Item 1A. Risk Factors
Risks Relating to our Business
Our operating history may not serve as an adequate basis to judge
our future prospects and results of operations.
Dongfang Paper commenced
its current line of business operations in 1996 and received its initial Pollution Discharge Permit in September 1996, which must be renewed
every year for Dongfang Paper to stay in business. Although we have never had problem renewing the Pollution Discharge Permit, we cannot
guarantee automatic renewal every year. In addition, Baoding Shengde commenced its current line of business operations in 2009. Therefore,
our operating history may not provide a more meaningful basis on which to evaluate its business. We cannot assure you that Dongfang Paper
or Baoding Shengde will not incur net losses in the future. We expect that operating expenses of Dongfang Paper and Baoding Shengde will
increase as they expand. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We
will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our
potential failure to:
● raise adequate capital for expansion and operations;
● implement our business model and strategy and adapt and modify them as needed;
● maintain adequate control of our expenses; or
If we are not successful in addressing any or all of these
risks, our business may be materially and adversely affected.
Dongfang Paper and Baoding Shengde’s failure to compete
effectively may adversely affect our ability to generate revenue.
Through Dongfang Paper and
Baoding Shengde, we compete in a highly developed market with companies that have significantly greater experience and history in our
industry. If we do not compete effectively, we could lose market share and experience reduced selling prices, adversely affecting our
financial results. Our competitors will expand in the key markets and implement new technologies making them more competitive. There is
also the possibility that competitors will be able to offer additional products, services, lower prices, or other incentives that we cannot
or will not offer or that will make our products less profitable. We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures we face will not harm our business.
23
We may not be able to effectively control and manage our growth.
If our business and markets
grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. An expansion would increase demands
on existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect our operations
and cause delay in production and delivery of our paper products, as well as administrative inefficiencies.
We, through our subsidiaries, may engage
in future acquisitions that could dilute the ownership interests of our stockholders and cause us to incur debt and assume contingent
liabilities.
We, through our subsidiaries,
may review acquisition and strategic investment prospects that we believe would complement the current product offerings of Dongfang Paper,
augment its market coverage or enhance its technical capabilities, or otherwise offer growth opportunities. From time to time we review
investments in new businesses and we, through our subsidiaries, expect to make investments in, and to acquire, businesses, products, or
technologies in the future. We expect that when we raise funds from investors for any of these purposes we will be either the issuer or
the primary obligor while the proceeds will be forwarded to Dongfang Paper. In the event of any future acquisitions, we could:
● incur substantial debt;
● assume contingent liabilities; or
● expend significant cash.
These actions could have
a material adverse effect on our operating results or the price of our common stock. Moreover, even if we do obtain benefits in the form
of increased sales and earnings, there may be a lag between the time when the expenses associated with an acquisition are incurred and
the time when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including:
● unanticipated costs associated with the acquisition or investment transaction;
● the diversion of management’s attention from other business concerns;
● the potential loss of key employees of acquired organizations; and
We cannot ensure that we
will be able to successfully integrate any businesses, products, technology, or personnel that we might acquire in the future and our
failure to do so could have a material adverse effect on our and/or Dongfang Paper’s business, operating results and financial condition.
We are responsible for the indemnification of our officers and
directors.
Our Articles of Incorporation
provides for the indemnification and/or exculpation of our directors, officers, employees, agents and other entities which deal with us
to the maximum extent provided, and under the terms provided, by the laws and decisions of the courts of the state of Nevada. Although
we do maintain professional error and omission insurance for the officers and directors, due to limitations of the insurance coverage
these indemnification provisions could still result in substantial expenditures which we may be unable to recoup through the insurance
and could adversely affect our business and financial conditions. Zhenyong Liu, our Chairman of the Board and Chief Executive Officer,
Jing Hao, our Chief Financial Officer, Dahong Zhou, our Secretary, and Marco Ku Hon Wai, Wenbing Christopher Wang, Lusha Niu, and Fuzeng
Liu, our directors, are key personnel with rights to indemnification under our Articles of Incorporation.
