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IT TECH PACKAGING, INC. - Quarter Report: 2022 September (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 September 30, 2022

 

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

 

IT TECH PACKAGING, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   20-4158835
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   identification No.)

 

Science Park, Juli Rd, Xushui District, Baoding City

Hebei Province, The People’s Republic of China 072550

(Address of principal executive offices and Zip Code)

 

011 - (86) 312-8698215

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   ITP   NYSE American

 

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 every Interactive Data File required to be submitted 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 such files). Yes No

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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

 

As of November 10, 2022, there were 11,415,920 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

Part I. - FINANCIAL INFORMATION   1
     
Item 1. Financial Statements   1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   42
     
Item 4. Controls and Procedures
  42
     
Part II. - OTHER INFORMATION   43
     
Item 1. Legal Proceedings   43
     
Item 1A. Risk Factors   43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   43
     
Item 3. Defaults Upon Senior Securities   43
     
Item 4. Mine Safety Disclosures   43
     
Item 5. Other Information   43
     
Item 6. Exhibits   43
   
SIGNATURES   44

 

i 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021

(unaudited)

 

   September 30,   December 31, 
   2022   2021 
ASSETS        
         
Current Assets        
Cash and bank balances  $16,017,403   $11,201,612 
Restricted cash   
-
    
-
 
Accounts receivable (net of allowance for doubtful accounts of $61,270 and $69,053 as of September 30, 2022 and December 31, 2021, respectively)   4,236,299    4,868,934 
Inventories   4,441,390    5,844,895 
Prepayments and other current assets   22,795,907    25,796,640 
Due from related parties   938,803    7,804,068 
           
Total current assets   48,429,802    55,516,149 
           
Prepayment on property, plant and equipment   1,266,120    43,446,210 
Operating lease right-of-use assets, net   659,912    - 
Finance lease right-of-use assets, net   1,940,586    2,286,459 
Property, plant, and equipment, net   149,535,243    126,587,428 
Value-added tax recoverable   2,066,239    2,430,277 
Deferred tax asset non-current   11,239,637    11,268,679 
           
Total Assets  $215,137,539   $241,535,202 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities          
Short-term bank loans  $5,632,553   $5,958,561 
Current portion of long-term loans from credit union   4,175,620    6,838,465 
Lease liability   272,147    210,161 
Accounts payable   144,213    10,255 
Advance from customers   35,646    39,694 
Due to related parties   727,856    727,433 
Accrued payroll and employee benefits   221,530    291,206 
Other payables and accrued liabilities   5,635,813    5,250,539 
Income taxes payable   746,694    1,108,038 
           
Total current liabilities   17,592,072    20,434,352 
           
Loans from credit union   4,692,235    2,980,065 
Deferred gain on sale-leaseback   73,311    155,110 
Lease liability - non-current   568,952    152,233 
Derivative liability   1,334,271    2,063,534 
           
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $17,417,813 and $17,924,475 as of September 30, 2022 and December 31, 2021, respectively)   24,260,841    25,785,294 
           
Commitments and Contingencies   
 
    
 
 
           
Stockholders’ Equity          
Common stock, 50,000,000 shares authorized, $0.001 par value per share, 11,415,920 and 9,915,920 shares issued and outstanding as of September 30, 2022 and December, 31, 2021, respectively.   11,416    9,916 
Additional paid-in capital   90,575,421    89,016,921 
Statutory earnings reserve   6,080,574    6,080,574 
Accumulated other comprehensive (loss) income   (11,273,597)   10,496,168 
Retained earnings   105,482,884    110,146,329 
           
Total stockholders’ equity   190,876,698    215,749,908 
           
Total Liabilities and Stockholders’ Equity  $215,137,539   $241,535,202 

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2022     2021     2022     2021  
                         
Revenues   $ 31,709,214     $ 45,087,671     $ 78,979,716     $ 115,832,013  
                                 
Cost of sales     (28,925,626 )     (43,266,135 )     (75,251,646 )     (109,150,452 )
                                 
Gross Profit     2,783,588       1,821,536       3,728,070       6,681,561  
                                 
Selling, general and administrative expenses     (3,370,541 )     (2,019,565 )     (8,541,224 )     (7,172,495 )
Gain on acquisition     (1,759 )    
-
      30,404      
-
 
                                 
Loss from Operations     (588,712 )     (198,029 )     (4,782,750 )     (490,934 )
                                 
Other Income (Expense):                                
Interest income     7,729       12,044       16,108       28,096  
Subsidy income    
-
      (30 )    
-
      197,861  
Interest expense     (256,678 )     (281,670 )     (786,597 )     (844,470 )
Gain (Loss) on derivative liability     (617,370 )     1,938,873       729,263       2,810,913  
                                 
(Loss) Income before Income Taxes     (1,455,031 )     1,471,188       (4,823,976 )     1,701,466  
                                 
Provision for Income Taxes     (432,287 )     71,388       160,531       (4,950,994 )
                                 
Net (Loss) Income     (1,887,318 )     1,542,576       (4,663,445 )     (3,249,528 )
                                 
Other Comprehensive (Loss) Income                                
Foreign currency translation adjustment     (11,171,156 )     (819,183 )     (21,769,765 )     1,128,209  
                                 
Total Comprehensive (Loss) Income   $ (13,058,474 )   $ 723,393     $ (26,433,210 )   $ (2,121,319 )
                                 
(Losses) Earnings Per Share:                                
                                 
Basic and Diluted (Losses) Earnings per Share
  $ (0.03 )   $ 0.03     $ (0.07 )   $ (0.06 )
                                 
Outstanding – Basic and Diluted
    71,449,208       54,196,300       71,449,208       54,196,300  

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2022  2021 
        
Cash Flows from Operating Activities:       
Net income  $(4,663,445) $(3,249,528)
Adjustments to reconcile net income to net cash provided by operating activities:         
Depreciation and amortization   11,218,254   11,733,664 
(Gain) Loss on derivative liability   (729,263)  (2,810,913)
Gain on acquisition   (32,502)  
-
 
(Recovery from) Allowance for bad debts   (791)  20,118 
Share-based compensation and expenses   1,560,000   
-
 
Deferred tax   (1,197,630)  3,235,556 
Changes in operating assets and liabilities:         
Accounts receivable   146,250   (1,742,594)
Prepayments and other current assets   (422,092)  (6,918,816)
Inventories   863,170   (6,396,066)
Accounts payable   144,331   (242,357)
Advance from customers   -   (43,161)
Related parties   (149,827)  (821,943)
Accrued payroll and employee benefits   (42,738)  92,207 
Other payables and accrued liabilities   1,000,945   522,353 
Income taxes payable   (265,493)  178,903 
Net Cash Provided by (Used in) Operating Activities   7,429,169   (6,442,577)
          
Cash Flows from Investing Activities:         
Purchases of property, plant and equipment   (1,681,979)  (12,781,114)
Acquisition of land   (6,507,431)  
-
 
          
Net Cash Used in Investing Activities   (8,189,410)  (12,781,114)
          
Cash Flows from Financing Activities:         
Proceeds from issuance of shares and warrants, net   
-
   41,837,553 
Proceeds from short term bank loans   602,319   
-
 
Proceeds from long term loans   60,232   
-
 
Repayment of bank loans   (307,182)  (154,579)
Payment of capital lease obligation   (154,212)  (135,611)
Loan repaid by a related party   6,638,923   
-
 
          
Net Cash Provided by Financing Activities   6,840,080   41,547,363 
          
Effect of Exchange Rate Changes on Cash and Cash Equivalents   (1,264,048)  109,473 
          
Net Increase in Cash and Cash Equivalents   4,815,791   22,433,145 
          
Cash, Cash Equivalents and Restricted Cash - Beginning of Period   11,201,612   4,142,437 
          
Cash, Cash Equivalents and Restricted Cash - End of Period  $16,017,403  $26,575,582 
          
Supplemental Disclosure of Cash Flow Information:         
Cash paid for interest, net of capitalized interest cost  $248,275  $485,075 
Cash paid for income taxes  $1,287,530  $1,523,555 
          
Cash and bank balances   16,017,403   26,575,582 
Restricted cash   
-
   
-
 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows   16,017,403   26,575,582 

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

   Common Stock   Additional
Paid-in
   Statutory
Earnings
   Accumulated
Other
Comprehensive
   Retained     
   Shares   Amount   Capital   Reserve   Income (loss)   Earnings   Total 
                             
Balance at December 31, 2020   2,864,512   $2,865   $54,015,219   $6,080,574   $5,740,722   $109,240,794   $175,080,174 
Issuance of shares to institutional investors   2,618,182    2,618    8,026,052    
-
    
-
    
-
    8,028,670 
Issuance of shares to public investors   2,927,786    2,928    15,612,217    
-
    
-
    
-
    15,615,145 
Exercise of warrants   1,505,440    1,505    11,363,433    
-
    
-
    
-
    11,364,938 
Foreign currency translation adjustment   -    
-
    
-
    
-
    1,128,207    -    1,128,207 
Net income   -    
-
    
-
    
-
    
-
    (3,249,528)   (3,249,528)
Balance at September 30, 2021   9,915,920   $9,916   $89,016,921   $6,080,574   $6,868,929   $105,991,266   $207,967,606 
                                    
Balance at December 31, 2021   9,915,920   $9,916   $89,016,921   $6,080,574   $10,496,168   $110,146,329   $215,749,908 
Issuance of shares to officer and directors   1,500,000    1,500    1,558,500    
-
    
-
    
-
    1,560,000 
Foreign currency translation adjustment   -    
-
    
-
    
-
    (21,769,765)   
-
    (21,769,765)
Net loss   -    
-
    
-
    
-
    
-
    (4,663,445)   (4,663,445)
Balance at September 30, 2022   11,415,920   $11,416   $90,575,421   $6,080,574   $(11,273,597)  $105,482,884   $190,876,698 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) Organization and Business Background

 

IT Tech Packaging, Inc. (the “Company”) 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 Dongfang Paper Milling Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007.

 

On August 1, 2018, we changed our corporate name to IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. In connection with the name change, our common stock began being traded under a new NYSE symbol, “ITP”.

