Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion
of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data, the
financial statements, and the notes to those statements that are included elsewhere in this annual report.
Results of Operations
Revenue for the year ended
December 31, 2022 was $100,352,434, representing a decrease of $60,529,286, or 37.62%, from $160,881,720 for 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 year ended December 31, 2022 was $100,081,664, a decrease of $60,262,256, or 37.58%,
from $160,343,920 for the year ended December 31, 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 products.
Total quantities of offset
printing paper, CMP and tissue paper products sold during the year ended December 31, 2022 amounted to 219,604 tonnes, a decrease of 72,855
tonnes, or 24.91%, compared to 292,459 tonnes sold during the year ended December 31, 2021. Total quantities of CMP and offset printing
paper sold decreased by 65,873 tonnes in the year of 2022 as compared to 2021. We sold 1,273 tonnes of tissue paper products in the year
of 2022 as opposed to 8,255 tonnes in 2021. Production of CMP was suspended during January and February 2022 and offset printing paper
suspended during the year. Production was restricted due to Winter Olympics held in Beijing 2022 and COVID-19 control measures during
the year as required by the government. The changes in revenue and quantity sold for the year ended December 31, 2022 and 2021 are summarized
as follows:
Year Ended Year Ended Percentage
45
Monthly revenue (excluding revenue of digital
photo paper and tissue paper products) for the 24 months ended December 31, 2022, are summarized below:
The average selling price, or ASP, for our major products
for the years ended December 31, 2022 and 2021 are summarized as follows:
Increase (Decrease) by percentage - % -12.50 % -13.21 % 0.28 %
The following is a chart showing the month-by-month ASPs
for the 24 month period ended December 31, 2022:
46
Corrugating Medium Paper
Revenue from CMP amounted
to $98,725,409 (98.64% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2022,
representing a decrease of $35,786,346, or 26.60%, from $134,511,755 during 2021.
We sold 218,331 tonnes of
CMP in the year ended December 31, 2022 as compared to 259,691 tonnes in the year ended December 31, 2021, representing a 15.93% decrease
in quantity sold.
ASP for regular CMP dropped
from $520/tonne in 2021 to $455/tonne in 2022, representing a 12.50% decrease. ASP in RMB for regular CMP in 2021 and 2022 was RMB3,355
and RMB3,073, respectively, representing a 8.41% decrease. The quantity of regular CMP sold decreased by 32,513 tonnes, from 213,490 tonnes
in 2021 to 180,977 tonnes in 2022.
ASP for light-weight CMP
dropped from $507/tonne in 2021 to $440/tonne in 2022, representing a $13.21% decrease. ASP in RMB for light-weight CMP in 2021 and 2022
was RMB3,270 and RMB2,972, respectively, representing a 9.11% decrease. The quantity of light-weight CMP sold decreased by 8,847 tonnes,
from 46,201 tonnes in 2021, to 37,354 tonnes in 2022.
Our PM6 production line,
which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December 31, 2022
and 2021 were 49.28% and 60.94%, respectively, representing a decrease of 11.66%.
Quantities sold for regular
CMP that was produced by the PM6 production line from January 2021 to December 2022 are as follows:
Offset Printing Paper
Revenue from offset printing
paper was $nil for the year ended December 31, 2022 compared to the revenue of $17,062,564 for the year ended December 31, 2021. Due to
COVID-19, our paper production was restricted and production of offset printing paper was suspended in 2022.
47
Tissue Paper Products
Revenue from tissue paper
products was $1,356,255 (1.36% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December
31, 2022, representing a decrease of $7,413,346, or 84.53%, from $8,769,601 in 2021. We sold 1,273 tonnes of tissue paper products in
the year ended December 31, 2022, as compared to 8,255 tonnes in 2021, a decrease of 6,982 tonnes, or 84.58%.
ASP for tissue paper products
was $1,062/tonne and $1,065/tonne in the year ended December 31, 2021 and 2022, respectively, representing a 0.28% increase. ASP in RMB
for tissue paper products for the year ended 2021 and 2022 was RMB6,849 and RMB7,198, respectively, representing a 5.10% increase.