24
We are dependent on certain key personnel and loss of
these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain
extent, attributable to the management, sales and marketing, and paper factory operational expertise of key personnel. Zhenyong Liu, our
Chief Executive Officer and Chairman of the Board, Jing Hao, our Chief Financial Officer, Dahong Zhou, our Secretary, and Shuting Liang,
Dongfang Paper’s General Engineer, Gengqi Yang, Dongfang Paper’s Vice President of Sales and Marketing, Xuetao Chen, Dongfang
Paper’s Vice President of Environmental Protection and Xiaodong Liu, Baoding Shengde’s General Manager, perform key functions
in the operation of our business. There can be no assurance that IT Tech Packaging, Dongfang Paper or Baoding Shengde will be able to
retain these officers after the term of their employment contracts expire. The loss of these officers could have a material adverse effect
upon our business, financial condition, and results of operations. We do not carry key man life insurance for any of our key personnel
or personnel nor do we foresee purchasing such insurance to protect against a loss of key personnel and personnel.
We are dependent upon the
services of Mr. Zhenyong Liu for the continued growth and operation of our company because of his experience in the industry and his personal
and business contacts in the PRC. Although Mr. Liu has entered into an employment agreement with Baoding Shengde, our wholly owned subsidiary
and a PRC company, and that we have no reason to believe that Mr. Liu will discontinue his services with us or Dongfang Paper, the interruption
or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as
our results of operations.
We may not be able to hire and retain qualified
personnel to support our growth and if we are unable to retain or hire these personnel in the future, our ability to improve our products
and implement our business objectives could be adversely affected.
We must attract, recruit
and retain a sizeable workforce of technically competent employees. Competition for senior management and senior personnel in the PRC
is intense, the pool of qualified candidates in the PRC is very limited, and we may not be able to retain the services of our senior executives
or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future. This failure could materially
and adversely affect our future growth and financial condition.
Our operating results may fluctuate as a result of factors beyond
our control.
Our operating results
may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include:
● the costs of paper products and development;
● capital expenditure for equipment;
● marketing and promotional activities and other costs;
● changes in our pricing policies, suppliers and competitors;
● changes in operating expenses;
● increased competition in the paper markets; and
● other general economic and seasonal factors.
We face risks related to product liability claims.
We presently do not maintain
product liability insurance. We face the risk of loss because of adverse publicity associated with product liability lawsuits, whether
or not such claims are valid. We may not be able to avoid such claims. Although product liability lawsuits in the PRC are rare, and we
have not, to date, experienced significant failure of our products, there is no guarantee that we will not face such liability in the
future. This liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business,
financial condition and prospects.
25
Our operating results also depend on the availability and pricing
of energy and raw materials.
In addition to our dependence
upon wood pulp, recycled white scrap paper and paperboard costs, our operating results depend on the availability and pricing of energy
and other raw materials. An interruption in the supply of supplemental chemical agents could cause a material disruption at our mill.
In addition, an interruption in the supply of natural gas could cause a material disruption at our facilities. At present, our raw materials
including natural gas are purchased from a number of suppliers, of which the three largest suppliers account for over 95% of all purchases.
If any of these contracts were to be terminated for any reason, or not renewed upon expiration, or if market conditions were to substantially
change creating a significant increase in the price of natural gas and recycled paper, we may not be able to find alternative, comparable
suppliers or suppliers capable of providing gas to us on terms or in amounts satisfactory to us.
We replaced all the coal
boilers with natural gas boiler in September 2017, but due to the gas consumption rise significantly, the government will from time to
time issue mandated restriction/suspension of natural gas supply for all natural gas consumption industries, including the paper manufacturing
industry in order to secure adequate natural gas to households uses in urban and rural areas. We are subject to the risks of natural gas
supply restriction and above-mentioned factors. As a result, our business, financial condition and operating results could suffer.
A material disruption at one of our manufacturing facilities
could prevent us from meeting customer demand, reduce our sales, and/or negatively affect our net income.
Any of our manufacturing facilities, or any of
our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:
● maintenance outages;
● prolonged power failures;
● a chemical spill or release;
● closure because of environmental-related concerns;
● explosion of a boiler;
● the effect of a drought or reduced rainfall on our water supply;
● fires, floods, earthquakes, hurricanes, epidemic or other catastrophes;
● terrorism or threats of terrorism;
● labor difficulties; or
● other operational problems.
