Item 1A. RISK FACTORS 22
Item 1B. UNRESOLVED STAFF COMMENTS 43
Item 2. PROPERTIES 43
Item 3. LEGAL PROCEEDINGS 43
Item 4. MINE SAFETY DISCLOSURES 43
PART II
Item 6. [RESERVED] 44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 56
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 56
Item 9A. CONTROLS AND PROCEDURES 57
Item 9B. OTHER INFORMATION 57
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION. 57
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 58
Item 11. EXECUTIVE COMPENSATION 61
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 64
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 65
SIGNATURES 69
i
INTRODUCTION
All references to “we,”
“us,” “our,” or similar terms used in this annual report refer to IT Tech Packaging, Inc., a Nevada corporation,
including its wholly-owned subsidiaries, and, in the context of describing our operations and consolidated financial information, our
variable interest entity in China, Hebei Baoding Dongfang Paper Milling Company Limited, or Dongfang Paper. “IT Tech Packaging”
refers to IT Tech Packaging, Inc. “VIE” or “Dongfang Paper” refers to our variable interest entity in China. “Baoding
Shengde” refers to our wholly-owned subsidiary, Baoding Shengde Paper Co., Ltd, a PRC company. “Qianrong”, refers to
our indirect wholly-owned subsidiary, QianrongQianhui Hebei Technology Co., Ltd, a PRC company. “Tengsheng Paper” refers to
the subsidiary of Dongfang Paper, Hebei Tengsheng Paper Co., Ltd., a PRC company.
All
references to “PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of
this annual report, Taiwan, Hong Kong and Macau; all references to “RMB” or “Renminbi” refer to the legal currency
of China; all references to “US$,” “dollars,” “U.S. dollars” and “$” refer to the legal
currency of the United States.
This
annual report on Form 10-K includes our audited consolidated statements of income and comprehensive income and our audited consolidated
balance sheets as of December 31, 2022 and 2021.
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K contains “forward-looking statements.” These statements are made under the “safe harbor”
provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terms such
as “may,” “will,” “expects,” “anticipates,” “future,” “intend,”
“plan,” “believe,” “estimate,” “is/are likely to” and similar expressions. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be
materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, without limitation, COVID-19 outbreak, our anticipated revenues from the corrugating medium
paper business segment and offset printing paper business, our ability to implement the planned capacity expansion of tissue paper, our
ability to introduce new products, market acceptance of new products, general economic and business conditions, the ability to attract
or retain qualified senior management personnel and research and development staff, and those specifically addressed under the headings
“Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The forward-looking statements made in this annual report relate only to events as of the date on which the statements are made. We undertake
no obligation, beyond any than as required by law, to update any forward-looking statement to reflect events or circumstances after the
date on which the statement is made, even though our situation changes in the future.
We
operate in an emerging and evolving environment. New risk factors emerge from time to time and it is impossible for our management to
predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statement.
ii
PART I
Item
1. Business
IT
Tech Packaging, Inc. (the “Company,” “IT Tech Packaging,” or “ITP”) is not an operating company but
a Nevada holding company with operations primarily conducted by its subsidiary and variable interest entity, or VIE, in China. IT Tech
Packaging operated its business in China through its wholly-owned PRC subsidiaries, namely Baoding Shengde Paper Co., Ltd., a People’s
Republic of China company (“Baoding Shengde”) and QianrongQianhui Hebei Technology Co., Ltd., a People’s Republic of
China company (“Qianrong”) (together with Baoding Shengde, the “PRC Subsidiaries”), and Hebei Baoding Dongfang
Paper Milling Company Limited (“Dongfang Paper”), which we refer to as our VIE in this annual report, and rely on contractual
arrangements that establish the VIE structure among Baoding Shengde, the VIE and VIE’s shareholders to operate our business in
China.
IT
Tech Packaging is a Nevada holding company with no operations of its own. Operations in China are primarily conducted through Dongfeng
Paper, the consolidated VIE. Dongfang Paper is consolidated for accounting purposes but is not an entity in which you own equity.
Investors
in our common stock should be aware that they may never directly hold equity interests in the Chinese operating entities, but rather
purchasing equity solely in IT Tech Packaging Inc., our Nevada holding company, which does not directly own substantially all of our
business in China conducted by our PRC Subsidiaries and VIE.
Because
of our corporate structure, we as well as the investors are subject to unique risks due to uncertainty of the interpretation and the
application of the PRC laws and regulations, including but not limited to regulatory review of oversea listing of PRC companies through
a special purpose vehicle. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard.