 

On June 9, 2022, the Board of Directors of the Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-10 (the “Reverse Stock Split”). The Reverse Stock Split become effective on July 7, 2022 (the “Effective Date”), and the shares began trading on the split-adjusted basis on the NYSE American under the Company’s existing trading symbol “ITP” at market open on July 8, 2022. The new CUSIP number following the Reverse Stock Split will be 46527C 209. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

 

On October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired DongfangZhiye 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 Dongfang Paper and such shares of Dongfang Paper were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of Dongfang Paper’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, Dongfang Paper, became an indirectly owned subsidiary of the Company.

 

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

 

5

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

On February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through Baoding Shengde instead of Dongfang Paper, 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 Dongfang Paper and its businesses in the PRC.

 

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

 

On June 25, 2019, Dongfang Paper entered into an acquisition agreement with the shareholder of Hebei Tengsheng Paper Co., Ltd. (“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. Full payment of the consideration in the amount of RMB320 million (approximately $45 million) was made on February 23, 2022.

 

QianrongQianhui Hebei Technology Co., Ltd, a wholly owned subsidiary of Shengde holding, was incorporated on July 15, 2021. It is a service provider of high quality material solutions for textile, cosmetics and paper production.

 

The Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang Paper and its subsidiary, being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”). The revenue generated from Dongfang Paper and Hebei Tengsheng for the three months ended September 30, 2022 and 2021 was accounted for 99.83% and 97.01% of the Company’s total revenue, respectively. The revenue generated from Dongfang Paper and Hebei Tengsheng for the nine months endedSeptember 30, 2022 and 2021 was accounted for 99.75% and 98.89% of the Company’s total revenue, respectively. Dongfang Paper and Hebei Tengsheng also accounted for 87.51% and 84.13% of the total assets of the Company as of September 30, 2022 and December 31, 2021, respectively.

 

6

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 30, 2022 and December 31, 2021, details of the Company’s subsidiaries and variable interest entities are as follows:  

 

   Date of Incorporation or  Place of Incorporation or  Percentage of
    
Name  Establishment  Establishment  Ownership   Principal Activity
Subsidiary:               
Dongfang Holding  November 13, 2006  BVI   100%  Inactive investment holding
Shengde Holdings  February 25, 2009  State of Nevada   100%  Investment holding
Baoding Shengde  June 1, 2009  PRC   100%  Paper production and distribution
QianrongQianhuiHeibei   July 15, 2021   PRC    100%  New material technology service
Variable interest entity (“VIE”):              
Dongfang Paper  March 10, 1996  PRC   Control*  Paper production and distribution

 

*Dongfang Paper is treated as a 100% controlled variable interest entity of the Company.

 

However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the aforementioned agreements.

 

In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or being required to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote.

 

7

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has aggregated the financial information of Dongfang Paper in the table below. The aggregate carrying value of Dongfang Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 are as follows:

 

The Company and its consolidated subsidiaries are not required to provide financial support to the VIE, and no creditor (or beneficial interest holders) of the VIE have recourse to the assets of Company unless the Company separately agrees to be subject to such claims. There are no terms in any agreements or arrangements, implicit or explicit, which require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE does require financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIE.

 

   September 30,
   December 31,
 
   2022   2021 
   (Unaudited)     
ASSETS        
Current Assets        
Cash and bank balances   $7,978,632   $1,921,407 
Restricted cash    
-
    
-
 
Accounts receivable    4,236,299    4,867,759 
Inventories    4,421,829    5,823,762 
Prepayments and other current assets    15,857,737    19,942,878 
Due from related parties    797,954    888,893 
           
Total current assets    33,292,451    33,444,699 
           
Prepayment on property, plant and equipment    

1,266,121

    41,877,755 
Finance lease right-of-use assets, net    2,600,499    2,286,459 
Property, plant, and equipment, net    141,258,899    116,054,387 
Deferred tax asset non-current    9,841,540    9,547,741 
Total Assets   $188,259,510   $203,211,041 
           
LIABILITIES           
           
Current Liabilities           
Short-term bank loans   $5,632,553   $5,958,561 
Current portion of long-term loans from credit union    4,175,621    2,289,945 
Lease liability    272,147    210,161 
Accounts payable    144,213    10,255 
Advance from customers    35,646    39,694 
Due to related parties    
-
    
-
 
Accrued payroll and employee benefits    210,791    279,513 
Other payables and accrued liabilities    4,950,272    4,740,900 
Income taxes payable    746,694    1,108,038 
           
Total current liabilities    16,167,937    14,637,067 
           
Loans from credit union    607,613    2,980,065 
Deferred gain on sale-leaseback    73,311    155,110 
Lease liability - non-current    568,952    152,233 
Total liabilities   $17,417,813   $17,924,475 

 

8

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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, 2021 of the Company, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “the Company”, “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 September 30, 2022 and the results of operations for the nine months ended September 30, 2022 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.

 

Reverse stock split

 

On June 9, 2022, the Board of Directors of the Company approved the Reverse Stock Split, at a ratio of 1-for-10, pursuant to Section 78.207 of the Nevada Revised Statutes (“NRS”). The Reverse Stock Split was effected by the Company filing of a Certificate of Change Pursuant to NRS 78.209 with the Secretary of State of the State of Nevada on July 7, 2022. The par value per share of our stock remains unchanged at $0.001 per share after the Reverse Stock Split. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

 

Valuation of long-lived asset

 

The Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

 

Fair Value Measurements

 

The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

9

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

 

The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that the Company could realize in a current market exchange. As of September 30, 2022 and December 31, 2021, the carrying value of the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank of China.

 

Management determined that liabilities created by beneficial conversion features associated with the issuance of certain warrants (see “Derivative liabilities” under Note (10)), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities was determined based on management’s estimate of the expected future cash flows required to settle the liabilities. This valuation technique involves management’s estimates and judgment based on unobservable inputs and is classified in level 3.

 

Non-Recurring Fair Value Measurements

 

The Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the possibility of impairment. For the continuing operations, long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. For discontinued operations, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. The fair value of these assets were determined using models with significant unobservable inputs which were classified as Level 3 inputs, primarily the discounted future cash flow.

 

Share-Based Compensation

 

The Company uses the fair value recognition provision of ASC Topic 718, Compensation-Stock Compensation, which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments over the vesting period.

 

The Company also applies the provisions of ASC Topic 505-50, Equity Based Payments to Non-Employees to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of the instruments issued in exchange for such services, whichever is more reliably measurable.

 

(3) Restricted Cash

 

Restricted cash was nil as of September 30, 2022 and December 31, 2021.

 

10

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4) Inventories

 

Raw materials inventory includes mainly recycled paper board and recycled white scrap paper. Finished goods include mainly products of corrugating medium paper, offset printing paper and tissue paper products. Inventories consisted of the following as of September 30, 2022 and December 31, 2021:

 

   September 30,
   December 31,
 
   2022   2021 
Raw Materials        
Recycled paper board  $3,246,847   $2,097,062 
Recycled white scrap paper   10,603    11,808 
Gas   80,319    32,753 
Base paper and other raw materials   214,370    206,531 
    3,552,139    2,348,154 
Semi-finished Goods   165,707    96,087 
Finished Goods   723,544    3,400,654 
Total inventory, gross   4,441,390    5,844,895 
Inventory reserve   
-
    
-
 
Total inventory, net  $4,441,390   $5,844,895 

 

(5) Prepayments and other current assets

 

Prepayments and other current assets consisted of the following as of September 30, 2022 and December 31, 2021:

 

   September 30,
   December 31,
 
   2022   2021 
Prepaid land lease  $173,244   $188,215 
Prepayment for purchase of materials   9,030,641    9,190,527 
Prepayment for purchase of equipment   -    980,786 
Value-added tax recoverable   13,154,522    14,740,296 
Prepaid gas   26,939    
-
 
Others   410,561    696,816 
   $22,795,907   $25,796,640 

 

(6) Property, plant and equipment, net

 

As of September 30, 2022 and December 31, 2021, property, plant and equipment consisted of the following:

 

   September 30,
   December 31,
 
   2022   2021 
Property, Plant, and Equipment:        
Land use rights  $56,587,713   $12,790,062 
Building and improvements   64,597,187    74,609,698 
Machinery and equipment   155,366,410    170,149,367 
Vehicles   713,510    725,838 
Construction in progress   973,922    
-
 
Totals   278,238,742    258,274,965 
Less: accumulated depreciation and amortization   (128,703,499)   (131,687,537)
Property, Plant and Equipment, net  $149,535,243   $126,587,428 

 

As of September 30, 2022 and December 31, 2021, land use rights represented twenty three parcels of state-owned lands located in Xushui District and Wei County of Hebei Province in China, with lease terms of 50 years expiring in 2061 and 2068, respectively.

 

11

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 30, 2022 and December 31, 2021, certain property, plant and equipment of Dongfang Paper with net values of $460,107 and $1,130,333, respectively, have been pledged pursuant to a long-term loan from credit union of Dongfang Paper. Land use right of Dongfang Paper with net values of $5,289,810 and $6,002,195, respectively, as of September 30, 2022 and December 31, 2021 was pledged for the bank loan from Industrial & Commercial Bank of China (“ICBC”). Land use right of Hebei Tengsheng with net value of $5,042,556 and $5,690,261, respectively, as of September 30, 2022 and December 31, 2021 was pledged for a long-term loan from credit union of Baoding Shengde. In addition, land use right of Hebei Tengsheng with net value of $3,899,128 and $4,407,889, respectively, as of September 30, 2022 and December 31, 2021 was pledged for another long-term loan from credit union of Baoding Shengde. See “Short-term bank loans” under Note (7), Loans Payable, for details of the transaction and asset collaterals.

 

Depreciation and amortization of property, plant and equipment was $3,609,985 and $3,500,145 for the three months ended September 30, 2022 and 2021, respectively. Depreciation and amortization of property, plant and equipment was $11,168,328 and $11,659,670 for the nine months ended September 30, 2022 and 2021, respectively.

 

(7) 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, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng 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.