If any of the abovementioned events were to occur,
we may be unable to meet customer demand, which may adversely affect our sales and net income.
26
Our certificates, permits, and licenses
related to our papermaking operations are subject to governmental control and renewal and failure to obtain renewal will cause all or
part of our operations to be terminated.
In 1988, the National Environmental
Protection Bureau issued Interim Measures on the Administration of Water Pollutants Discharge Permits, requiring all companies discharging
pollution into the water as a direct or indirect byproduct of production to adhere to certain caps on pollution discharge. On January
24, 2021, the State Council issued Regulations on the Administration of Pollutant Discharge Permits, which has effected since March 1,
2022. Additionally, such companies were required to obtain and annually renew a Pollution Discharge Permit in order to conduct their operations.
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.
The PRC government has the
authority to shut down a company’s operations for its failure to maintain a valid permit. We renewed our Pollution Discharge Permit
in June 2020. Our latest permit is effective from June 28, 2020 through June 27, 2025. Pollution discharge Permit for Tengsheng Paper
was effective from August 10, 2021 through August 9, 2026. An application to renew will be filed by us with the local environment protection
agency before the expiration.
The failure by us to maintain or obtain
any certificate, permit, and license necessary for our operations or the failure by us to obtain the renewal of any such certificate,
permit or license may materially and adversely affect our business, prospects, financial condition and results of operation.
Compliance with environmental regulations
is expensive, and noncompliance may result in adverse publicity and potentially significant monetary damages and fines or suspension of
our business operations.
We are required to comply
with all Chinese national and local regulations regarding the protection of the environment. Compliance with environmental regulation
is expensive. The Chinese government is adopting even more stringent environmental protection and operational safety regulations and the
costs of complying with these regulations are expected to increase. Although we have obtained all of the necessary approvals and permits
for our production facilities currently existing, we cannot assure you that we will be able to comply with all applicable environmental
protection and operational safety requirements, and obtain all of the required governmental approvals and permits that may be or may become
applicable to us on a timely basis, or at all, or will be able to complete all our registrations and filings with the government, in time
for our future projects. The relevant governmental authorities may impose on us fines for any non-compliance, set deadlines for rectification,
and order us to cease construction or production if we fail to comply with their requirements.
If we are unable to respond to pricing pressures, our business
may be harmed.
In order to remain
competitive, from time to time we have to adjust the prices of our products to remain competitive. We may not have available sufficient
financial or other resources to continue to make investments necessary to maintain our competitive position.
If we fail to introduce enhancements
to our existing products or to develop new products, our business and results of operations could be adversely affected.
We believe that
our future success depends in part on our ability to enhance our existing products and develop new products in order to continue to meet
customer demand. Our failure to introduce new or enhanced products on a timely and cost-competitive basis, or the development of processes
that make our existing products obsolete, could harm our business and results of operations.
We have limited insurance coverage and may incur losses resulting
from product liability claims or business interruptions.
As the insurance industry
in China is still in an early stage of development, insurance companies in China currently offer limited business insurance products.
We do not have any product liability insurance or business interruption insurance. Based on the insurance products available in China,
even if we decide to take out business interruption coverage, such insurance as currently available offers limited coverage compared to
that offered in many other jurisdictions. Any business disruption, natural disaster, or product liability claim could result in our incurring
substantial costs and diversion of resources, which would have an adverse effect on our business and results of operations.
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Our failure to protect our intellectual property rights
may undermine our competitive position, and external infringements of our intellectual property rights may adversely affect our business.
Our success and ability
to compete depends in part on our intellectual property. We primarily rely on a combination of trademark, trade secret, and copyright
laws, as well as confidentiality procedures and contractual restrictions with our employees, contractors and others to establish and protect
our intellectual property rights. However, confidentiality and license arrangements may be breached by counterparties, and there may not
be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property
rights or to enforce our contractual rights. In addition, our trade secrets may be leaked or otherwise become available to, or be independently
discovered by, our competitors. The steps we take to protect our intellectual property rights may be inadequate or we may be unable to
secure intellectual property protection for some of our properties. Infringement of intellectual property rights continues to pose a serious
risk of doing business.