We may also be subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory Commission (“CSRC”)
if we fail to comply with their rules and regulations. Although the Company is currently not required to obtain permission from any of
the PRC central or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our operations
could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry,
if we inadvertently conclude that such approvals are not required when they are, or applicable laws, regulations, or interpretations
change and we are required to obtain approval in the future. For a description of relevant risks related to our corporate structure,
see “Risk Factors – Risks Relating to Doing Business in China” and “Risk Factors – Risks Relating to Our
Corporate Structure.”
Corporate
History
IT
Tech Packaging was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the
steps described below, we became the holding company with operations primarily conducted by our subsidiaries and our VIE, Dongfang Paper,
a producer and distributor of paper products in China, on October 29, 2007. Effective 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,” at such time.
On
October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang Zhiye
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, and holds a wholly-owned subsidiary, Baoding Shengde, a limited liability company organized under the laws of the PRC on June 1,
2009. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc., it is regarded as a wholly foreign-owned entity
under PRC law.
1
Effective
June 24, 2009, Baoding Shengde, Dongfang Paper and the original shareholders of Dongfang Paper entered into a number of contractual arrangements,
as subsequently amended on February 10, 2010, pursuant to which Baoding Shengde acts as the management company for Dongfang Paper, and
Dongfang Paper conducts the principal operations of the business. The contractual arrangements, as amended, effectively transferred the
preponderance of the economic benefits of Dongfang Paper to Baoding Shengde, and as a result, Baoding Shengde assumed effective control
and management over, is considered the primary beneficiary of Dongfang Paper for accounting purposes and we consolidate Dongfang Paper’s
operating results in IT Tech Packaging’s financial statements under U.S. GAAP. The contractual arrangements, as amended, include
the following:
(i) Exclusive Technical Service and Business Consulting Agreement
The
exclusive technical service and business consulting agreement, entered into by and between Baoding Shengde and Dongfang Paper, 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. The agreement is terminable upon mutual
written agreement.
(ii) Call Option Agreement
The
call option agreement, entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that
the shareholders of Dongfang Paper irrevocably grant to Baoding Shengde an option to purchase all or part of each shareholder’s
equity interest in Dongfang Paper. The exercise price for the options shall be RMB yuan for each of the shareholders’ equity interests,
or if at any time there are PRC laws regulating the minimum exercise price of such options, then to the extent permitted under PRC Law.
The call option agreement contains covenants from Dongfang Paper and its shareholders that they will refrain from taking certain actions
without Baoding Shengde’s consent that would materially affect Dongfang Paper’s operations and asset value, including (i)
supplementing or amending its articles of association or bylaws, (ii) changing Dongfang Paper’s registered capital or shareholding
structure, (iii) selling, transferring, mortgaging or disposing of any interests in Dongfang Paper’s assets or income, or encumbering
Dongfang Paper’s assets or income in a way that would approve a security interest on such assets, (iv) incurring or guaranteeing
any debts not incurred in its normal business operations, (v) entering into any material contract or urging Dongfang Paper management
to dispose of any Dongfang Paper assets, unless it is within the company’s normal business operations; (vi) providing any loan
or guarantee to any third party; (vii) appointing or removing any management personnel or directors that can be changed upon Dongfang
Paper shareholder approval; (viii) declaring or distributing any dividends to the stockholders. The agreement remains effective until
Baoding Shengde or its designees have acquired 100% of the equity interests of Dongfang Paper underlying the options.
(iii) Share Pledge Agreement
The
share pledge agreement entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that
the Dongfang Paper shareholders will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their
obligations under the other management agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of
the pledged equity interests in the event that the Dongfang Paper shareholders or Dongfang Paper fails to pay the service fees to Baoding
Shengde pursuant to the exclusive technical service and business consulting agreement or fails to perform their other obligations under
the other management agreement. The agreement contains covenants from Dongfang Paper’s shareholders that they will refrain from
taking certain actions without Baoding Shengde’s prior written consent, such as transferring or assigning their equity interests,
or creating or permitting the creation of any pledges which may have an adverse effect on the rights or benefits of Baoding Shengde under
the agreement. The Dongfang Paper shareholders also promise to comply with the laws and regulations relevant to the pledges under the
agreement and to facilitate in good faith the protection of the ability of Baoding Shengde to exercise its rights under the agreement.
The terms of the share pledge agreement remains in effect until all the obligations under the other management agreements have been fulfilled,
whether or not the terms of the other management agreements have expired.