 

Hebei Tengsheng made payments due according to the schedule. The balance of Leased Equipment net of amortization was $1,940,586 and $2,286,459 as of September 30, 2022 and December 31, 2021, respectively. The lease liability was $181,187 and $362,394, and its current portion in the amount of $181,187 and $210,161 as of September 30, 2022 and December 31, 2021, respectively.

 

Amortization of the Leased Equipment was $38,486 and $41,208 for the three months ended September 30, 2022 and 2021. Amortization of the Leased Equipment was $120,464 and $123,663 for the nine months ended September 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $8,439 and $17,026 for the three months ended September 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was $32,808 and $56,376 for the nine months ended September 30, 2022 and 2021.

 

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 September 30, 2022 were as follows:

 

September 30,  Amount 
2023   194,372 
Less: unearned discount   (13,185)
    181,187 
Less: Current portion lease liability   (181,187)
   $
-
 

 

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.

 

12

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

   Nine Months
Ended
 
   2022 
   RMB 
     
Operating lease cost   23,475 
Short-term lease cost   
-
 
Lease cost   23,475 

 

Supplemental cash flow information related to its operating leases was as follows for the period ended September 30, 2022:

 

   Nine Months
Ended
 
   2022 
   RMB 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash outflow from operating leases   140,849 

 

Maturities of its lease liabilities for all operating leases are as follows as of September 30, 2022:

 

September 30,   Amount 
2023   140,849 
2024   140,849 
2025   140,849 
2026   140,849 
2027   140,849 
Thereafter   140,849 
Total operating lease payments  $845,094 
Less: Interest   (185,182)
Present value of lease liabilities   659,912 
Less: current portion, record in current liabilities   (90,960)
Present value of lease liabilities   568,952 

 

The weighted average remaining lease terms and discount rates for all of its operating leases were as follows as of September 30, 2022:

 

   September 30, 
   2022 
   RMB 
Remaining lease term and discount rate:    
Weighted average remaining lease term (years)   5.9 
Weighted average discount rate   7.56%

 

(8) Loans Payable

 

Short-term bank loans

 

   September 30,  December 31, 
   2022   2021 
Industrial and Commercial Bank of China (“ICBC”) Loan 1  $5,069,157   $5,958,561 
ICBC Loan 2   422,547    
-
 
China Construction Bank Loan   140,849    
-
 
           
Total short-term bank loans  $5,632,553   $5,958,561 

 

On November 25, 2021, the Company entered into a working capital loan agreement with the ICBC, with a balance of $5,069,157 and $5,958,561 as of September 30, 2022 and December 31, 2021, respectively. The working capital loan was secured by the land use right of Dongfang Paper as collateral for the benefit of the bank and guaranteed by Mr. Liu. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by November 17, 2022.

 

13

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On June 28, 2022, the Company entered into a working capital loan agreement with the ICBC, with a balance of $422,547 as of September 30, 2022. The loan bears a fixed interest rate of 4.3% per annum. The loan will be due by December 25, 2022.

 

On July 29, 2022, the Company entered into a working capital loan agreement with the China Construction Bank, with a balance of $140,849 as of September 30, 2022. The loan bears a fixed interest rate of 3.95% per annum. The loan will be due by July 29, 2023.

 

As of September 30, 2022, there were guaranteed short-term borrowings of $5,069,157 and unsecured bank loans of $563,396. As of December 31, 2021, there were guaranteed short-term borrowings of $5,958,561 and unsecured bank loans of $nil.

 

The average short-term borrowing rates for the three months ended September 30, 2022 and 2021 were approximately 4.28% and 4.79%. The average short-term borrowing rates for the nine months endedSeptember 30, 2022 and 2021 were approximately 4.6% and 4.79%.

 

Long-term loans from credit union

 

As of September 30, 2022 and December 31, 2021, loans payable to Rural Credit Union of Xushui District, amounted to $8,867,855 and $9,818,530, respectively.

 

   September 30,
   December 31,
 
   2022   2021 
Rural Credit Union of Xushui District Loan 1  $1,211,302   $1,348,871 
Rural Credit Union of Xushui District Loan 2   3,521,225    3,921,139 
Rural Credit Union of Xushui District Loan 3   2,253,585    2,509,528 
Rural Credit Union of Xushui District Loan 4   1,831,037    2,038,992 
Jiangna Yu   50,706    
-
 
Total   8,867,855    9,818,530 
Less: Current portion of long-term loans from credit union   (4,175,620)   (6,838,465)
Long-term loans from credit union  $4,692,235   $2,980,065 

 

As of September 30, 2022, the Company’s long-term debt repayments for the next coming years were as follows:    

 

  Amount 
Fiscal year   
Remainder of 2022 $4,175,620 
2023  4,656,256 
2024 & after  35,979 
Total  8,867,855 

 

On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of September 30, 2022 and December 31, 2021, total outstanding loan balance was $1,211,302 and$1,348,871, respectively, Out of the total outstanding loan balance, current portion amounted were $647,906 and $329,376 as of September 30, 2022 and December 31, 2021, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $563,396 and $1,019,495 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $460,107 and $1,130,333 as of September 30, 2022 and December 31, 2021, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $3,521,225 and $3,921,139, respectively. Out of the total outstanding loan balance, current portion amounted were $3,521,225 and $1,960,569 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,960,570 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

14

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on April 16, 2024 according to the new schedule. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $2,253,585 and $2,509,528, respectively. Out of the total outstanding loan balance, current portion amounted were $nil and $2,509,528 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,253,585 and $nil are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on December 11, 2024 according to the new schedule. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $1,831,037 and $2,038,992, respectively. Out of the total outstanding loan balance, current portion amounted were $nil and $2,038,992 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,831,037 and $nil are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On July 1, 2022, the Company entered into a loan agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowed RMB 400,000 from Jiangna Yu for a term of five years. The loan is payable in monthly installment of RMB10,667 from July 2022 to July 2027. As of September 30, 2022, the total outstanding loan balance was $50,706. Out of the total outstanding loan balance, the current portion amounted $6,489, which is presented as current liabilities and the remaining balance of $44,217 is presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022.

 

Total interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2022 and 2021 were $248,239 and $264,644, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2022 and 2021 were $753,789 and $788,094, respectively.

 

(9) Related Party Transactions

 

Mr. Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $361,044 and $402,047 of interest were outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of September 30, 2022 and December 31, 2021, approximately $42,255 and $47,054 of interest, respectively were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.

 

On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,201,342 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries 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. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance was due on July 12, 2021. On November 23, 2018, the Company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the Company paid off the remaining balance, together with interest of 94,636. As of September 30, 2022 and December 31, 2021, the outstanding interest was $193,579 and $215,565, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.

 

15

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 30, 2022 and December 31, 2021, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans were $nil for the three and nine months ended September 30, 2022 and 2021. The accrued interest owing to Mr. Zhenyong Liu was approximately $596,878 and $664,666, as of September 30, 2022 and December 31, 2021, respectively, which was recorded in other payables and accrued liabilities.

 

On December 8, 2021, the Company entered an agreement with Mr. Zhenyong Liu, which allows Mr. Zhenyong Liu to borrow from the Company an amount of $6,507,431 (RMB44,089,085). The loan is unsecured and carries a fixed interest rate of 3% per annum. The loan was repaid by Mr. Zhenyong Liu in February 2022.

 

As of September 30, 2022 and December 31, 2021, amount due to shareholder was $727,433, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.

  

(10) Other payables and accrued liabilities

 

Other payables and accrued liabilities consist of the following:

 

   September 30,   December 31, 
   2022   2021 
Accrued electricity  $143,537   $135,360 
Accrued rental   20,356    61,879 
Value-added tax payable   398,303    
-
 
Accrued interest to a related party   596,878    664,666 
Payable for purchase of equipment   3,019,217    3,379,368 
Accrued commission to salesmen   13,885    15,274 
Accrued bank loan interest   1,395,251    992,989 
Others   48,386    1,003 
Totals  $5,635,813   $5,250,539 

 

(11) Derivative Liabilities

 

The Company analyzed the warrant for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.

 

ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.

 

The Company determined its derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of September 30, 2022. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the September 30, 2022:

 

    Three months
ended
    September 30,
2022
 
Expected term   1.55 - 2.75 
Expected average volatility   85% - 207% 
Expected dividend yield   - 
Risk-free interest rate   0.19% - 4.25% 

 

The following table summarizes the changes in the derivative liabilities during the three months ended September 30, 2022:

 

Fair Value Measurements Using Significant Observable Inputs (Level 3)

 

Balance at December 31, 2021  $2,063,534 
Addition of new derivatives recognized as warrant   
-
 
Addition of new derivatives recognized as loss on derivatives   
-
 
Exercise of warrants   
-
 
Change in fair value of derivative liability   (729,263)
Balance at September 30, 2022  $1,334,271 

 

16

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(12) Common Stock

 

Issuance of common stock to investors

 

On January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 2,618,182 shares of common stock and 2,618,182 warrants to purchase up to 2,618,182 shares of common stock in a best-efforts public offering for gross proceeds of approximately $14.4 million. The purchase price for each share of common stock and the corresponding warrant was $0.55. The exercise price of the warrant was $0.55 per share.

 

On March 1, 2021, the Company offered and sold to the public investors an aggregate of 2,927,786 shares of common stock and 1,463,893 warrants to purchase up to 1,463,893 shares of common stock in a firm commitment underwritten public offering for gross proceeds of approximately $21.9 million. The purchase price for each share of common stock and accompanying warrant was $0.75. The exercise price of the warrant was $0.75 per share.

 

Reverse stock split

 

On June 9, 2022, the Board of Directors of the Company approved the Reverse Stock Split, at a ratio of 1-for-10, pursuant to Section 78.207 of the Nevada Revised Statutes (“NRS”). The Reverse Stock Split was effected by the Company filing of a Certificate of Change Pursuant to NRS 78.209 with the Secretary of State of the State of Nevada on July 7, 2022. The par value per share of our stock remains unchanged at $0.001 per share after the Reverse Stock Split. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

 

Issuance of common stock pursuant to the 2021 Incentive Stock Plan

 

On August 15, 2022, the Company granted an aggregate of 1,500,000 shares of common stock under its compensatory incentive plans to fifteen employees, as awards under the 2021 Incentive Stock Plan. Please see Note (16), Stock Incentive Plans for more details. Total fair value of the stock was calculated at $1,560,000 as of the date of grant.