We may in the future file,
patent applications on certain of our innovations. It is possible, however, that these innovations may not be patentable. In addition,
given the cost, effort and risks associated with patent application, we may choose not to seek patent protection for some innovations.
Furthermore, our patent applications may not lead to granted patents, the scope of the protection gained may be insufficient or an issued
patent may be deemed invalid or unenforceable. We also cannot guarantee that any of our present or future patents or other intellectual
property rights will not lapse or be invalidated, circumvented, challenged, or abandoned.
If we are unable to protect
our intellectual property, our competitors could use our intellectual property to market offerings similar to ours and our ability to
compete effectively would be impaired. Moreover, others may independently develop technologies that are competitive to ours or infringe
on our intellectual property. The enforcement of our intellectual property rights depends on our legal actions against these infringers
being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed. In addition, defending
our intellectual property rights might entail significant expense and diversion of management resources. Any of our intellectual property
rights may be challenged by others or invalidated through administrative processes or litigations. We can provide no assurance that we
will prevail in such litigations, and, even if we do prevail, we may not obtain a meaningful relief. Accordingly, despite our efforts,
we may be unable to prevent external parties from infringing or misappropriating our intellectual property. Any intellectual property
that we own may not provide us with competitive advantages or may be successfully challenged by external parties.
We may be subject to intellectual property
infringement claims or other allegations, which may materially and adversely affect our business, financial condition and prospects.
We cannot be certain that
we do not or will not infringe patents, copyrights, trademarks or other intellectual property rights held by external parties. From time
to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks, copyrights or other intellectual
property rights, or misappropriation of creative ideas or formats, or other infringement of proprietary, which may materially and adversely
affect our business, financial condition and prospects.
28
Risks Related To Doing Business in the PRC
The PRC government has significant oversight
and discretion over the conduct of a PRC company’s business operations or to exert control over any offering of securities conducted
overseas and/or foreign investment in China-based issuers, and may intervene with or influence our operations, may limit or completely
hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly
decline or be worthless, as the government deems appropriate to further regulatory, political and societal goals.
The PRC government may intervene
or influence our operations at any time, which could result in a material change in our operations and/or the value of our common stock.
For example, the PRC government has recently published new policies that significantly affected certain industries such as the education
and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding any
industry that could adversely affect the business, financial condition and results of operations of our company. Furthermore, the PRC
government has also recently indicated an intent to exert more oversight and control over securities offerings and other capital markets
activities that are conducted overseas and foreign investment in China-based companies. Any such action, once taken by the PRC government,
could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of
such securities to significantly decline or in extreme cases, become worthless.
Recently, the PRC government
initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including
cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable
interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly
enforcement. Currently, these statements and regulatory actions have had no impact on our daily business operation, the ability to accept
foreign investments and list our securities on an U.S. or other foreign exchange. Since these statements and regulatory actions are new,
it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations
or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new
laws and regulations will have on our daily business operation, the ability to accept foreign investments and list our securities on an
U.S. or other foreign exchange.
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.
On February 17, 2023, with
the approval of the State Council, the CSRC released the Trial Measures and five supporting guidelines, which will come into effect on
March 31, 2023. According to the Trial Measures, (1) 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; (2) if the issuer meets both of the following conditions, the overseas offerings and listings shall be determined
as an indirect overseas offerings and listings by a domestic company: (i) 50% or more of the issuer’s operating revenue, total profit,
total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted
for by domestic enterprises; and; (ii) its major operational activities are carried out in China or its main places of business are located
in China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in China;
and (3) where a domestic company seeks to indirectly offer and list securities in an overseas market, the issuer shall designate a major
domestic operating entity responsible for all filing procedures with the CSRC, and where an issuer makes an application for initial public
offerings or listings in an overseas market, the issuer shall submit filings with the CSRC within three business days after such application
is submitted; if the issuer submits the application documents for offerings or listings in secret or non-public ways overseas, it may
submit an explanation at the time of filing, and the application shall be postponed until the application documents are reported to the
CSRC within three business days after the application documents are disclosed overseas.