(iv) Proxy Agreement
The
proxy agreement, entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that the
Dongfang Paper shareholders shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the
right to represent such shareholder to exercise his or her rights at any shareholder’s meeting of Dongfang Paper or with respect
to any shareholder 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 the Dongfang Paper shareholders continue to hold any equity interest in Dongfang
Paper. Dongfang Paper shareholder will cease to be a party to the agreement once it transfers its equity interests with the prior approval
of Baoding Shengde.
On
June 24, 2009, Zhao Tianqing, the sole shareholder of Shengde Holdings Inc., assigned to the Company, for good and valuable consideration,
100 shares representing 100% of the issued and outstanding shares of Shengde Holdings Inc. As a result of this assignment and the restructuring
transactions described above, Shengde Holdings Inc., Baoding Shengde, and Dongfang Paper became directly and indirectly controlled by
the Company, and Dongfang Paper continued to function as the Company’s operating entity.
2
In
addition to controlling the operations and beneficial ownership of Dongfang Paper, Baoding Shengde also acquired a digital photo paper
production line (including two photo paper coating lines and ancillary equipment) in an asset acquisition transaction on November 25,
2009 and began directly conducting business in the PRC. We suspended production of photo paper in June 2016 and now are upgrading the
production line to produce more competitive photo paper products.
An
agreement was entered into among Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper on December 31, 2010, reiterating
that Baoding Shengde is entitled to the distributable profit of Dongfang Paper, pursuant to the above mentioned Exclusive Technical Service
and Business Consulting Agreement. In addition, Dongfang Paper and the shareholders of Dongfang Paper agreed that they would not declare
any of Dongfang Paper’s unappropriated earnings, including any earnings of Dongfang Paper from its establishment to 2010 and thereafter,
as dividend.
The
contractual agreements described above have not been tested in a court of law.
The
diagram below illustrates our corporate structure and contractual arrangements with respect to each of our subsidiaries and consolidated
VIE and the place of incorporation of each named entity as of the date of this annual report:
3
The
following diagram sets forth the current ownership of Dongfang Paper:
Our
subsidiaries and the VIE in which our operations are conducted include:
1. Hebei
Baoding Dongfang Paper Milling Co., Ltd. (“Dongfang Paper”) is a PRC entity that entered into VIE Agreements with Baoding
Shengde; Dongfang Paper is the VIE.
2. Hebei
Tengsheng Paper Co., Ltd. (“Tengsheng”) is a PRC entity that is 100% owned by Dongfang Paper.
4
Recent Regulatory Developments
On
January 4, 2022, the Cyberspace Administration of China, or CAC, issued the revised Measures on Cyberspace Security Review (the “Revised
Measures”), which came into effect on February 15, 2022. Under the Revised Measures, any “network platform operator”
controlling personal information of no less than one million users which seeks to list in a foreign stock exchange should also be subject
to cyber security review.
We
do not believe we are “network platform operator” who control over one million personal information as mentioned above; as
such, we believe we are currently not be subject to the cyber security review by the CAC. However, the definition of “network platform
operator” is unclear and it is also unclear on how it will be interpreted and implemented by the relevant PRC governmental authorities.
See “Risk factors — Risk Factors Relating to Doing Business in China — Our business may be subject to a variety
of PRC laws and other obligations regarding cyber security and data protection.”
On
July 6, 2021, the relevant PRC governmental authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities
in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and
the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction
of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions
are recently issued, official guidance and related implementation rules have not been issued yet and the interpretation of these opinions
remains unclear at this stage. See “Risk Factors — Risk Factors Relating to Doing Business in China — While the
approval and/or other requirements of the CSRC or other PRC governmental authorities are currently not required, they may be required,
in connection with our oversea listing under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon
we will be able to obtain such approval.” As of the date of this annual report, we have not received any inquiry, notice, warning,
or sanctions regarding listing abroad or offshore offering from the CSRC or any other PRC governmental authorities.
We
believe that we are currently not required to obtain any permission or approval from the China Securities Regulatory Commission (“CSRC”)
and Cyberspace Administration of China (“CAC”) in the PRC to issue securities to foreign investors. However, there is no
guarantee that this will continue to be the case in the future in relation to any future offerings of our company or the continued listing
of our company’s securities on the NYSE American, or even in the event such permission or approval is required and obtained, it
will not be subsequently revoked or rescinded. If we do not receive or maintain the approvals, or we inadvertently conclude that such
approvals are not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in
the future, we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting
an offering, and these risks could result in a material adverse change in our operations and the value of our securities, significantly
limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly
decline in value or become worthless.
On
February 17, 2023, the CSRC released the Trial Administrative Measures for Administration of Overseas Securities Offerings and Listings
by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which will come into effect on March 31, 2023.
Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should
fulfill the filing procedures and report relevant information to the CSRC. If a domestic company fails to complete the filing procedures
or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative
penalties by the CSRC, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly
in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. As a listed
company, we believe that we, all of our PRC Subsidiaries, the consolidated VIE and its subsidiary are not required to fulfill filing
procedures and obtain approvals from the CSRC to continue to offer our securities or operate business of the consolidated VIE and its
subsidiary as of the date of this annual report. In addition, to date, none of us, our PRC Subsidiaries, the consolidated VIE and its
subsidiary has received any filing or compliance requirements from CSRC for the listing of the Company at NYSE American and all of its
overseas offerings. Furthermore, based on our understanding of the current PRC laws, we believe that the CSRC’s approval is not
required to be obtained for the Company’s listing on NYSE American; however, there are substantial uncertainties regarding the
interpretation and application of the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors (“M&A
Rules”), other PRC Laws and future PRC laws and regulations, and there can be no assurance that any governmental agency will not
take a view that is contrary to or otherwise different from our belief stated herein. See “Risk Factors — Risk Factors
Relating to Doing Business in China — The CSRC has released the Trial Measures for Administration of Overseas Securities
Offerings and Listings by Domestic Companies (the “Trial Measures”). While such rules have not yet gone into effect, the
Chinese government may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based
issuers, which could significantly limit or completely hinder our ability to continue to offer our securities to investors and could
cause the value of our securities to significantly decline or become worthless”
5
On
December 24, 2021, the Standing Committee of the National People’s Congress issued Law of the People’s Republic of China
on the Prevention and Control of Noise Pollution (the “Prevention and Control of Noise Pollution Law”), which became effective
on June 5, 2022. According to the Prevention and Control of Noise Pollution Law, entities subject to the pollutant discharge licensing
management requirements shall not emit industrial noise without a pollutant discharge permit and shall prevent and control noise pollution
according to the requirements of the pollutant discharge permit. The noise pollution has been included in the Pollution Discharge Permit,
and we conduct quarterly test on the noise through qualified testing institutions to comply with the laws, which is required by laws.
Consolidation
We
conduct substantially all of our business in China through Dongfang Paper, the VIE, due to PRC legal restrictions of foreign ownership
in certain sectors. Substantially most of IT Tech Packaging’s revenues, costs and net income in China are directly or indirectly
generated through the VIE. IT Tech Packaging, through Baoding Shengde, has signed various agreements with the VIE and shareholders of
the VIE to allow the transfer of economic benefits from the VIE to Baoding Shengde and to direct the activities of the VIE.
Total assets and liabilities
presented on IT Tech Packaging’s consolidated balance sheets and revenue, expense, net income presented on consolidated statement
of operations and comprehensive income as well as the cash flow from operating, investing and financing activities presented on the consolidated
statement of cash flows are substantially the financial position, operation and cash flow of the VIE. As of December 31, 2022, our variable
interest entity accounted for an aggregate of 88.54% and 72.59% of our total assets and total liabilities. As of December 31, 2021, our
variable interest entity accounted for an aggregate of 84.13% and 69.51% of our total assets and total liabilities. As of December 31,
2022 and 2021, $7,612,294 and $2,058,841 of cash and cash equivalents were denominated in RMB, respectively.
IT
Tech Packaging and its directly owned subsidiary, Shengde Holding, do not have any substantial assets or liabilities or result of operations.
The following table sets forth the assets, liabilities, results of operations and changes in cash, cash equivalents of the VIE, which
were included in the Company’s consolidated balance sheets and statements of comprehensive income and statements of cash flows
with intercompany transactions eliminated:
As of
For the Fiscal Year Ended
December 31,
6
Distributions
and Other Transfers of Cash through our Organization
We
are a holding company, although other means are available for us to obtain financing at the holding company level, we may receive dividends
and other distributions on equity paid by our subsidiary established in China for our cash needs, including the funds necessary to pay
dividends and other cash distributions to our shareholders to the extent we choose to do so, to service any debt we may incur and to
pay our operating expenses. Our PRC Subsidiaries, consolidated VIE and its subsidiary in China are subject to restrictions on making
dividends and other payments to us. Baoding Shengde’s income in turn depends on the service and other fees paid by the consolidated
VIE and its subsidiary. ITP, its subsidiaries, the consolidated VIE and its subsidiary may also transfer cash to each other as part of
the group cash management. If any of our subsidiaries, the consolidated VIE and its subsidiary incurs debt on its own behalf in the future,
the instruments governing such debt may restrict their ability to pay dividends or make other payments to us. Current PRC regulations
permit our PRC Subsidiaries in China to pay dividends to us only out of their accumulated profits, if any, determined in accordance with
Chinese accounting standards and regulations. In addition, under the applicable requirements of PRC law, our PRC Subsidiaries, consolidated
VIE and its subsidiary incorporated as companies may only distribute dividends after they have made allowances to fund certain statutory
reserves. These reserves are not distributable as cash dividends.
IT
Tech Packaging conducts its business operations in China through its PRC Subsidiaries and Dongfang Paper, the VIE. If needed, IT Tech
Packaging can transfer cash to the PRC Subsidiaries through loans and/or capital contributions, and the PRC Subsidiaries can transfer
cash to IT Tech Packaging through issuing dividends or other distributions. The PRC Subsidiaries can transfer cash to the VIE through
intercompany loans and capital contributions, and the VIE can transfer cash to the PRC Subsidiaries as services fees under the VIE contractual
arrangements. For the year ended December 31, 2022, the cash flows occurred between IT Tech Packaging, its subsidiaries and the VIE included
(i) funding through Shengde Holdings Inc. to Baoding Shengde, with an amount of $6,500,000 as capital contributions; (ii) Baoding Shengde
loans to Dongfang Paper with total amount of $1,727,644; (iii) Baoding Shengde loans to Tengsheng Paper with total amount of $1,923,845;
and (iv) funding through Shengde Holdings Inc. to Qianrong, with an amount of $3,500,000 as capital contributions. We do not have an
established cash management policy that dictates how funds are transferred between us, our subsidiaries, consolidated VIE and its subsidiary.
We do not, at this time, intend to distribute earnings or settle amounts owed under the VIE Agreements.
Current
PRC regulations permit the PRC Subsidiaries to pay dividends to its shareholders only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. The PRC Subsidiaries are required to set aside 10% of its after-tax profits
to fund a statutory reserve until such reserve reaches 50% of its registered capital if it distributes its after-tax profits for the
current financial year. For details, see “Risk Factors — Risk Factors Relating to Doing Business in China — We may
rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have,
and any limitation on the ability of our PRC Subsidiaries to make payments to us could have a material and adverse effect on our ability
to conduct our business.” In addition, cash transfers from IT Tech Packaging are subject to applicable PRC laws and regulations
on loans and direct investment. For details, see “Risk Factors — Risk Factors Relating to Doing Business in China —
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion
may delay us from making loans or additional capital contributions to our PRC Subsidiaries, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.”
7
In
addition, the PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the
remittance of currency out of China. IT Tech Packaging receives a significant portion of its revenues in Renminbi. Under IT Tech Packaging’s
current corporate structure, IT Tech Packaging’s Nevada holding company may rely on dividend payments from the PRC Subsidiaries
to fund any cash and financing requirements it may have. Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in
foreign currencies without prior approval of State Administration of Foreign Exchange, or SAFE, by complying with certain procedural
requirements. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted
into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.
As a result, we need to obtain SAFE approval to use cash generated from the operations of the PRC Subsidiaries and VIE to pay off their
respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside
China in a currency other than Renminbi. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies
to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to its shareholders. See “Risk
Factors — Risk Factors Relating to Doing Business in China — Governmental control of currency conversion may limit our ability
to utilize our revenues effectively and affect the value of your investment”. In order to secure the amounts owed under the
VIE agreements, the VIE and its shareholders entered into a share pledge agreement with Baoding Shengde, pursuant to which if the VIE
fails to pay the service fees to the Baoding Shengde pursuant to the exclusive technical service and business consulting agreement or
fails to perform their other obligations under the other management agreement, Baoding Shengde is entitled to dispose of the pledged
equity interests in the VIE.
IT
Tech Packaging declared and paid four quarterly cash dividends to its U.S. investors in April 2012 and November 2013. As of the date
of this annual report, other than those cash dividends, none of IT Tech Packaging’s subsidiaries have ever issued any dividends
or made other distributions to IT Tech Packaging or their respective holding companies nor has IT Tech Packaging or any of IT Tech Packaging’s
subsidiaries ever paid dividends or made other distributions to U.S. investors. IT Tech Packaging currently intend to retain all future
earnings to finance its operations and to expand its business. As a result, IT Tech Packaging does not expect to pay any cash dividends
in the foreseeable future.