Revenue of Face Mask
Revenue generated from selling
face masks were $257,820 and $537,800 for the year ended December 31, 2022 and 2021. We sold 5,625 thousand pieces of face masks in the
fourth quarter of 2022, as compared to 12,664 thousand pieces in the comparable period of 2021, a decrease of 7,039 thousand pieces, or
55.58%.
Cost of Sales
Total cost of sales for CMP,
offset printing paper and tissue paper products in the year ended December 31, 2022 was $95,384,334, a decrease of $54,045,377, or 36.17%,
from $149,429,711 for the year ended December 31, 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
$91,093,891 for the year ended December 31, 2022, as compared to $125,445,157 in 2021. The decrease in the cost of sales of $34,351,266
for CMP was mainly due to the decrease in the quantities of regular CMP sold and the decrease in average cost of sales in the year of
2022. Average cost of sales per tonne for CMP decreased by 13.66%, from $483 for the year ended December 31, 2021, to $417 in 2022.This
is mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board.
Cost of sales for offset
printing paper was $nil for the year ended December 31, 2022, as compared to $13,963,983 in 2021.
Cost of sales for tissue
paper products was $4,290,443 for the year ended December 31, 2022, as compared to $10,020,571 in 2021. The decrease in the cost of sales
of $5,730,128 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 177.59%, from $1,214 in 2021
to $ 3,370 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 year ended December 31, 2022 and 2021 are summarized below:
Year Ended Year Ended
December 31, 2022 December 31, 2021 Change in Change in percentage
Our average unit purchase
costs (net of applicable value added tax) of recycled paper board for the year ended December 31, 2022 were RMB 1,690/tonne (approximately
$250/tonne), as compared to RMB 1,997/tonne (approximately $310/tonne) for the year ended December 31, 2021. These changes (in US dollars)
represent a year-over-year decrease of 19.35% for the unit purchase cost of 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.
48
The pricing trends of our major raw materials for the 24-month
period from January 2021 to December 2022 are shown below:
Electricity and gas are our
two main energy sources. Electricity and gas accounted for approximately 4% and 12.4% of total sales in 2022, respectively, compared to
4% and 10.5% of total sales 2021. The monthly energy cost (electricity and gas) as a percentage of total monthly sales of our main paper
products for the 24 months ended December 31, 2022 are summarized as follows:
Gross Profit
Gross profit for December
31, 2022 was $4,754,196 (4.74% of the total revenue), representing a decrease of $6,263,363, or 56.85%, from the gross profit of $11,017,559
(6.85% of the total revenue) for the year ended December 31, 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.
49
Corrugating Medium Paper, Offset Printing Paper and Tissue Paper
Products
Gross profit for offset printing paper, CMP
and tissue paper products for the year ended December 31, 2022 was $4,697,330, a decrease of $6,216,879, or 56.96%, from the gross profit
of $10,914,209 for the year ended December 31, 2021. The decrease 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 2.12 percentage points, from 6.81% for the year ended December 31, 2021, to 4.69% for
the year ended December 31, 2022.
Gross profit margin for regular CMP for the year
ended December 31, 2022 was 7.39%, or 1.07 percentage points higher, as compared to gross profit margin of 6.32% for the year ended December
31, 2021. Such increase was primarily due to decrease in material costs, partially offset by the decrease in ASP of regular CMP.
Gross profit margin for light-weight CMP for
the year ended December 31, 2022 was 9.42%, or 0.69 percentage points higher, as compared to gross profit margin of 8.73% for the year
ended December 31, 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 -216.34% for the year ended December 31, 2022, a decrease of 202.08 percentage points, as compared to -14.26% for the year ended December
31, 2021.The decrease was mainly due to the increase in cost of tissue base paper.