The Trial Measures, when
coming into effect on March 31, 2023, may subject us to additional compliance requirements in the future, and we cannot assure you that
we will be able to get the clearance of filing procedures under the Trial Measures on a timely basis, or at all. Any failure of us to
fully comply with new regulatory requirements may significantly limit or completely hinder our ability to continue to offer our securities,
cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect
our consolidated financial condition and results of operations and cause our securities to significantly decline in value or become worthless.
We believe that we, 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 the business of the consolidated VIE and its subsidiary. In addition,
to date, none of us, our PRC Subsidiaries, consolidated VIE and its subsidiary have received any filing or compliance requirements from
CSRC for the listing of the Company at NYSE American and all of its overseas offerings. Based on our understanding of the current PRC
laws, we believe that the CSRC’s approval is not required to be obtained for ITP’s continued listing on NYSE American; however,
there are substantial uncertainties regarding the interpretation and application of the M&A Rules, other PRC Laws and future PRC laws
and regulations, and there can be no assurance that any PRC governmental agency will not take a view that is contrary to or otherwise
different from our belief stated herein.
29
Recent greater oversight by the
Cyberspace Administration of China, or the “CAC,” over data security, particularly for companies seeking to list on a foreign
exchange, could adversely impact the business of us, the consolidated VIE and its subsidiary and investing in our securities.
On December 28, 2021, the
CAC, together with 12 other governmental departments of the PRC, jointly promulgated the Cybersecurity Review Measures, which became effective
on February 15, 2022. The Cybersecurity Review Measures provides that, in addition to critical information infrastructure operators (“CIIOs”)
that intend to purchase Internet products and services, data processing operators engaging in data processing activities that affect or
may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity
Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data
processing, or overseas listing. The Cybersecurity Review Measures further requires that CIIOs and data processing operators that possess
personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings
in foreign countries.
On November 14, 2021, the
CAC published the Draft Regulations on the Network Data Security Administration (Draft for Comments) (the “Security Administration
Draft”), which provides that data processing operators engaging in data processing activities that affect or may affect national
security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According to the Security
Administration Draft, data processing operators who possess personal data of at least one million users or collect data that affects or
may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. The
deadline for public comments on the Security Administration Draft was December 13, 2021.
The Security Assessment
Measures for Outbound Data Transfers which was released on May 19, 2022 at the 10th executive meeting of the Cybersecurity Administration
of China in 2022, and implemented on September 1, 2022, stipulates that a data processor shall declare security assessment for its outbound
data transfer to the CAC at the provincial level: (i) where a data processor provides critical data abroad; (ii) where a CIIO or a data
processor processing the personal information of more than one million people provides personal information abroad; (iii) where a data
processor has provided personal information of 100,000 people or sensitive personal information of 10,000 people in total abroad since
January 1 of the previous year; and (iv) other circumstances prescribed by the CAC for which declaration for security assessment for outbound
data transfers is required.
