the loss of two old boilers in July and August 2010 and the extended Chinese New Year break.holiday break in February 2011.

 

Since March 2010, we have produced and sold digital photo paper.  Revenue generated from selling digital photo paper was $2,247,409$1,970,851 (or 5.41%5.32% of total revenue) for the three months ended JuneSeptember 30, 2011: