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Leases

9 Months Ended

Sep. 30, 2023

(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. On July 17, 2023, the Company made a final payment on outstanding obligations and bought back the Lease Equipment at nominal price according to the agreement. The lease assets were reclassified as own assets and balance of Leased Equipment net of amortization were $nil and $1,939,970 as of September 30, 2023 and December 31, 2022, respectively.

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:

	Nine Months Ended
	September 30, 2023
	RMB

Operating lease cost		104,460
Short-term lease cost		-
Lease cost		104,460

Supplemental cash flow information related to its operating leases was as follows for the period ended September 30, 2023:

	Nine Months Ended
	September 30, 2023
	RMB
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflow from operating leases		139,280

Maturities of its lease liabilities for all operating leases are as follows as of September 30, 2023:

September 30,	Amount
2024		139,280
2025		139,280
2026		139,280
2027		139,280
2028		139,280
Thereafter		-
Total operating lease payments	$	696,400
Less: Interest		(133,788	)
Present value of lease liabilities		562,612
Less: current portion, record in current liabilities		(96,746	)
Present value of lease liabilities		465,866

The weighted average remaining lease terms and discount rates for all of its operating leases were as follows as of September 30, 2023:

	September 30,
	2023
Remaining lease term and discount rate:	RMB
Weighted average remaining lease term (years)		4.9
Weighted average discount rate		7.56	%