 

(13) Warrants

 

On April 29, 2020, the Company and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020 (the “2020 Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 440,000 shares of common stock and warrants to purchase up to 440,000 shares of common stock in a concurrent private placement (the “May 2020 Warrants”). The exercise price of the May 2020 Warrant is $0.7425 per share. These warrants become exercisable on July 23, 2020 and have a term of exercise equal to five years and six months from the date of issuance till July 23, 2025. 88,000 May 2020 Warrants were exercised in February 2021 at the exercise price of $0.7425 per share and 352,000 May 2020 Warrants were outstanding as of September 30, 2022. The Company classified warrant as liabilities and accounted for the issuance of the May 2020 Warrants as a derivative.

 

On January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 2,618,182 shares of common stock and 2,618,182 warrants to purchase up to 2,618,182 shares of common stock (the “January 2021 Warrants”). The January 2021 Warrants became exercisable on January 20, 2021 at an exercise price of $0.55 and will expire on January 20, 2026. 1,410,690 January 2021 Warrants were exercised in January and February of 2021 at the exercise price of $0.55 per share. 1,207,492 January 2021 Warrants were outstanding as of September 30, 2022.

 

On March 1, 2021, the Company offered and sold to the public investors an aggregate of 2,927,786 shares of common stock and 1,463,893 warrants to purchase up to 1,463,893 shares of common stock (the “March 2021 Warrants”). The March 2021 Warrants became exercisable on March 1, 2021 at an exercise price of $0.75 and will expire on March 1, 2026. 6,750 March 2021 Warrants were exercised in January and March 2021 at the exercise price of $0.75 per share and 1,457,143 March 2021 Warrants were outstanding as of September 30, 2022.

 

The Company classified warrants as liabilities and accounted for the issuance of the warrants as a derivative.

 

A summary of stock warrant activities is as below:

 

   Nine months ended
September 30, 2022
 
       Weight 
       average 
   Number   exercise
price
 
Outstanding and exercisable at beginning of the period   3,016,635   $6.6907 
Issued during the period   
-
    
 
 
Exercised during the period   
-
    
 
 
Outstanding and exercisable at end of the period   3,016,635   $6.6907 

 

17

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes information relating to outstanding and exercisable warrants as of September 30, 2022.      

 

Warrants Outstanding  Warrants Exercisable 
   Weighted Average           
   Remaining           
Number of  Contractual life  Weighted Average  Number of   Weighted Average 
Shares  (in years)  Exercise Price  Shares   Exercise Price 
 3,016,635  3.34  $6.6907   3,016,635   $6.6907 

 

Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at September 30, 2022 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). The intrinsic value of the warrants as of September 30, 2022 and December 31, 2021 are nil.

 

(14) Earnings Per Share

 

For the three months ended September 30, 2022 and 2021, basic and diluted net income per share are calculated as follows:

 

   Three Months Ended
September 30,
 
   2022   2021 
Basic (loss) income per share        
Net (loss) income for the period - numerator  $(1,887,318)  $1,542,576 
Weighted average common stock outstanding - denominator   71,449,208    54,196,300 
           
Net (loss) income per share  $(0.026)  $0.03 
           
Diluted income per share          
Net income for the period- numerator  $(1,887,318)  $1,542,576 
Weighted average common stock outstanding - denominator   71,449,208    54,196,300 
           
Effect of dilution   
-
    
-
 
Weighted average common stock outstanding - denominator   71,449,208    54,196,300 
           
Diluted (loss) income per share  $(0.03)  $0.03 

 

For the nine months ended September 30, 2022 and 2021, basic and diluted net income per share are calculated as follows:

 

   Nine Months Ended
September 30,
 
   2022   2021 
Basic loss per share        
Net loss for the period - numerator  $(4,663,445)  $(3,249,528)
Weighted average common stock outstanding - denominator   71,449,208    54,196,300 
           
Net loss per share  $(0.07)  $(0.06)
           
Diluted loss per share          
Net loss for the period - numerator  $(4,663,445)  $(3,249,528)
Weighted average common stock outstanding - denominator   71,449,208    54,196,300 
           
Effect of dilution   
-
    
-
 
Weighted average common stock outstanding - denominator   71,449,208    54,196,300 
           
Diluted loss per share  $(0.07)  $(0.06)

 

For the three and nine months ended September 30, 2022 and 2021 there were no securities with dilutive effect issued and outstanding.

 

18

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(15) Income Taxes

 

United States

 

The Company 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. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJA”), which significantly changed U.S. tax law. The 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA.

 

Transition tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional income tax expense of approximately $80,000 in the fourth quarter of 2017. However, the Company is continuing to gather additional information and will consider additional technical guidance to more precisely compute and account for the amount of the transition tax. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable over eight years beginning in 2018.

 

PRC

 

Dongfang Paper 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 provisions for income taxes for three months ended September 30, 2022 and 2021 were as follows:

 

   Three Months Ended 
   September 30, 
   2022   2021 
Provision for Income Taxes        
Current Tax Provision U.S.  $15,062   $14,717 
Current Tax Provision PRC   793,630    443,028 
Deferred Tax Provision PRC   (376,405)   (529,133)
Total Provision for (Deferred tax benefit)/ Income Taxes  $432,287   $(71,388)

 

The provisions for income taxes for nine months ended September 30, 2022 and 2021 were as follows:

 

   Nine Months Ended 
   September 30, 
   2022   2021 
Provision for Income Taxes        
Current Tax Provision U.S.  $15,062   $14,717 
Current Tax Provision PRC   1,022,037    1,700,721 
Deferred Tax Provision PRC   (1,197,630)   3,235,556 
Total Provision for (Deferred tax benefit)/ Income Taxes  $(160,531)  $4,950,994 

 

19

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In addition to the reversible future PRC income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset depreciation, the Company was incorporated in the United States and incurred net operating losses of approximately $776,533 and $882,743 for U.S. income tax purposes for the years ended December 31, 2021 and 2020, respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized, during the period of 2030 through 2035. As of September 30, 2022,management believed that the realization of all the U.S. income tax benefits from these losses, which generally would generate a deferred tax asset if it can be expected to be utilized in the future, appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, As of September 30, 2022, the Company provided a 100% valuation allowance on the U.S. deferred tax asset benefit to reduce the total deferred tax asset to the amount realizable for the PRC income tax purposes. Management reviews this valuation allowance periodically and will make adjustments as warranted. A summary of the otherwise deductible (or taxable) deferred tax items is as follows:

 

   September 30,   December 31, 
    2022   2021 
Deferred tax assets (liabilities)        
Depreciation and amortization of property, plant and equipment  $14,915,860   $14,754,456 
Impairment of property, plant and equipment   761,925    783,433 
Miscellaneous   353,366    342,170 
Net operating loss carryover of PRC company   208,486    388,620 
Total deferred tax assets   16,239,637    16,268,679 
Less: Valuation allowance   (5,000,000)   (5,000,000)
Total deferred tax assets, net  $11,239,637    11,268,679 

 

   Three Months Ended 
   September 30, 
   2022   2021 
PRC Statutory rate   25.0%   25.0%
Effect of different tax jurisdiction   
 
      
Effect of reconciling items in the PRC for tax purposes   (54.7)%   (29.9)%
Change in valuation allowance   
 
    
 
 
           
Effective income tax rate   (29.7)%   (4.9)%

 

   Nine Months Ended 
   September 30, 
   2022   2021 
PRC Statutory rate   25.0%   25.0%
Effect of different tax jurisdiction   
 
    
 
 
Effect of reconciling items in the PRC for tax purposes   (21.7)%   (27.9)%
(Over) Under-provision in previous year   
 
    
 
 
Change in valuation allowance   
-
    293.9%
           
Effective income tax rate   3.3%   291.0%

 

During the three months ended September 30, 2022 and 2021, the effective income tax rate was estimated by the Company to be 29.7% and 4.9%, respectively.

 

During the nine months ended September 30, 2022 and 2021, the effective income tax rate was estimated by the Company to be 3.3% and 291%, respectively.

 

As of September 30, 2022, except for the one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated foreign E&Ps, the Company does not believe that its future dividend policy and the available U.S. tax deductions and net operating losses will cause the Company to recognize any other substantial current U.S. federal or state corporate income tax liability in the near future. Nor does it believe that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required.

 

20

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 September 30, 2022 and December 31, 2021, management considered that the Company had no uncertain tax positions affecting its 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 consolidated financial statements for the three and nine months ended September 30, 2022 and 2021, 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.

 

(16) Stock Incentive Plans

 

2021 Incentive Stock Plan

 

On November 12, 2021, the Company’s Annual General Meeting adopted and approved the 2021 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the”2021 Plan”).Under the 2021 ISP, the Company has reserved a total of 1,500,000 shares of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On August 15, 2022, the Compensation Committee granted common shares of 1,500,000 shares under the 2021 Plan, to fifteen officers. Total fair value of the stock was calculated at $1,560,000 as of the date of issuance at $1.04 per share.

 

(17) Commitments and Contingencies

 

Xushui Land Lease

 

The Company leases 32.95 acres of land from a local government in Xushui District, 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 $16,902 (RMB120,000). This lease is renewable at the end of the 30-year term.

 

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 for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. Sales of the LUR and the Industrial Buildings were completed in year 2013.

 

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 with an annual rental payment of approximately $140,849 (RMB1,000,000). The lease was recorded in lease assets and liabilities in the consolidated balance sheet as of September 30, 2022. See ’Operating lease’ under note (7).

 

Future minimum lease payments of the land lease isas follows:

 

September 30,  Amount 
2023   16,902 
2024   16,902 
2025   16,902 
2026   16,902 
2027   16,902 
Thereafter   71,833 
Total operating lease payments  $156,342 

 

21

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Capital commitment

 

As of September 30, 2022, the Company has entered into several contracts for the purchase of paper machine of a new tissue paper production line PM10, and the improvement of Industrial Buildings. Total outstanding commitments under these contracts were $7,146,745 and $4,700,927 as of September 30, 2022 and December 31, 2021, respectively. The Company expected to pay off all the balances within 1-3 years.