We believe none of us, our
PRC Subsidiaries, the consolidated VIE or its subsidiaries is a CIIO, and we believe that, to date, we, all of our PRC Subsidiaries, the
consolidated VIE and its subsidiary are not required to go through cybersecurity review from the CAC to continue to offer our securities
or operate the business of the consolidated VIE and its subsidiary. In addition, as of the date of this annual report, we, our PRC Subsidiaries,
consolidated VIE and its subsidiary have not received any notice from any authorities identifying us as a CIIO or requiring us to go through
cybersecurity review or network data security review by the CAC. We, our PRC Subsidiaries, consolidated VIE and its subsidiary have not
been required to obtain any approvals or permits from CAC. When the Cybersecurity Review Measures become effective and if the Security
Administration Draft is enacted as proposed, we believe that the operations of the consolidated VIE and its subsidiary and our listing
will not be affected and that we, the consolidated VIE and its subsidiary will not be subject to cybersecurity review or network data
security review by the CAC, given that: (i) as a company that mainly engages in paper production and distribution, our PRC Subsidiaries,
the consolidated VIE and VIE’s subsidiaries are unlikely to be classified as CIIOs by the PRC regulatory agencies; (ii) we, the
consolidated VIE and its subsidiary possess personal data of fewer than one million individual clients in the business operations as of
the date of this annual report and do not anticipate that we, the consolidated VIE and its subsidiary will be collecting over one million
users’ personal information in the near future, which we understand might otherwise subject us, the consolidated VIE and its subsidiary
to the Cybersecurity Review Measures; and (iii) data processed in the business of the consolidated VIE and its subsidiary is unlikely
to have a bearing on national security and therefore is unlikely to be classified as core or important data by the authorities. There
remains uncertainty, however, as to how the Cybersecurity Review Measures and the Security Administration Draft will be interpreted or
implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation
and interpretation related to the Cybersecurity Review Measures and the Security Administration Draft. If any such new laws, regulations,
rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions to comply and to minimize
the adverse effect of such laws on us. We cannot guarantee, however, that we, the consolidated VIE and its subsidiary will not be subject
to cybersecurity review and network data security review in the future. During such reviews, we, the consolidated VIE and its subsidiary
may be required to suspend our operation or experience other disruptions to our operations. Cybersecurity review and network data security
review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which
could materially and adversely affect the business, financial conditions, and results of operations of us, the consolidated VIE and its
subsidiary.
30
The occurrence of security
breaches and cyber-attacks could negatively impact our business.
Information technology systems
are important to our business and operations. We are subject to attempts to compromise our security and information systems, including
denial of service attacks, viruses, malicious software or ransomware, and exploitations of system flaws or weaknesses. Error or malfeasance
or other irregularities may also result in the failure of our or our third-party service providers’ cybersecurity measures and may give
rise to a cybersecurity incident. The techniques used to conduct security breaches and cyber-attacks, as well as the sources and targets
of these attacks, change frequently and may not be recognized until launched against us or our third-party service providers. We or our
third-party service providers may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of
cyber-attacks. The primary risks that could directly result from the occurrence of security breaches and cyber-attacks include operational
interruption, financial losses, personal information leakage and non-compliance. The occurrence of such incidents could negatively impact
our business operations and our relationships with customers and employees, and damage our reputation. If we or our third-party service
providers are unable to avert security breaches and cyber-attacks, we could incur significantly higher costs, including remediation costs
to repair damage caused by the breach, costs to deploy additional personnel and network protection technologies, train employees and engage
third-party experts and consultants, as well as litigation costs resulting from the incident. These costs, which could be material, could
adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future
attempts to breach our information technology systems.
Our business may be subject to a variety of PRC laws and other
obligations regarding cybersecurity and data protection.
We receive and maintain
certain personal, financial and other information about our customers in various information systems that we maintain and in those maintained
by third-party service providers. Our information technology systems, such as those we use for administrative functions, including human
resources, payroll, accounting and internal and external communications, can contain personal, financial or other information of our employees.
We also maintain important proprietary and other confidential information related to our operations. As a result, we face risks inherent
in handling and protecting information.
If our security and information
systems or the security and information systems of third-party service providers are compromised for any reason, including as a result
of data corruption or loss, security breach, cyber-attack or other external or internal methods, or if our employees, or service providers
fail to comply with laws, regulations and practice standards, and this information is obtained by unauthorized persons, used or disclosed
inappropriately or destroyed, it could subject us to litigation and government enforcement actions, cause us to incur substantial costs,
liabilities and penalties and/or result in a loss of customer confidence, any and all of which could adversely affect our business, reputation,
ability to attract new customers, results of operations and financial condition.
In addition, our business
may be subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private information,
such as personal information and other data. These laws continue to develop, and the PRC government may adopt other rules and restrictions
in the future. Non-compliance could result in penalties or other significant legal liabilities.
Pursuant to the PRC Cybersecurity
Law, which was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June
1, 2017, personal information and important data collected and generated by a critical information infrastructure operator in the course
of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products
and services that affects or may affect national security, it should be subject to cybersecurity review by the Cyberspace Administration
of China (“CAC”). Due to the lack of further interpretations, the exact scope of “critical information infrastructure
operator” remains unclear.