Monthly gross profit margins for our corrugating
medium paper and offset printing paper for the 24-month period ended December 31, 2022 are as follows:
Face Masks
Gross profit for face mask
for the year ended December 31, 2022 was $67,328, representing a gross margin of 26.11% compared with a gross profit of $103,350, representing
a gross margin of 19.22%, for the year ended December 31, 2021.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses for the year ended December 31, 2022 were $10,058,723, an increase of $500,533, or 5.24% from $9,558,190 for the year ended December
31, 2021. The increase was mainly due to 150,000 shares of common stock granted under our compensatory incentive plan in August 2022,
value at $156,000 and additional bad debt provision.
Income (Loss) from Operations
Operating loss for
the year ended December 31, 2022 was $5,304,527, a decrease of $6,763,896, or 463.48%, from income from operations of $1,459,369 for
the year ended December 31, 2021. The decrease was primarily due to the decrease in gross profit and increase in selling, general and
administrative expenses.
50
Other Income and Expenses
Interest expense for the
year ended December 31, 2022 decreased by $96,751, from $1,124,702 for the year ended December 31, 2021, to $1,027,951. The Company had
short-term and long-term interest-bearing loans and lease obligation that aggregated $15,442,807 as of December 31, 2022, as compared
to $16,139,485 as of December 31, 2021.
Provision for Income Taxes
Full allowance for deferred
tax asset loss was provided in the year of 2022. Income tax for the year ended December 31, 2022 is $11,711,339 as compared to the income
tax $5,546,954 for the year ended December 31, 2021.
Net Income (Loss)
As a result of the above,
net loss was $16,571,308 for the year ended December 31, 2022, representing a decrease of $17,476,843, or 1930.0%, from net income of
$905,535 for year ended December 31, 2021.
Accounts Receivable
Net accounts receivable decreased
by $3,987,056, or 81.89%, to $881,878 as of December 31, 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 51.22% of total value of inventory as of December 31, 2022), semi-finished goods and finished goods. As of
December 31, 2022, the recorded value of inventory decreased by 50.85% to $2,872,622 from $5,844,895 as of December 31, 2021. As of December
31, 2022, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $1,258,161, approximately
$838,901, or 40.00%, lower than the balance as of December 31, 2021. As a result of better control over stock turnover, recycled paper
board and finished goods were reduced by 40% and 62.7%, respectively, as at December 31, 2022 as compared to finished goods at the end
of 2021.
A summary of changes in
major inventory items is as follows:
December 31, December 31,
Raw Materials
Inventory reserve - - -
51
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 $147,988 (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 December 31, 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 December 31, 2022,
we had approximately $4.3 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,
Tengsheng Paper sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment,
Tengsheng Paper leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Tengsheng Paper
may pay a nominal purchase price of RMB 100 (approximately $15) 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 of15.6% per annum and stated at $567,099 at the inception of the lease on August
17, 2020.
Tengsheng Paper made payments
due according to the schedule. As of December 31, 2022 and 2021, the balance of Leased Equipment net of amortization was $1,939,970 and
$2,286,459, respectively. The lease liability were $131,772 and $362,394, and its current portion in the amount of $131,772 and $210,161
as of December 31, 2022 and 2021, respectively.
Amortization of the Leased
Equipment was $157,854 and $165,441 for the year ended December 31, 2022 and 2021, respectively. Total interest expenses for the sale
lease back arrangement was $38,954 and $71,798 for the year ended December 31, 2022 and 2021, respectively.
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.