 

Guarantees and Indemnities

 

The Company agreed with Baoding Huanrun Trading Co., a major supplier of raw materials, to guarantee certain obligations of this third party, and as of September 30, 2022 and December 31, 2021, the Company guaranteed its long-term loan from financial institutions amounting to $4,366,320 (RMB31,000,000) and $4,862,211 (RMB31,000,000), respectively, that matured at various times in 2018-2023. If Huanrun Trading Co., were to become insolvent, the Company could be materially adversely affected.

 

(18) Segment Reporting

 

Since March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business operating segments: Dongfang Paper, which produces offset 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 basedon 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 three reportable segments is as follows:

 

   September 30, 2022 
   Dongfang   Hebei   Baoding   Not Attributable   Elimination of   Enterprise-wide, 
   Paper   Tengsheng   Shengde   to Segments   Inter-segment   consolidated 
                         
Revenues  $31,359,186   $293,157   $56,871   $
-
   $
-
   $31,709,214 
Gross profit   3,524,435    (757,695)   16,848    
-
    
-
    2,783,588 
Depreciation and amortization   1,168,036    2,054,034    403,865    
-
    
-
    3,625,935 
Interest income   4,130    416    2,965    217    
-
    7,728 
Interest expense   160,740    17,230    78,708    
-
    
-
    256,678 
Income tax expense(benefit)   740,764    (337,791)   14,252    15,062    
-
    432,287 
Net income (loss)   2,100,268    (1,871,128)   (12,836)   (2,101,863)   (1,759)   (1,887,318)

 

22

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   Three Months Ended September 30, 2021 
   Dongfang   Hebei   Baoding   Not Attributable   Elimination of   Enterprise-wide, 
   Paper   Tengsheng   Shengde   to Segments   Inter-segment   consolidated 
                         
Revenues  $42,123,855   $2,508,611   $2,789,071   $
-
   $(2,333,866)  $45,087,671 
Gross profit   2,026,870    (249,996)   44,662    
-
    
-
    1,821,536 
Depreciation and amortization   1,215,907    1,918,917    432,437    
-
    
-
    3,567,261 
Interest income   8,222    370    3,452    
-
    
-
    12,044 
Interest expense   180,270    17,026    84,374    
-
    
-
    281,670 
Income tax expense(benefit)   320,249    (396,715)   5,078    
-
    
-
    (71,388)
Net income (loss)   956,901    (1,258,593)   (56,897)   1,901,165    
-
    1,542,576 

 

   Nine Months Ended September 30, 2022 
   Dongfang   Hebei   Baoding   Not
 Attributable
   Elimination of   Enterprise-wide, 
   Paper   Tengsheng   Shengde   to Segments   Inter-segment   consolidated 
                         
Revenues  $77,675,737    1,102,933    201,046    
-
    
-
    78,979,716 
Gross profit   5,812,160    (2,135,819)   51,729    
-
    
-
    3,728,070 
Depreciation and amortization   3,649,174    6,304,944    1,264,136    
-
    
-
    11,218,254 
Interest income   7,874    812    7,205    217    
-
    16,108 
Interest expense   501,360    41,599    243,638    
-
    
-
    786,597 
Income tax expense(benefit)   795,347    (1,128,442)   157,502    15,062    
-
    (160,531)
Net income (loss)   2,046,362    (5,480,223)   (297,484)   (962,504)   30,404    (4,663,445)

 

   Nine Months Ended September 30, 2021 
   Dongfang   Hebei   Baoding   Not Attributable   Elimination of   Enterprise-wide, 
   Paper   Tengsheng   Shengde   to Segments   Inter-segment   consolidated 
                         
Revenues  $108,949,261    6,487,027    5,714,288    
-
    (5,318,563)   115,832,013 
Gross profit (loss)   7,523,100    (938,454)   96,915    
-
    
-
    6,681,561 
Depreciation and amortization   3,976,098    6,459,845    1,297,721    
-
    
-
    11,733,664 
Interest income   19,202    1,176    7,718    
-
    
-
    28,096 
Interest expense   537,831    56,376    250,263    
-
    
-
    844,470 
Income tax expense(benefit)   1,355,079    3,582,328    (1,130)   14,717    
-
    4,950,994 
Net income (loss)   3,892,107    (9,219,504)   (210,718)   2,288,587    
-
    (3,249,528)

 

23

 

 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   As of September 30, 2022 
   Dongfang   Hebei   Baoding   Not
Attributable
   Elimination of   Enterprise-wide, 
   Paper   Tengsheng   Shengde   to Segments   Inter-segment   consolidated 
Total assets  $63,539,735    124,719,775    21,280,523    5,597,506    
           -
    215,137,539 

 

   As of December 31, 2021 
   Dongfang   Hebei   Baoding   Not Attributable   Elimination of   Enterprise-wide, 
   Paper   Tengsheng   Shengde   to Segments   Inter-segment   consolidated 
Total assets  $109,369,166    93,841,874    29,181,392    9,142,770    
          -
    241,535,202 

 

(19) Concentration and Major Customers and Suppliers

 

For the three months ended September 30, 2022, the Company had five customers accounted for approximately 12% of total sales. For the three months ended September 30, 2021, the Company hadno single customer contributed over 10% of total sales.

 

For the nine months ended September 30, 2022, the Company had no single customer contributed over 10% of total sales. For the nine months ended September 30, 2021, the Company had no single customer contributed over 10% of total sales.

 

For the three months ended September 30, 2022, the Company had three major suppliers accounted for 77%, 14% and 7% of total purchases. For the three months ended September 30, 2021, the Company had three major suppliers accounted for 74%, 12% and 5% of total purchases.

 

For the nine months ended September 30, 2022, the Company had three major suppliers accounted for 77%, 15% and 5% of total purchases. For the nine months ended September 30, 2021, the Company had two major suppliers accounted for 78% and 11% 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 as of September 30, 2022 and December 31, 2021. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB500,000 ($70,425) 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 September 30, 2022 and December 31, 2021, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB96,281,183 ($13,561,112) as of September 30, 2022.

 

(21) Risks and Uncertainties

 

The Company 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.

 

(22) Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the CECL standards. The ASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements.

 

(23) Subsequent Event

 

None. 

24

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Notice Regarding Forward-Looking Statements

 

The following discussion of the financial condition and results of operations of the Company for the periods ended September 30, 2022 and 2021 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 “the Company,” “we,” “our” and “us” refer to IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity 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 products, 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. Indeed, it is likely that some of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements and the variances may be material. 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 Securities and Exchange Commission (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 profitably, (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 primary requirements for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities laws.

 

Impact of COVID-19 on Our Operations and Financial Performance

 

Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. It is, however, still unclear how the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues.

 

While we have resumed business operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.

 

Results of Operations

 

Comparison of the Three months ended September 30, 2022 and 2021

 

Revenue for the three months ended September 30, 2022 was $31,709,214, a decrease of $13,378,457, or 29.67%, from $45,087,671 for the same period in the previous year. This was mainly due to the decrease in sales of regular corrugating medium paper, offset printing paper and tissue paper products.

 

25

 

 

Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products

 

Revenue from sales of offset printing paper, corrugating medium paper (“CMP”) and tissue paper products for the three months ended September 30, 2022 was $31,652,343, a decrease of $13,283,137, or 29.56%, from $44,935,480 for the third quarter of 2021. Total offset printing paper, CMP and tissue paper products sold during the three months ended September 30, 2022 amounted to 72,615 tonnes, a decrease of 11,520 tonnes, or 13.69%, compared to 84,135 tonnes sold in the comparable period in the previous year. Due to the sporadic situation of COVID-19 in China, our factory facilities were operated in a limited, transitional basis during the three months ended September 30, 2022. The changes in revenue dollar amount and in quantity sold for the three months ended September 30, 2022 and 2021 are summarized as follows:

 

   Three Months Ended   Three Months Ended           Percentage 
   September 30, 2022   September 30, 2021   Change in   Change 
Sales Revenue  Quantity (Tonne)   Amount   Quantity (Tonne)   Amount   Quantity (Tonne)   Amount   Quantity   Amount 
                                 
Regular CMP   59,848   $26,062,736    61,947   $31,200,984    (2,099)  $(5,138,248)   -3.39%   -16.47%
Light-Weight CMP   12,507   $5,296,450    12,497   $6,127,480    10   $(831,030)   0.08%   -13.56%
Total CMP   72,355   $31,359,186    74,444   $37,328,464    (2,089)  $(5,969,278)   -2.81%   -15.99%
Offset Printing Paper   -   $-    7,045   $4,795,391    (7,045)  $(4,795,391)   (100.00)%   (100.00)%
Tissue Paper Products   260   $293,157    2,646   $2,811,625    (2,386)  $(2,518,468)   -90.17%   -89.57%
Total CMP, Offset Printing Paper and Tissue Paper Revenue   72,615   $31,652,343    84,135   $44,935,480    (11,520)  $(13,283,137)   -13.69%   -29.56%

 

Monthly sales revenue for the 24 months ended September 30, 2022, are summarized below:

 

 

 

The Average Selling Prices (ASPs) for our main products in the three months ended September 30, 2022 and 2021 are summarized as follows:

 

   Offset
Printing
Paper ASP
   Regular
CMP ASP
   Light-Weight CMP ASP   Tissue
Paper
Products
ASP
 
Three Months ended September 30, 2021  $681   $504   $490   $1,063 
Three Months ended September 30, 2022  $-   $435   $423   $1,128 
Increase (Decrease) from comparable period in the previous year  $(681)  $(69)  $(67)  $65 
Increase (Decrease) by percentage   -    -13.69%   -13.67%   6.11%

 

26

 

 

The following chart shows the month-by-month ASPs for the 24-month period ended September 30, 2022:

 

 

 

Corrugating Medium Paper

 

Revenue from CMP amounted to $31,359,186 (99.07% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September 30, 2022, representing a decrease of $5,969,278, or 15.99%, from $37,328,464 for the comparable period in 2021.