Holding
Foreign Company Accountable Act (“HFCAA”)
Our
common stock may be delisted from the NYSE American under the Holding Foreign Companies Accountable Act (“HFCAA”), if the
PCAOB is unable to adequately inspect audit documentation located in China, or investigate our auditor. Furthermore, on June 22, 2021,
the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which was signed into law on December 29, 2022, amends
the HFCAA and requires the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not
subject to PCAOB inspections for two consecutive years instead of three. Our auditor, WWC, P.C., Certified Public Accountants, is a U.S.-based
accounting firm registered with the PCAOB, and is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections
to assess its compliance with the applicable professional standards. Our auditor is headquartered in the United States and is subject
to inspection by the PCAOB on a regular basis with the last inspection in November 2021. On August 26, 2022, the PCAOB signed the Protocol
with the CSRC and the MOF of the People’s Republic of China, governing inspections and investigations of audit firms based in mainland
China and Hong Kong. The Protocol remains unpublished and is subject to further explanation and implementation. Pursuant to the fact
sheet with respect to the Protocol disclosed by the SEC, the PCAOB shall have independent discretion to select any issuer audits for
inspection or investigation and the unfettered ability to transfer information to the SEC. On December 15, 2022, the PCAOB announced
that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China
mainland and Hong Kong completely in 2022. The PCAOB Board vacated its previous 2021 determinations that the PCAOB was unable to inspect
or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong. However, whether the PCAOB
will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in China mainland
and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s control. The PCAOB is
continuing to demand complete access in China mainland and Hong Kong moving forward and is already making plans to resume regular inspections
in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB
has indicated that it will act immediately to consider the need to issue new determinations with the HFCAA if needed. Therefore, the
PCAOB in the future may determine that it is unable to inspect or investigate completely registered public accounting firms in mainland
China and Hong Kong. Our auditor’s working papers related to us and the consolidated VIE and its subsidiary are located in China.
If our auditor is not permitted to provide requested audit work papers located in China to the PCAOB, investors would be deprived of
the benefits of PCAOB’s oversight of our auditor through such inspections which could result in limitation or restriction to our
access to the U.S. capital markets and trading of our securities may be prohibited under the HFCAA, which would result in the delisting
of our securities from the NYSE American.
8
See
“Risk Factors—Risks Associated with Our Company— Our common stock may be delisted from the NYSE American under the
Holding Foreign Companies Accountable Act if the PCAOB is unable to adequately inspect audit documentation located in China. The delisting
of our common stock, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
Summary
of Risk Factors
Investing
in our securities involves significant risks and uncertainties. You should carefully consider all of the information in this annual report
before making an investment in our securities. Below please find a summary of the principal risks we face, organized under relevant headings.
These risks are discussed more fully in the section titled “Risk Factors.”
Risks Relating to our Business
● We may not be able to effectively control and manage our growth.
● We are responsible for the indemnification of our officers and directors.
● Our operating results may fluctuate as a result of factors beyond our control.
● We face risks related to product liability claims.
9
● If we are unable to respond to pricing pressures, our business may be harmed.
Risks
Related To Doing Business in the PRC
10
● The fluctuation of the Renminbi may harm your investment.
Risks
Related to Our Corporate Structure
11
Risks
Related to Our Common Stock
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.
On
the basis of scientific assessment of the characteristics of the virus and the pandemic situation, as well as reference to the prevention
practices of other countries, at the end of 2022, the Chinese government refined its COVID-19 prevention and control measures and stopped
conducting nucleic acid testing for all residents. By the end of 2022, vaccination rate has exceeded 90%. And normal life is returning.
Under such circumstances, the government has taken positive service measures, including tax incentives, bank loan and financial support,
etc, to support domestic enterprises to overcome difficulties. The market consolidation will be expedited eventually.
Since
we resumed business operations after the outbreak of COVID-19, the Company kept continuous attention on the development of the COVID-19
pandemic and reacted actively to its impact on the financial position and operating results of the Company. As of the date of the annual
report, COVID-19’s adverse impacts on the company’s financial position and operating result as of December 31, 2022 were
limited.
12
Our
Business
We,
through our PRC Subsidiaries and VIE, engage in production and distribution of three categories of paper products: corrugating medium
paper, offset printing paper, tissue paper products and medical face masks in China.
Our
principal executive offices are located at Science Park, Juli Road, Xushui District, Baoding City, Hebei Province, People’s Republic
of China.