52
Cash, Cash Equivalents and restricted cash
Our cash, cash equivalents and restricted cash
as of December 31, 2022 was $9,524,868, a decrease of $1,676,744, from $11,201,612 as of December 31, 2021. The decrease of cash and cash
equivalents for the year ended December 31, 2022 was attributable to a number of factors including:
i. Net cash provided by operating activities
Net cash provided by operating
activities was $10,719,388 for the year ended December 31, 2022. The balance represented a decrease of cash of $13,155,459, or 540.03%,
from $2,436,071 used in operating activities for the year ended December 31, 2021. Net loss for the year ended December 31, 2022 was $
$16,571,308, representing a decrease of $17,476,843, or 1930.0%, from a net income of $905,535 for the year ended December 31, 2021. Changes
in various asset and liability account balances throughout the year ended December 31, 2022 also contributed to the net change in cash
from operating activities in year ended December 31, 2022. Chief among such changes is the decrease of accounts receivable in the amount
of $3,750,196 (an increase to net cash) during the year of 2022. There was also a decrease of $2,554,072 in the ending inventory balance
as of December 31, 2022 (an increase to net cash for the year ended December 31, 2022 cash flow purposes). In addition, the Company had
non-cash expenses relating to depreciation and amortization in the amount of $14,788,036, net deferred tax allowance of $10,261,104 and
allowance for bad debts of $843,779. The Company also had a net increase of $3,976,010 in prepayment and other current assets (a decrease
to net cash) and a net increase of $1,018,448 in other payables and accrued liabilities and related parties (a decrease to net cash),
as well as a decrease in income tax payable of $614,738 (a decrease to net cash) during the year ended December 31, 2022.
ii. Net cash used in investing activities
We incurred $10,898,531 in
net cash expenditures for investing activities during the year ended December 31, 2022, as compared to $25,071,372 for the year ended
December 31, 2021. Payments in 2022 were mainly for the last installments for the Tengsheng land acquisition.
iii. Net cash provided by financing activities
Net cash used in financing
activities was $879,596 for the year ended December 31, 2022, as compared to net cash provided by financing activities in the amount of
$34,193,824 for the year ended December 31, 2021.
December 31, December 31,
Industrial and Commercial Bank of China (“ICBC”) Loan 1 $ - $ 5,958,561
China Construction Bank Loan 143,583 -
On November 25, 2021, the Company entered into
a working capital loan agreement with the ICBC, with a balance of $5,958,561 as of December 31, 2021. 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 was fully repaid in November 2022.
On November 10, 2022, the Company entered into
a working capital loan agreement with the ICBC, with a balance of $5,023,978 as of December 31, 2022. 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 by November 13, 2023.
On November 30, 2022, the Company entered into
a working capital loan agreement with the ICBC, with a balance of $287,167 as of December 31, 2022. The loan bears a fixed interest rate
of 4.3% per annum. The loan will be due by May 29, 2023.
On November 30, 2022, the Company entered into
a working capital loan agreement with the ICBC, with a balance of $143,583 as of December 31, 2022. The loan bears a fixed interest rate
of 4.3% per annum. The loan will be due by May 29, 2023.
On July 29, 2022, the Company entered into a
working capital loan agreement with the China Construction Bank, with a balance of $143,583 as of December 31, 2022. The loan bears a
fixed interest rate of 3.95% per annum. The loan will be due by July 29, 2023.
As of December 31, 2021, there were guaranteed
short-term borrowings of $5,958,561 and unsecured bank loans of $nil. As of December 31, 2022, there were guaranteed short-term borrowings
of $5,023,978 and unsecured bank loans of $574,333.
The average short-term borrowing
rates for the years ended December 31, 2022, and 2021 were approximately 4.72% and 4.73%, respectively.
53
Long-term loans
As of December 31, 2022, and 2021, long-term
loans balance is $9,040,002 and $9,818,530, respectively.
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 bore a rate of 7.68% per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum. 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 December 31, 2022, and 2021, total outstanding loan balance was $1,234,816 and $1,348,871, respectively, Out of the total
outstanding loan balance, current portion amounted were $1,234,816 and $329,376 as of December 31, 2022, and 2021, respectively, which
are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,019,495 are presented
as non-current liabilities in the consolidated balance sheet as of December 31, 2022, and 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 $280,466 and $1,130,333 as of December 31, 2022, and 2021, respectively. Interest payment
is due quarterly and bore a rate of 7.68% per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum.
As of December 31, 2022, and 2021, the total outstanding loan balance was $3,589,582 and $3,921,139, respectively. Out of the total outstanding
loan balance, current portion amounted were $3,589,582 and $1,960,569 as of December 31, 2022, and 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 December 31, 2022, and 2021, respectively.