31
On April 13, 2020, twelve
Chinese government agencies jointly promulgated the Measures for Cybersecurity Review (2020 version) (“Old Measures”), which
became effective on June 1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and
provided that critical information infrastructure operators (“CIIOs”) who intend to procure network products and services
that affect or may affect national security shall be subject to a cybersecurity review. On June 10, 2021, the Standing Committee of the
National People’s Congress promulgated the PRC Data Security Law, which took effect in September 2021. The Data Security Law provides
for a security review procedure for the data activities that may affect national security. Moreover, the CAC issued the Measures of Cybersecurity
Review (Revised Draft for Comments) on July 10, 2021, which requires operators with personal information of more than one million users
who want to list abroad to file a cybersecurity review with the CAC. Furthermore, the General Office of the Central Committee of the Communist
Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities
Activities, which was available to the public on July 6, 2021. These opinions emphasized the need to strengthen the administration over
illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective
measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed
companies and the demand for cybersecurity and data privacy protection.
The Data Security Law also
sets forth the data security protection obligations for entities and individuals handling personal data, including that no entity or individual
may acquire such data by stealing or other illegal means, and the collection and use of such data should not exceed the necessary limits
The costs of compliance with, and other burdens imposed by, PRC Cybersecurity Law and any other cybersecurity and related laws may limit
the use and adoption of our products and services and could have an adverse impact on our business. Further, if the enacted version of
the Measures for Cybersecurity Review mandates clearance of cybersecurity review and other specific actions to be completed by companies
like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.
On January 4, 2022, the
CAC issued the revised Measures on Cyberspace Security Review (the “Revised Measures”) that has come into effect on February
15, 2022, which required that, among others, in addition to “operator of critical information infrastructure,” any “network
platform operator data processor” controlling personal information of no less than one million users which seeks to list in a foreign
stock exchange should also be subject to cybersecurity review. We do not believe we are among the “operator of critical information
infrastructure” or “network platform operator data processor” who control over one million personal information as mentioned
above; however, the definition of “network platform operator” is unclear. The revised draft of the Measures for Cybersecurity
Review is in the process of being formulated and it is also unclear on how it will be interpreted, amended and implemented by the relevant
PRC governmental authorities. The Revised Measures also establish a Cybersecurity Review Office (the “CRO”), an administrative
body within the CAC, to formulate the regulations for cybersecurity review and to lead the cybersecurity review process. Applicable CIIOs
and NP operators are required to submit an application to the CRO, and the CRO will assess whether a cybersecurity review is required.
As these laws, opinions
and the measures were recently issued, official guidance and interpretation of these remain unclear in several respects at this time,
and the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws, opinions and the measures.
Therefore, it is uncertain whether the future regulatory changes would impose additional restrictions on our business.
We believe that we are currently
not be subject to the cybersecurity review by the CAC, given the factors discussed above. However, there remains uncertainty as to how
the Revised Measures will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws,
regulations, rules, or detailed implementation and interpretation related to the Revised Measures. If any such new laws, regulations,
rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions to comply and to minimize
the adverse effect of such laws on us.
We cannot assure you that
PRC regulatory agencies, including the CAC, would take the same view as we do. In the event that we are subject to any mandatory cybersecurity
review and other specific actions required by the CAC, we face uncertainty as to whether any clearance or other required actions can be
timely completed, or at all. Given such uncertainty, we may be further required to suspend our relevant business, or face other penalties,
which could materially and adversely affect our business, financial condition, and results of operations.
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Changes in the policies of the PRC government could have
a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.
Our business operations,
financial condition, results of operations and prospects may be adversely affected by the current and future political environment in
the PRC. The PRC has operated as a socialist state since the middle of the 20th century and is controlled by the Communist Party of China.
The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. The
PRC has only permitted provincial and local economic autonomy and private economic activities since 1978. The government of the PRC has
exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, including the paper industry,
through regulation and state ownership. Our ability to operate in the PRC may be adversely affected by changes in Chinese laws and regulations,
including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and
other matters. Under its current leadership, the government of the PRC has been pursuing economic reform policies that encourage private
economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue
to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Policies of the PRC government
can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow
the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships
with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue,
there can be no assurance that this will be the case.
