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Leases

3 Months Ended

Mar. 31, 2023

Leases [Abstract]

(6) Leases

Financing with Sale-Leaseback

The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.5 million). Under the sale-leaseback arrangement, Tengsheng Paper sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Tengsheng Paper leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Tengsheng Paper may pay a nominal purchase price of RMB 100 (approximately $16) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of $2,349,452 was recorded as right of use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020.

Tengsheng Paper made payments due according to the schedule. The balance of Leased Equipment net of amortization was $1,927,390 and $1,939,970 as of March 31, 2023 and December 31, 2022, respectively. The lease liability was $77,789 and $131,772, and its current portion in the amount of $77,789 and $131,772 as of March 31, 2023 and December 31, 2022, respectively.

Amortization of the Leased Equipment was $38,865 and $42,006 for the three months ended March 31, 2023 and 2022. Total interest expenses for the sale-leaseback arrangement was $4,490 and $13,507 for the three months ended March 31, 2023 and 2022.

As a result of the sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to amortization of the Leased Equipment.

The future minimum lease payments of the capital lease as of March 31, 2023 were as follows:

March 31,		Amount
2023			80,329
Less: unearned discount			(2,540	)
			77,789
Less: Current portion lease liability			(77,789	)
		$	-

Operating lease

The Company leases space under non-cancelable operating leases for office and manufacturing locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

The leases include option to renew in condition that it is agreed by the landlord before expiry. Therefore, the majority of renewals to extend the lease terms are not included in its right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluate the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term.

As the Company’s leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The components of the Company’s lease expense are as follows:

		Three Months
		Ended
		March 31, 2023
		RMB
Operating lease cost			36,381
Short-term lease cost			-
Lease cost			36,381

Supplemental cash flow information related to its operating leases was as follows for the period ended March 31, 2023:

			Three Months
			Ended
			March 31,
			2023
			RMB
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases			-

Maturities of its lease liabilities for all operating leases are as follows as of March 31, 2023:

March 31,		Amount
2024			145,524
2025			145,524
2026			145,524
2027			145,524
2028			145,524
Thereafter			145,524
Total operating lease payments		$	873,146
Less: Interest			(191,329	)
Present value of lease liabilities			681,817
Less: current portion, record in current liabilities			(93,979	)
Present value of lease liabilities			587,838

The weighted average remaining lease terms and discount rates for all of its operating leases were as follows as of March 31, 2023:

		March 31, 2023
		RMB
Remaining lease term and discount rate:
Weighted average remaining lease term (years)			5.4
Weighted average discount rate			7.56	%