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Property, Plant and Equipment
 9 Months Ended
Sep. 30, 2013
Property, Plant and Equipment [Abstract]  
Property, plant and equipment

(8) Property, plant and equipment

 

As of September 30, 2013 and December 31, 2012, property, plant and equipment consisted of the following:

 

    September 30,
2013		     December 31,
2012		  
Property, Plant, and Equipment:                
Land use rights   $ 7,727,124     $ 9,895,081  
Building and improvements     22,307,565       31,625,816  
Machinery and equipment     120,552,470       111,857,002  
Vehicles     485,616       439,007  
Construction in progress     47,552,834       1,315,664  
      198,625,609       155,132,570  
Less accumulated depreciation and amortization     (36,977,851 )     (32,741,114 )
Property, Plant and Equipment, net   $ 161,647,758     $ 122,391,456  

 

As of December 31, 2012, land use rights represented two parcels of state-owned land located in Xushui County of Hebei Province in China, with lease terms of 50 years expiring in 2053 and 2061, respectively. On August 9, 2013, one of these land use rights was sold to a related party company controlled by our Chairman and CEO Mr. Zhenyong Liu. See Note (10) for the details of the related party transaction.The remaining land use right as of September 30, 2013 will expire in year 2061.

 

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 RMB150 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 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 September 30, 2013. As a result of the sale, a deferred gain on sale of leased equipment in the amount of $758,257 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 $25,878,515 as of September 30, 2013. See “Financing with Sale-Leaseback” under Note (9), Loans Payable, for details of the transaction and asset collaterals. The depreciation of capital lease equipment has started in July 2013 and was included with the depreciation expense of the company’s own assets in the statement of income. During the three months and the nine months ended September 30, 2013, depreciation of capital lease equipment was $396,736 and $396,736, respectively. The accumulated depreciation of the leased asset was $401,396 as of September 30, 2013. During the three months and the nine months ended September 30, 2013, the gain realized on sale-leaseback transaction was $62,798 and $62,798, respectively. The gain realized was recorded in cost of sales as a reduction of depreciation expenses. The unamortized deferred gain on sale-lease back was $698,896 as of September 30, 2013.

 

Construction in progress mainly represents payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue paper workshops, four warehouses, office buildings and the new staff dormitory in the Wei County industrial park. For the nine months ended September 30, 2013 and 2012, the amount of interest capitalized is $152,036 and $nil, respectively. For the three months ended September 30, 2013 and 2012, the amount of interest capitalized is $113,941 and $nil, respectively.

 

As of September 30, 2013, the three employee dormitory buildings in the amount of $4,116,497, which will be sold to a related party company controlled by our Chairman and CEO Mr. Zhenyong Liu by the end of year 2013, were reclassified as assets held for sale. Please refer to Note (6) for details.

 

As of September 30, 2013 and December 31, 2012, certain property, plant and equipment of Orient Paper HB with net values of $22,439,622 and $9,316,645 have been pledged for the long-term loan from credit union of Orient Paper HB, respectively. As of September 30, 2013, essentially all production equipment of Orient Paper Shengde with net value of $36,667,728 has been pledged for the guarantee of Orient Paper HB’s performance under the capital lease. In addition, land use right with net values of $nil and $7,419,614 were pledged for an independent third party which cross-guarantees the Company’s credit facility from the Bank of Hebei as of September 30, 2013 and December 31, 2012, respectively. The amount of that long-term loan of the third party was $1,505,881 as of December 31, 2012 and has been paid off on June 3, 2013. In addition, land use right with net values of $7,508,189 as of September 30, 2013 was pledged for the sale-leaseback financing. See “Financing with Sale-Leaseback” under Note (9), Loans Payable, for details of the transaction and asset collaterals.

 

Depreciation and amortization of property, plant and equipment was $2,059,270 and $2,171,851 during the three months ended September 30, 2013 and 2012, respectively. Depreciation and amortization of property, plant and equipment was $5,980,720 and $6,222,600 during the nine months ended September 30, 2013 and 2012, respectively.