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 Tengsheng Paper with its land
use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bore a rate of 7.68% per annum. With
effective from November 15, 2022, the interest rate is reduced to 7% per annum. As of December 31, 2022, and 2021, the total outstanding
loan balance was $2,297,332 and $2,509,528, respectively. Out of the total outstanding loan balance, current portion amounted were $nil
and $2,509,528 as of December 31, 2022 and 2021 respectively, which are presented as current liabilities in the consolidated balance sheet
and the remaining balance of $2,297,332 and $nil are presented as non-current liabilities in the consolidated balance sheet as of December,
2022 and 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 Tengsheng
Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bore a rate of 7.68%
per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum. As of December 31, 2022, and 2021, the
total outstanding loan balance was $1,866,582 and $2,038,992, respectively. Out of the total outstanding loan balance, current portion
amounted were $nil and $2,038,992 as of December 31, 2022, and 2021 respectively, which are presented as current liabilities in the consolidated
balance sheet and the remaining balance of $1,866,582 and $nil are presented as non-current liabilities in the consolidated balance sheet
as of December 31, 2022, and 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 RMB400,000 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 December 31, 2022,
the total outstanding loan balance was $51,690. Out of the total outstanding loan balance, the current portion amounted $11,486, which
is presented as current liabilities and the remaining balance of $40,204 is presented as non-current liabilities in the consolidated balance
sheet as of December 31, 2022.
Total interest expenses for
the short-term bank loans and long-term loans for the years ended December 31, 2022, and 2021 were $988,997 and $1,052,904 respectively.
Related party transactions
Mr. Zhenyong Liu 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
$368,052 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 December 31, 2022, and 2021, respectively.
54
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 December 31, 2022, and 2021, approximately $43,075 and $47,054 of interest 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 into 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
will be 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 December 2022, and 2021, the outstanding
interest was $197,338 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 December 31, 2022,
and 2021, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil
for the years ended December 31, 2022 and 2021. The accrued interest payable to Mr. Zhenyong Liu was approximately $608,465 and $664,666,
as of December 31, 2022 and 2021, respectively, which was recorded in other payables and accrued liabilities
On December 8, 2021, the
Company entered into an agreement with Mr. Zhenyong Liu, which allowed 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.
In October 2022 and November
2022, the Company entered into two agreements with Mr. Zhenyong Liu, which allowed Mr. Zhenyong Liu to borrow from the Company an amount
of $7,179,163 (RMB50,000,000) in total. The loans were unsecured and carried a fixed interest rate of 4.35% per annum. The loans were
fully repaid by Mr. Zhenyong Liu in February 2023.
As of December 31, 2022 and
2021, amount due to shareholder are $727,433, which represent funds from shareholders to pay for various expenses incurred in the U.S.
The amount is due on demand with interest free.
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 years
ended December 31, 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.
55
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 December 31, 2022 and 2021 to translate the Chinese RMB to the U.S. Dollars are 6.9646:1 and 6.3757:1, respectively.
Revenues and expenses are translated using the prevailing average exchange rates at 6.7573:1, and 6.4474:1 for the years ended December
31, 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 $4,862,211 (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.
Recent Accounting Pronouncements
In May 2019, the FASB issued
ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial
assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic
326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified
the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than
the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt
Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair
value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief
will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial
assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update
2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10,
which to update the effective date of ASU No. 2016-02 for private companies, not-for-profit organizations and certain smaller reporting
companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning
after December 15, 2022. The Company is currently evaluating the impact of ASU 2019-05 will have on its consolidated financial statements.
In October 2021, the
FASB issued ASU 2021-08, “Business Combinations”. The amendments in this Update address how to determine whether a contract
liability is recognized by the acquirer in a business combination and resolve the inconsistency of measuring revenue contracts with customers
acquired in a business combination by providing specific guidance on how to recognize and measure acquired contract assets and contract
liabilities from revenue contracts in a business combination. The amendments in this Update apply to all entities that enter into a business
combination within the scope of Subtopic 805-10, Business Combination-Overalls. For public business entities, ASU 2021-08 is
effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early
application is permitted. The amendments in this Update should be applied prospectively to business combinations occurring on or after
the effective date of the amendments. The Company does not expect the adoption of this standard to have a material impact on its consolidated
financial statements.