 

We sold 72,355 tonnes of CMP in the three months ended September 30, 2022 as compared to 74,444 tonnes for the same period in 2021, representing a 2.81% decrease in quantity sold.

 

ASP for regular CMP dropped from $504/tonne for the three months ended September 30, 2021 to $435/tonne for the three months ended September 30, 2022, representing a 13.69% decrease. ASP in RMB for regular CMP for the third quarter of 2021 and 2022 was RMB3,259 and RMB2,980, respectively, representing a 8.56% decrease. The quantity of regular CMP sold decreased by 2,099 tonnes, from 61,947 tonnes in the third quarter of 2021 to 59,848 tonnes in the third quarter of 2022.

 

ASP for light-weight CMP decreased from $490/tonne for the three months ended September 30, 2021 to $423/tonne for the three months ended September 30, 2022, representing a 13.67% decrease. ASP in RMB for light-weight CMP for the third quarter of 2021 and 2022 was RMB3,173 and RMB2,892, respectively, representing a 8.86% decrease. The quantity of light-weight CMP sold increased by 10 tonnes, from 12,497 tonnes in the third quarter of 2021, to 12,507 tonnes in the third quarter of 2022.

 

Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes/year. The utilization rates for the third quarter of 2022 and 2021 were 66.82% and 67.42%, respectively, representing a decrease of 0.60%.

 

27

 

 

Quantities sold for regular CMP that was produced by the PM6 production line from October 2020 to September 2022 are as follows:

 

 

 

Offset printing paper

 

Revenue from offset printing paper was $nil for the three months ended September 30, 2022 compared to the revenue of $4,795,391 for the three months ended September 30, 2021. As required by the government to stem the sporadic spread of COVID-19, our production of offset printing paper was suspended in the third quarter of 2022.

 

Tissue Paper Products

 

Revenue from tissue paper products was $293,157 (0.93% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September 30, 2022, representing a decrease of $2,518,468, or 89.57%, from $2,811,625 for the three months ended September 30, 2021. We sold 260 tonnes of tissue paper in the third quarter of 2022, as compared to 2,646 tonnes in the comparable period of 2021, representing a decrease of 2,386 tonnes, or 90.17%.

 

ASP for tissue paper products increased from $1,063/tonne for the three months ended September 30, 2021 to $1,128/tonne for the three months ended September 30, 2022, representing a 6.11% increase. ASP in RMB for tissue paper products for the third quarter of 2021 and 2022 was RMB6,875 and RMB7,913, respectively, representing a 15.10% increase.

 

28

 

 

Revenue of Face Mask

 

Revenue generated from selling face mask were $56,871 and $152,191 for the three months ended September 30, 2022 and 2021, respectively, representing a decrease of $95,320, or 62.63%. We sold 1,282 thousand pieces of face masks in the third quarter of 2022, as compared to 3,180 thousand pieces in the comparable period of 2021, a decrease of 1,898 thousand pieces, or 59.69%.

 

Cost of Sales

 

Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended September 30, 2022 was $28,885,603, a decrease of $14,259,449, or 33.05%, from $43,145,052 for the comparable period in 2021. This was mainly due to the decrease in sales quantity of regular CMP, offset printing paper and tissue paper products, and the decrease in material costs of CMP.

 

Cost of sales for CMP was $27,834,752 for the quarter ended September 30, 2022, as compared to $36,069,192 for the comparable period in 2021. The decrease in the cost of sales of $8,234,440 for CMP was mainly due to the decrease in sales volume of regular CMP and the decrease in average cost of sales. Average cost of sales per tonne for CMP decreased by 20.62%, from $485 in the third quarter of 2021 to $385 in the third quarter of 2022. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board in the third quarter of 2022 compared to the third quarter of 2021.

 

Cost of sales for offset printing paper was $nil for the quarter ended September 30, 2022, as compared to $4,018,447 for the comparable period in 2021.

 

Cost of sales for tissue paper products was $1,050,851 for the quarter ended September 30, 2022, as compared to $3,057,413 for the comparable period in 2021. The decrease in the cost of sales of $2,006,562 for tissue paper products was mainly due to the decrease in sales volume of tissue paper products, partially offset by the increase in average cost of sales. Average cost of sales per tonne of tissue paper products increased by 249.96%, from $1,155 in the three months ended September 30, 2021, to $4,042 for the comparable period in 2022. This was mainly due to the increase in cost of tissue base paper and higher manufacturing overhead costs absorbed in the unit cost of sales due to low production yield.

 

Changes in cost of sales and cost per tonne by product for the quarters ended September 30, 2022 and 2021 are summarized below:

 

   Three Months Ended   Three Months Ended         
   September 30, 2022   September 30, 2021   Change in   Change in percentage 
   Cost of Sales   Cost per Tonne   Cost of Sales   Cost per Tonne   Cost of Sales   Cost per Tonne   Cost of Sales   Cost per Tone 
Regular CMP  $23,218,241   $388   $30,284,195   $489   $(7,065,954)  $(101)   -23.33%   -20.65%
Light-Weight CMP  $4,616,511   $369   $5,784,997   $463   $(1,168,486)  $(94)   -20.20%   -20.30%
Total CMP  $27,834,752   $385   $36,069,192   $485   $(8,234,440)  $(100)   -22.83%   -20.62%
Offset Printing Paper  $-   $-   $4,018,447   $570   $(4,018,447)  $(570)   -100.00%   -100.00%
Tissue Paper Products  $1,050,851   $4,042    3,057,413   $1,155   $(2,006,562)  $2,887    -65.63%   249.96%
Total CMP, Offset Printing Paper and Tissue Paper  $28,885,603   $n/a   $43,145,052   $n/a   $(14,259,449)  $n/a    -33.05%   n/a 

 

Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended September 30, 2022 were RMB 1,561/tonne (approximately $235/tonne), as compared to RMB 1,966/tonne (approximately $304/tonne) for the three months ended September 30, 2021. These changes (in US dollars) represent a year-over-year decrease of 22.70% for the recycled paper board. We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled paper.

 

29

 

 

The pricing trends of our major raw materials for the 24-month period from October 2020 to September 2022 are shown below:

 

 

 

Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 11.6% of total sales in the third quarter of 2022, respectively, compared to 4% and 10.8% of total sales in the third quarter of 2021. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended September 30, 2022 are summarized as follows:

 

 

 

Gross Profit

 

Gross profit for the three months ended September 30, 2022 was $2,783,588 (8.78% of the total revenue), representing an increase of $962,052, or 52.82%, from the gross profit of $1,821,536 (4.04% of the total revenue) for the three months ended September 30, 2021, as a result of factors described above.

 

30

 

 

Offset Printing Paper, CMP and Tissue Paper Products

 

Gross profit for offset printing paper, CMP and tissue paper products for the three months ended September 30, 2022 was $2,766,740, representing an increase of $976,312, or 54.53%, from the gross profit of $1,790,428 for the three months ended September 30, 2021. The increase was mainly the result of the factors discussed above.

 

The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 4.76 percentage points, from 3.98% for the three months ended September 30, 2021, to 8.74% for the three months ended September 30, 2022.

 

Gross profit margin for regular CMP for the three months ended September 30, 2022 was 10.91%, or 7.97 percentage points higher, as compared to gross profit margin of 2.94% for the three months ended September 30, 2021. Such increase was mainly due to the decrease in cost of recycled paper board, partially offset bythe decrease of ASP of regular CMP in the third quarter of 2022.

 

Gross profit margin for light-weight CMP for the three months ended September 30, 2022 was 12.84%, or 7.25 percentage points higher, as compared to gross profit margin of 5.59% for the three months ended September 30, 2021. The increase was mainly due to the decrease in cost of recycled paper board, partially offset bythe decrease of ASP of light-weight CMP in the third quarter of 2022.

 

Gross profit margin for tissue paper products for the three months ended September 30, 2022 was -258.46%, or 249.72 percentage points lower, as compared to gross profit margin of -8.74% for the three months ended September 30, 2021. The increase in gross loss was mainly due to the decrease in ASP of tissue paper products and the increase in cost of sales in the third quarter of 2022.

 

Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended September 30, 2022 are as follows:

 

 

 

31

 

 

Face Masks

 

Gross profit for face masks for the three months ended September 30, 2022 and 2021 were $16,848 and $31,108, representing a gross margin of 29.62% and 20.44%, respectively.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended September 30, 2022 were $3,370,541, an increase of $1,350,976, or 66.89% from $2,019,565 for the three months ended September 30, 2021. The increase was mainly due to 1,500,000 shares of common stock granted under our compensatory incentive plan in August 2022, value at $1,560,000.

 

Loss from Operations

 

Operating loss for the quarter ended September 30, 2022 was $588,712, a decrease of $390,683, or 197.29%, from $198,029 for the quarter ended September 30, 2021. The decrease in income from operations was primarily due to the increase in selling, general and administrative expenses, partially offset by the increase in gross profit.

 

Other Income and Expenses

 

Interest expense for the three months ended September 30, 2022 decreased by $24,992, from $281,670 in the three months ended September 30, 2021, to $256,678. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,681,595 as of September 30, 2022, as compared to $16,377,758 as of September 30, 2021.

 

Loss (Gain) on derivative liability

 

The Company analyzed the warrant for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The (loss) gain recognized on addition and change in fair value of derivative liability for the three months ended September 30, 2022 and 2021 was a loss of $617,370 and a gain of $1,938,873, respectively.

 

Net Loss

 

As a result and the factors discussed above, net loss was $1,887,318 for the quarter ended September 30, 2022, representing a decrease of $3,429,894, or 222.35%, from net income of $1,542,576 for the quarter ended September 30, 2021.

 

32

 

 

Comparison of the nine months ended September 30, 2022 and 2021

 

Revenue for the nine months ended September 30, 2022 was $78,979,716, representing a decrease of $36,852,297, or 31.82%, from $115,832,013 for the same period in the previous year. This was mainly due to the decrease in sales volume of corrugating medium paper (“CMP”) and offset printing paper and tissue paper products.