Our
telephone number is (86) 312-869-8215. Our website is located at https://www.itpackaging.cn.
Manufacturing
Process
Corrugating
Medium Paper and Offset Printing Paper
Our
current products (excluding tissue paper products) generally undergo two stages of manufacturing: (1) creating pulp from recycled paper
products, and (2) treating the pulp and molding it into the desired types of paper products. A brief overview of the pulp and papermaking
process is provided below.
Pulping
The
recycled waste paper is first sorted by machine, and then broken down and beaten or smashed into small pieces using water and mechanical
energy. It is then put through a course screening drum, followed by a fine screening drum to separate different grades of pulp, a process
that we refer as “concentration”. In order to purify the pulp further, an approach flow system is used to filter out any
impurities or inconsistencies, such as sand, in the pulp.
Paper
Making
The
pulp is sieved to remove the excess water and molded into a specific size. The moisture content is further reduced by applying hydraulic
pressure to the pulp. The pulp then enters the drying section where it is rolled over by heated cylinders. The dried paper is then coated
with a mixture of clay, white pigment and binder to produce a surface on which ink can sit without being fully absorbed, enabling crisper,
and more consistent print quality.
The
paper goes through a process called calendaring, which flattens and smoothens the paper into long sheets. The paper is then wound onto
a reel that is mounted in a roll-slitting machine for rewinding, during which cutters are used to cut the paper into the desired widths.
Upon completion, the rolls are fitted with sleeves and labeled, and then sent to quality control before shipment or storage.
13
Base
Tissue Paper
While
we make tissue paper products, we currently purchase paper pulp from suppliers and use it to manufacture base tissue paper directly.
Products
Corrugating
medium paper
Corrugating
medium paper, or CMP is used in the manufacturing of cardboard. Since the launch of our new Paper Machine (“PM6”) production
line in December 2011, corrugating medium paper has become a major product of the Company. For the year ended December 31, 2022, corrugating
medium paper comprised approximately 99.42% of our total paper production quantities and roughly 98.38% of our total revenue. Raw materials
used in the production of corrugating medium paper include recycled paper board (or Old Corrugating Cardboard or “OCC,” as
it is commonly referred to in the United States) and certain supplementary agents. In January 2013, we suspended the operation of our
PM1 production line for renovation, which was then used to produce corrugating medium paper. In May 2014, we launched the commercial
production of a renovated PM1 production line. The renovated PM1 production line produces light-weight corrugating medium paper with
a specification of 40 to 80 grams per square meter (“g/s/m”). PM1’s light-weight corrugating medium paper products
have a wide range of commercial applications. For example, they can be used as a construction material for wall and floor insulation
or to manufacture moisture-proof packaging materials for the transportation of books and magazines by the publishing industry. It can
also be used as corrugating medium to make corrugating cardboard for packaging that requires light-weight boxes. The manufacturing process
of light-weight corrugating medium paper is similar to that of the regular corrugating medium paper and also uses recycled paper boards
as a major source of raw material. We now have two corrugating medium paper production lines, PM6 and PM1. We refer to products produced
from the PM6 production line as Regular CMP and products produced from the PM1 production line as Light-Weight CMP.
Offset
printing paper
Offset
printing paper is used for offset printing in the publishing industry. Revenue from offset printing paper was $nil for the year ended
December 31, 2022. Raw materials used in making offset printing paper include recycled white scrap paper, fluorescent whitening agent
and sizing agent. We currently have two production lines, PM2 and PM3, for the production of offset printing paper.
Tissue
Paper Products
We
began the commercial production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper purchased
from long-term cooperative third party and produce finished tissue paper products, including toilet paper, boxed and soft-packed tissues,
handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the Dongfang Paper
brand. In December 2018 and November 2019, we completed the construction, installation and test of operation of PM8 and PM9, respectively,
and commercially launched tissue paper production of PM8 and PM9 at such time. On May 5, 2020, the Company announced it planned the commercial
launch of a new tissue paper production line PM10 and the Company entered into 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. The machine supplier
was delayed because of pandemic. We are closely following up the provider for further actions. Tissue paper products comprised approximately
0.58% of our total paper production quantities and approximately 1.36% of our total sales revenue for the year ended December 31, 2022.
Face
Masks
On
April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials preparation,
trial run of the equipment and the sample products inspection. In May 2021, the Company obtained the license for its new single-use surgical
masks from local food and drug administration in Hebei province, and began commercial production in November 2021.