Item 7A. 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 8. Financial Statements and Supplementary Data
Our audited financial statement
for the fiscal year ended December 31, 2022 and 2021, together with the report of the independent certified public accounting firms thereon
and the notes thereto, are presented beginning at page F-1.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To: The Board of Directors and Stockholders of
IT Tech Packaging, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of IT Tech Packaging, Inc. (the Company) as of December 31, 2022, and 2021, and the related consolidated statements of
income (loss) and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and 2021, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is
a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the
audit committee and that: (1) related to the accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in anyway our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matters or on the accounts or disclosures to which they relate.
We determined that the auditing of deferred tax
asset should be considered a critical audit matter. The principal considerations in determining that this was a critical audit matter
was that the Company had a significant accumulated balance and the carrying value of such assets are subject to estimation, judgment,
and complex calculations. The balance resulted from temporary differences in taxes dues as the result of the difference in timing of recognition
of expenses that are required under generally accepted accounting principles, but may require deferral under local tax regulations. The
Company’s consolidated financial statements include entities in multiple jurisdictions with varying tax laws. These circumstances
lead to estimation and interpretation that may be challenging to assess and evaluate as part of the audit. The audit engagement team addressed
this critical accounting matter by reviewing the Company’s accounting policies, perform extended audit procedures including examination
of relevant local tax laws, testing for arithmetical accuracy of the asset, review of the Company’s assumptions and estimates concerning
future profitability, and independent recalculation of the future tax asset. The engagement team was satisfied with the evidence accumulated
to support our audit opinion and to mitigate the risk of material misstatement to an acceptable level. The accounts that are affected
by this critical audit matter are deferred tax assets, related valuation allowance and income tax expense.
/s/ WWC, P.C.
WWC, P.C.
Certified Public Accountants
We have served as the Company’s auditor since March 25, 2018.
San Mateo, California
PCAOB NO.: 1171
March 23, 2023
F-1
IT TECH PACKAGING, INC.
CONSOLIDATED BALANCE
SHEETS
AS OF DECEMBER 31, 2022 AND 2021
December 31, December 31,
ASSETS
Current Assets
Operating lease right-of-use assets, net 672,722 -
Deferred tax asset non-current - 11,268,679
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Advance from customers - 39,694
Commitments and Contingencies
Stockholders’ Equity
See accompanying notes to consolidated financial
statements.
F-2
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS
OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Year Ended
December 31,
Other Income (Expense):
Gain on acquisition 30,994 -
Other Comprehensive (Loss) Income
(Losses) Earnings Per Share:
Basic and Diluted (Losses) Earnings per Share $ (1.66 ) $ 0.10
F-3
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Accumulated
Additional Statutory Other
Common Stock Paid-in Earnings Comprehensive Retained
Shares Amount Capital Reserve Income (loss) Earnings Total
See accompanying notes to consolidated financial
statements.
F-4
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Year Ended
December 31,
Cash Flows from Operating Activities:
Gain on acquisition (30,992 ) -
Share-based compensation and expenses 156,000 -
Changes in operating assets and liabilities:
Cash Flows from Investing Activities:
Cash Flows from Financing Activities:
Proceeds from issuance of shares and warrants, net - 41,837,553
Proceeds from long term loans 59,195 -
Net Cash Provided by (Used in) Financing Activities (879,596 ) 34,193,824
Effect of Exchange Rate Changes on Cash and Cash Equivalents (618,005 ) 372,794
Net (Decrease) Increase in Cash and Cash Equivalents (1,676,744 ) 7,059,175
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of capitalized interest cost $ 320,568 $ 577,194
See accompanying notes to consolidated financial
statements.
F-5
IT TECH PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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,” and a new CUSIP number,
46527C100, at such time.
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 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. On June 1, 2009, Shengde Holdings Inc.