 

Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products

 

Revenue from sales of offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2022 was $78,778,671, a decrease of $36,661,823, or 31.76%, from $115,440,494 for the nine months ended September 30, 2021. This was mainly due to the decrease in sales volume of regular CMP, light-weight CMP, offset printing paper and tissue paper products, and the decrease in ASPs of CMP and tissue paper products. Total quantities of offset printing paper, CMP and tissue paper products sold during the nine months ended September 30, 2022 amounted to 168,066 tonnes, a decrease of 48,237 tonnes, or 22.30%, compared to 216,303 tonnes sold during the nine months ended September 30, 2021. Total quantities of CMP and offset printing paper sold decreased by 43,314 tonnes in the nine months of 2022 as compared to the same period of 2021. We sold 1,040 tonnes of tissue paper products in the nine months of 2022 as opposed to 5,963 tonnes in the same period of 2021. Production of CMP was suspended during January and February 2022 and offset printing paper suspended during the year. Production was restricted during Winter Olympics held in Beijing in 2022 and COVID-19 as required by the government. The changes in revenue and quantity sold for the nine months ended September 30, 2022 and 2021 are summarized as follows:

 

A summary of the above changes and further analyses of the changes in our sales revenue are as follows:

 

   Nine Months Ended   Nine Months Ended           Percentage 
   September 30, 2022   September 30, 2021   Change in   Change 
Sales Revenue  Quantity (Tonne)   Amount   Quantity (Tonne)   Amount   Quantity (Tonne)   Amount   Quantity   Amount 
                                 
Regular CMP   139,036   $65,015,400    156,080   $78,417,279    (17,044)  $(13,401,879)   -10.92%   -17.09%
Light-Weight CMP   27,990   $12,660,338    33,658   $16,436,588    (5,668)  $(3,776,250)   -16.84%   -22.97%
Total CMP   167,026   $77,675,738    189,738   $94,853,867    (22,712)  $(17,178,129)   -11.97%   -18.11%
Offset Printing Paper   -   $-    20,602   $14,095,393    (20,602)  $(14,095,393)   -100.00%   -100.00%
Tissue Paper Products   1,040   $1,102,933    5,963    6,491,234    (4,923)  $(5,388,301)   -82.56%   -83.01%
Total CMP, Offset Printing Paper and Tissue Paper Revenue   168,066   $78,778,671    216,303   $115,440,494    (48,237)  $(36,661,823)   -22.30%   -31.76%

 

ASPs for our main products in the nine-month period ended September 30, 2022 and 2021 are summarized as follows:

 

   Offset Printing Paper ASP   Regular
CMP ASP
   Light-Weight CMP ASP   Tissue Paper Products ASP 
Nine Months Ended September 30, 2021  $684   $502   $488   $1089 
Nine Months Ended September 30, 2022  $0   $468   $452   $1061 
Decrease from comparable period in the previous year  $-684   $-34   $-36   $-28 
Decrease by percentage   -100.00%   -6.77%   -7.38%   -2.57%

 

Revenue of Face Masks

 

Revenue generated from selling face masks were $201,045 and $391,519 for the nine months ended September 30, 2022 and 2021. We sold 4,295 thousand pieces of face masks for the nine months ended September 30, 2022, as compared to 9,650 thousand pieces in the comparable period of 2021, a decrease of 5,355 thousand pieces, or 55.49%.

 

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Cost of Sales

 

Total cost of sales for CMP, offset printing paper and tissue paper products for the nine months ended September 30, 2022 was $75,102,330, a decrease of $33,723,073, or 30.99%, from $108,825,403 for the nine months ended September 30, 2021. This was mainly a result of the decrease in sales volume of CMP and offset printing paper and decrease of material costs of CMP. Cost of sales for CMP was $71,863,579 for the nine months ended September 30, 2022, as compared to $89,766,509 in the same period of 2021.Cost of sales for tissue paper products was $3,238,751 for the nine months ended September 30, 2022, as compared to $7,425,480 in the same period of 2021. Average cost of sales per tonne of tissue paper products increased by 150.12%, from $1,245 for the nine months ended September 30, 2021, to $3,114 for the same period of 2022. The increase in average cost of sales of tissue paper products was mainly due to the increase in average cost of tissue base paper.

 

Changes in cost of sales and cost per tonne by product for the nine months ended September 30, 2022 and 2021 are summarized below:

 

   Nine Months Ended   Nine Months Ended         
   September 30, 2022   September 30, 2021   Change in   Change in percentage 
   Cost of Sales   Cost per Tonne   Cost of Sales   Cost per tonne   Cost of Sales   Cost per Tonne   Cost of Sales   Cost per Tone 
Regular CMP  $60,363,632   $434   $74,522,911   $477   $(14,159,279)  $(43)   -19.00%   -9.01%
Light-Weight CMP  $11,499,947   $411   $15,243,598   $453   $(3,743,651)  $(42)   -24.56%   -9.27%
Total CMP  $71,863,579   $430   $89,766,509   $473   $(17,902,930)  $(43)   -19.94%   -9.09%
Offset Printing Paper  $0   $-   $11,633,414   $565   $(11,633,414)  $(565)   -100.00%   -100.00%
Tissue Paper Products  $3,238,751   $3,114   $7,425,480   $1,245   $(4,186,729)  $1,869    -56.38%   150.12%
Total CMP, Offset Printing Paper and Tissue Paper Revenue  $75,102,330   $ n/a   $108,825,403   $ n/a   $(33,723,073)  $ n/a    -30.99%   n/a%

 

Gross Profit

 

Gross profit for the nine months ended September 30, 2022 was $3,728,070 (4.72% of the total revenue), representing a decrease of $2,953,491, or 44.20%, from the gross profit of $6,681,561 (5.77% of the total revenue) for the nine months ended September 30, 2021. The decrease was mainly due to (i) the decrease in quantities sold of CMP, offset printing paper and tissue paper products, and (ii) the increase in material costs of tissue paper products.

 

Offset Printing Paper, CMP and Tissue Paper Products

 

Gross profit for offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2022 was $3,676,341, a decrease of $2,938,750, or 44.42%, from the gross profit of $6,615,091 for the nine months ended September 30, 2021. The increase was mainly the result of the factors discussed above.

 

The overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 1.06 percentage points, from 5.73% for the nine months ended September 30, 2021, to 4.67% for the nine months ended September 30, 2022.

 

Gross profit margin for regular CMP for the nine months ended September 30, 2022 was 7.15%, or 2.18 percentage points higher, as compared to gross profit margin of 4.97% for the nine months ended September 30, 2021. Such increase was primarily due to decrease in material costs, partially offset by the decrease in ASP of regular CMP.

 

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Gross profit margin for light-weight CMP for the nine months ended September 30, 2022 was 9.17%, or 1.91 percentage points higher, as compared to gross profit margin of 7.26% for the nine months ended September 30, 2021. Such increase was primarily due to the decrease in material costs, partially offset by the decrease in ASP of light-weight CMP.

 

Gross profit margin for tissue paper products was -193.65% for the nine months ended September 30, 2022, a decrease of 179.26 percentage points, as compared to -14.39% for the nine months ended September 30, 2021. The decrease was mainly due to the increase in cost of tissue base paper.

 

Face Masks

 

Gross profit for face mask for the nine months ended September 30, 2022 was $51,729, representing a gross margin of 25.73% compared with a gross profit of $66,469, representing a gross margin of 16.98%, for the nine months ended September 30, 2021.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the nine months ended September 30, 2022 were $8,541,224, an increase of $1,368,729, or 19.08% from $7,172,495 for the nine months ended September 30, 2021. The increase was mainly due to 1,500,000 shares of common stock granted under our compensatory incentive plan in August 2022, value at $1,560,000.

 

Loss from Operations

 

Operating loss for the nine months ended September 30, 2022 was $4,782,750, a decrease of $4,291,816, or 874.21%, from $490,934 for the nine months ended September 30, 2021. The decrease was primarily due to the decrease in gross profit and increase in selling, general and administrative expenses.

 

Other Income and Expenses

 

Interest expense for the nine months ended September 30, 2022 decreased by $57,873, from $844,470 for the nine months ended September 30, 2021, to $786,597. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,681,595 as of September 30, 2022, as compared to $16,377,758 as of September 30, 2021.

 

Gain on derivative liability

 

The Company analyzed warrants for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The change in fair value of derivative liability for the nine months ended September 30, 2022 and 2021 were $729,263 and $2,810,913, respectively.

 

Net Loss

 

As a result of the above, net loss was $4,663,445 for the nine months ended September 30, 2022, representing a decrease of $1,413,917, or 43.51%, from $3,249,528 for nine months ended September 30, 2021.

 

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Accounts Receivable

 

Net accounts receivable decreased by $632,635, or 12.99%, to $4,236,299 as of September 30, 2022, as compared with $4,868,934 as of December 31, 2021. We usually collect accounts receivable within 30 days of delivery and completion of sales.

 

Inventories

 

Inventories consist of raw materials (accounting for 79.98% of total value of inventory as of September 30, 2022), semi-finished goods and finished goods. As of September 30, 2022, the recorded value of inventory decreased by 24.01% to $4,441,390 from $5,844,895 as of December 31, 2021. As of September 30, 2022, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $3,246,847, approximately $1,149,785, or 54.83%, higher than the balance as of December 31, 2021. Due to the volatility of recycled paper board price, a minimum level of inventory was maintained at the end of 2021.As a result of better control over stock turnover, finished goods were reduced by 78.72% as at September 30, 2022 as compared to finished goods at the end of 2021.

 

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

 

   September 30,   December 31,         
   2022   2021   $ Change   % Change 
Raw Materials                
Recycled paper board  $3,246,847   $2,097,062    1,149,785    54.83%
Recycled white scrap paper   10,603    11,808    -1,205    -10.20%
Tissue base paper   59,505    38,745    20,760    53.58%
Gas   80,319    32,753    47,566    145.23%
Mask fabric and other raw materials   154,865    167,786    -12,921    -7.70%
Total Raw Materials   3,552,139    2,348,154    1,203,985    51.27%
                     
Semi-finished Goods   165,707    96,087    69,620    72.46%
Finished Goods   723,544    3,400,654    -2,677,110    -78.72%
Total inventory, gross   4,441,390    5,844,895    -1,403,505    -24.01%
Inventory reserve   -    -    -      
Total inventory, net  $4,441,390   $5,844,895    (1,403,505)   -24.01%

 

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Renewal of operating lease

 

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 for cash prices of approximately $2.77 million, $1.15 million, and $4.31 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 $140,849 (RMB1,000,000). The lease agreement was renewed in August 2022 with a term of six years with the same rental payments as provided for in the original lease agreement.