14
Market
for our Products
The
PRC Paper Making Industry
According
to the 2021 China Paper Industry Annual Report, issued by the China Paper Association, there were approximately 2,500 paper and paper
board manufacturers in China, with a total output of 121.05 million tonnes, up by 7.50% from 112.60 million tonnes in 2020. Total domestic
consumption was 126.48 million tonnes in 2021, up by 6.94% from 118.27 million tonnes in 2020.
The
output of paper and paper board maintained an average growth rate of approximately 1.87% during the ten-year period from 2012 to 2021,
while consumption increased at an average annual rate of 2.59%. The growth is expected to continue. It is estimated that China currently
has the largest paper and paper board products output and consumption in the world. (Data source: 2021Annual Report of China Paper
Manufacturing, May 2022,China Paper Association)
Unit:
Million tons
Data
source: 2021 Annual Report of China’s Paper Industry, May 2022, China Paper Association
Corrugating
medium paper production in China totaled 26.85 million tonnes in 2021, a 12.34% increase from 2020. Consumption of corrugating medium
paper in China amounted to 29.77 million tonnes in 2021, an increase of 7.24% as compared to 2020.
Uncoated
offset printing paper production in China totaled 17.20 million tonnes in 2021, a 0.58% decrease from 2019. Consumption of uncoated offset
printing paper in China amounted to 17.93 million tonnes in 2021, an increase of 0.56% as compared to 2020.
The
paper making industry in China is concentrated in the east coast provinces. The largest paper production capacities by province for 2021
and 2020 (the most recent year for which relevant information is available) are summarized in the table below. The three provinces with
largest capacities showed moderate increases in paper production capacities; provinces with smaller capacities, such as, Chongqing, Hebei
and Sichuan, showed noticeable increases as well.
Province (10k tonnes) (10k tonnes) Change
Data
Sources: 2021 Annual Report of China’s Paper Industry, May 2022, China Paper Association
15
Customers
We
generally sell our corrugating medium paper to companies making corrugating cardboards and offset printing paper to printing companies.
Our largest customer is a packaging company in Hebei Province. Our total corrugating medium and offset printing paper revenue in 2022
was primarily derived from customers in Hebei Province and Shandong Province.
For
the year ended December 31, 2022, three major customers who individually accounted for more than 5% of our total sales revenue are as
follows:
Sales Amount
(USD$, net of % of
applicable Total
VAT) Revenue
Seven
of our top-ten customers of 2022 are also in the top-ten customer list in 2021, representing 78.48% of the 2021 top-ten customer sales.
Target
Market
We
target corporate customers in the middle range of the marketplace, where, with solid quality and competitive pricing, we see potential
for high volume growth for corrugating medium paper and offset printing paper. Our primary market has been the region of North China,
especially in the province of Hebei.
Our
Production Lines
During
the year ended December 31, 2022, we had six PM production lines in operation and are in the process of launching one more that are designated
as PM7. These production lines include the followings:
PM1 Corrugating Medium Paper 60,000 Dongfang Paper Dongfang Paper In production
PM2 Offset Printing Paper 50,000 Dongfang Paper Dongfang Paper In production
PM3 Offset Printing Paper 40,000 Dongfang Paper Dongfang Paper In production
PM8 Tissue paper 15,000 Dongfang Paper Dongfang Paper In production
PM9 Tissue paper 15,000 Dongfang Paper Dongfang Paper In production.
PM10 Tissue paper 20,000 Dongfang Paper Dongfang Paper In construction
16
On
December 31, 2009, we acquired a digital photo paper production line, including two coating lines that are designated as PM4 and PM5
and ancillary equipment, for a total purchase price of approximately $13.6 million. We suspended production of photo paper in June 2016.
In
order to meet the growing domestic demand for paper, which we believe currently exceeds domestic supply in the case of corrugating medium
paper, especially in the region of North China, we installed a corrugating medium paper production line (PM6) with a designed capacity
of 360,000 tonnes per year. We completed the installation of the PM6 production line in November 2011 and began commercial production
in December 2011.
We
have implemented a plan to renovate one of the old production lines that has been idle since the end of 2007. We previously made paper
with anti-counterfeit features from that production line. When the renovation is completed, we intend to use the renovated production
line to produce high-profit margin specialty papers. Our current plan is to complete the renovation project, put in place a new production
and marketing team and launch the renovated production line as PM7 by the end of 2023.
On
November 27, 2012, we signed a 15-year lease relating to approximately 49.4 acres of land in the Economic Development Zone in Wei County,
Hebei Province, China for the purpose of developing a new tissue paper production plant. We planned to build two tissue paper production