 

Capital Expenditure Commitment as of September 30, 2022

 

On May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company signed an agreement to purchase paper machine with paper machine supplier. The Company expected the new tissue paper production line to be launched after the completion of trial run.

 

As of September 30, 2022, we had approximately $7.1 million in capital expenditure commitments that were mainly related to the purchase of paper machine of PM10. The infrastructure work of PM10 has been completed and the associated ancillary facilities are working in progress. These commitments are expected to be financed by bank loans and cash flows generated from our business operations.

 

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, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng 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.

 

Hebei Tengsheng made payments due according to the schedule. The balance of Leased Equipment net of amortization was $1,940,586 and $2,286,459 as of September 30, 2022 and December 31, 2021, respectively. The lease liability was $181,187 and $362,394, and its current portion in the amount of $181,187 and $210,161 as of September 30, 2022 and December 31, 2021, respectively.

 

Amortization of the Leased Equipment was $38,486 and $41,208 for the three months ended September 30, 2022 and 2021. Amortization of the Leased Equipment was $120,464 and $123,663 for the nine months ended September 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $8,439 and $17,026 for the three months ended September 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was $32,808 and $56,376 for the nine months ended September 30, 2022 and 2021.

 

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.

 

Cash and Cash Equivalents

 

Our cash, cash equivalents and restricted cash as of September 30, 2022 was $16,017,403, an increase of $4,815,791, from $11,201,791 as of December 31, 2021. The increase of cash and cash equivalents for the nine months ended September 30, 2022 was attributable to a number of factors including:

 

i. Net cash provided by (used in) operating activities

 

Net cash provided by operating activities was $7,429,169 for the nine months ended September 30, 2022. The balance represented an increase of cash of $13,871,746, or 215.31%, from $6,442,577 used in operating activities for the nine months ended September 30, 2021. Net loss for the nine months ended September 30, 2022 was $4,663,445, representing an increase of loss of $1,413,917, or 43.51%, from a net loss of $3,249,528 for the nine months ended September 30, 2021. Changes in various asset and liability account balances throughout the nine months ended September 30, 2022 also contributed to the net change in cash from operating activities in nine months ended September 30, 2022. Chief among such changes is the decrease of accounts receivable in the amount of $146,250 during the nine months of 2022. There was also a decrease of $863,170 in the ending inventory balance as of September 30, 2022 (an increase to net cash for the nine months ended September 30, 2022 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $11,218,254. The Company also had a net increase of $422,092 in prepayment and other current assets (a decrease to net cash) and a net increase of $808,380 in other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable of $265,493 (a decrease to net cash) during the nine months ended September 30, 2022.

 

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ii. Net cash used in investing activities

 

We incurred $8,189,410 in net cash expenditures for investing activities during the nine months ended September 30, 2022, as compared to $12,781,114 for the same period of 2021. Payments in 2022 were mainly for the last installments for the Tengsheng land acquisition.

 

iii. Net cash provided by financing activities

 

Net cash provided by financing activities was $6,840,080 for the nine months ended September 30, 2022, as compared to net cash provided by financing activities in the amount of $41,547,363 for the nine months ended September 30, 2021. A $6.6 million loan was repaid by a related party during the period.

 

Short-term bank loans

 

   September 30,   December 31, 
   2022   2021 
Industrial and Commercial Bank of China (“ICBC”) Loan 1  $5,069,157   $5,958,561 
ICBC Loan 2   422,547    - 
China Construction Bank Loan   140,849    - 
           
Total short-term bank loans  $5,632,553   $5,958,561 

 

On November 25, 2021, the Company entered into a working capital loan agreement with the ICBC for a loan, with a balance of $5,069,157 and $5,958,561 as of September 30, 2022 and December 31, 2021, respectively. The working capital loan was secured by the land use right of Dongfang Paper as collateral for the benefit of the bank and guaranteed by Mr. Liu. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by November 17, 2022.

 

On June 28, 2022, the Company entered into a working capital loan agreement with the ICBC for a loan, with a balance of $422,547 as of September 30, 2022. The loan bears a fixed interest rate of 4.3% per annum. The loan will be due by December 25, 2022.

 

On July 29, 2022, the Company entered into a working capital loan agreement with the China Construction Bank for a loan, with a balance of $140,849 as of September 30, 2022. The loan bears a fixed interest rate of 3.95% per annum. The loan will be due by July 29, 2023.

 

As of September 30, 2022, there were guaranteed short-term borrowings of $5,069,157 and unsecured bank loans of $563,396. As of December 31, 2021, there were guaranteed short-term borrowings of $5,958,561 and unsecured bank loans of $nil.

 

The average short-term borrowing rates for the three months ended September 30, 2022 and 2021 were approximately 4.28% and 4.79%. The average short-term borrowing rates for the nine months ended September 30, 2022 and 2021 were approximately 4.6% and 4.79%.

 

Long-term loans from credit union

 

As of September 30, 2022 and December 31, 2021, loans payable to Rural Credit Union of Xushui District, amounted to $8,867,855 and $9,818,530, respectively.

 

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On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a loan with a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of September 30, 2022 and December 31, 2021, total outstanding loan balance was $1,211,302 and$1,348,871, respectively, Out of the total outstanding loan balance, current portion amounted were $647,906 and $329,376 as of September 30, 2022 and December 31, 2021, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $563,396 and $1,019,495 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a loan with a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $460,107 and $1,130,333 as of September 30, 2022 and December 31, 2021, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $3,521,225 and $3,921,139, respectively. Out of the total outstanding loan balance, the current portion amounted $3,521,225 and $1,960,569 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,960,570 are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a loan with a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on April 16, 2024 according to the new schedule. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $2,253,585 and $2,509,528, respectively. Out of the total outstanding loan balance, current portion amounted were $nil and $2,509,528 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,253,585 and $nil are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a loan with a term of 2 years, which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on December 11, 2024 according to the new schedule. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of September 30, 2022 and December 31, 2021, the total outstanding loan balance was $1,831,037 and $2,038,992, respectively. Out of the total outstanding loan balance, current portion amounted were $nil and $2,038,992 as of September 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,831,037 and $nil are presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On July 1, 2022, the Company entered into a loan agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowed RMB 400,000 from the customer for a term of five years, which is payable in monthly installment of RMB10667 from July 2022 to July 2027. As of September 30, 2022, the total outstanding loan balance was $50,706. Out of the total outstanding loan balance, current portion amounted was $6,489, which is presented as current liabilities and the remaining balance of $44,217 is presented as non-current liabilities in the consolidated balance sheet as of September 30, 2022.

 

Total interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2022 and 2021 were $248,239 and $264,644, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2022 and 2021 were $753,789 and $788,094, respectively.

 

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Shareholder Loans

 

Mr. Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $361,044 and $402,047 of interest were outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively.

 

On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of September 30, 2022 and December 31, 2021, approximately $42,255 and $47,054 of interest, respectively were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.

 

On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,201,342 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries 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. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance was due on July 12, 2021. On November 23, 2018, the Company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the Company paid off the remaining balance, together with interest of 94,636. As of September 30, 2022 and December 31, 2021, the outstanding interest was $193,579 and $215,565, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.

 

As of September 30, 2022 and December 31, 2021, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans were $nil for the three and nine months ended September 30, 2022 and 2021. The accrued interest owing to Mr. Zhenyong Liu was approximately $596,878 and $664,666, as of September 30, 2022 and December 31, 2021, respectively, which was recorded in other payables and accrued liabilities.

 

On December 8, 2021, the Company entered an agreement with Mr. Zhenyong Liu, which allows Mr. Zhenyong Liu to borrow from the Company an amount of $6,507,431 (RMB44,089,085). The loan is unsecured and carries a fixed interest rate of 3% per annum. The loan was repaid by Mr. Zhenyong Liu in February 2022.

 

As of September 30, 2022 and December 31, 2021, amount due to shareholder was $727,433, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.

 

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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 three months ended September 30, 2022 and 2021, 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 Dongfang Paper and Baoding 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 September 30, 2022 and December 31, 2021 to translate the Chinese RMB to the U.S. Dollars are 7.0998:1 and 6.3757:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.6410:1 and 6.4682:1 for the three months ended September 30, 2022 and 2021, respectively. Translation adjustments are included in other comprehensive income (loss).

 

Off-Balance Sheet Arrangements

 

We were the guarantor for Baoding Huanrun Trading Co., for its long-term bank loans in an amount of $4,366,320 (RMB31,000,000), which matures at various times in 2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions.

 

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Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the CECL standards. The ASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

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 and accounts receivables. As a result, we are exposed to foreign exchange risks 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, inflation 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, however, 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 in line with the increased costs.

 

Item 4. Controls and Procedures.

 

As required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Exchange 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 September 30, 2022, 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 (as such term is defined in Rules 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the quarterly period ended September 30, 2022.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

(a) Exhibits

 

31.1  Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2  Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS  Inline XBRL Instance Document
101.SCH  Inline XBRL Schema Document
101.CAL  Inline XBRL Calculation Linkbase Document
101.DEF  Inline XBRL Definition Linkbase Document
101.LAB  Inline XBRL Label Linkbase Document
101.PRE  Inline XBRL Presentation Linkbase Document
104  Cover Page Interactive Data File The cover page iXBRL tags are embedded within the inline

 

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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.

 

 IT TECH PACKAGING, INC.
    
Date: November 10, 2022/s/ Zhenyong Liu
 Name:  Zhenyong Liu
 Title: Chief Executive Officer
   (Principal Executive Officer)
    
Date: November 10, 2022/s/ Jing Hao
 Name: Jing Hao
 Title: Chief Financial Officer
   (Principal Financial Officer)

 

 

 

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