A change in policies by
the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof,
confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of
private enterprises. Although the PRC government has been pursuing economic reform policies for more than three decades, there is no assurance
that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event
of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social
life.
The PRC laws and regulations governing our
current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may harm our business.
The PRC laws and regulations
governing our current business operations are sometimes vague and uncertain. The PRC’s legal system is a civil law system based
on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the
United States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including
but not limited to the laws and regulations governing our business, the enforcement and performance of our contractual arrangements with
our VIE, Dongfang Paper, and its shareholders, or the enforcement and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive
system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such
as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations
are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively. Our major operating entity, Dongfang Paper, conducts its operations
in China, and as a result, we are required to comply with PRC laws and regulations. We cannot assure you that our current ownership and
operating structure would not be found in violation of any current or future PRC laws or regulations. Any of these or similar actions
could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which
could materially and adversely affect our business, financial condition and results of operations. We cannot predict what effect the interpretation
of existing or new PRC laws or regulations may have on our business. If the relevant authorities find that we are in violation of PRC
laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
● levying fines;
● revoking Dongfang Paper’s business and other licenses;
● requiring that we restructure our ownership or operations; and
● requiring that we discontinue any portion or all of our business.
Among the material laws that we are subject to
are the Price Law of The People’s Republic of China, Measurement Law of The People’s Republic of China, Tax Law, Environmental
Protection Law, Contract Law, Patent Law, Accounting Laws and Labor Law.
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A slowdown, inflation or other adverse developments in the PRC
economy may harm our customers and the demand for our services and products.
All of our operations are
conducted in the PRC and all of our revenue is generated from sales in the PRC. Although the PRC economy has grown significantly in recent
years, we cannot assure you that this growth will continue. In 2023, China’s Gross Domestic Product (“GDP”) growth rate
was 5.2% as compared to 3.0% in 2022. A slowdown in overall economic growth, an economic downturn, a recession or other adverse economic
developments in the PRC could significantly reduce the demand for our products and harm our business.
Additionally, while the
PRC economy experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas
of the country. Rapid economic growth could lead to growth in the money supply and rising inflation. If prices for our products rise at
a rate that is insufficient to compensate for the rise in the costs of supplies, it may harm our profitability. In order to control inflation
in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending.
Such an austere policy can lead to a slowing of economic growth.
Our PRC Subsidiaries, consolidated VIE and
its subsidiary in China are subject to restrictions on making dividends and other payments to us or any other affiliated company.
We are a holding company
and may receive dividends paid by our subsidiaries 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. Baoding Shengde’s income in turn depends on the service and other fees paid by the consolidated VIE. In addition, ITP,
its subsidiaries, the consolidated VIE and the VIE’s subsidiaries may also transfer cash to each other as part of the group cash
management. If any of our subsidiaries, the consolidated VIE and VIE’s subsidiaries 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 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.
In addition, under the Enterprise
Income Tax Law of the PRC, which became effective on January 1, 2008 and its implementation rules, dividends paid to us by our PRC Subsidiaries
are subject to withholding tax. The withholding tax on dividends may be exempted or reduced by the PRC State Council. Currently, the withholding
tax rate is 10% unless reduced or exempted by treaty between the PRC and the tax residence of the holder of the PRC Subsidiaries.
Furthermore, if our PRC Subsidiaries,
consolidated VIE and its subsidiary in China incur debt on their own behalf in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require our PRC Subsidiaries, consolidated
VIE and its subsidiary to adjust their taxable income under the contractual arrangements we currently have in place in a manner that would
restrict our subsidiaries’ ability to pay dividends and make other distributions to us.
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. 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 our shareholders.
To date, our PRC Subsidiaries
have not paid dividends to us out of their accumulated profits. In the near future, we do not expect to receive dividends from our PRC
subsidiaries because the accumulated profits of the PRC Subsidiaries are expected to be used for their own business or expansions.
For the year ended December
31, 2023, the cash flows occurred between IT Tech Packaging, its subsidiaries and the VIE included (i) loans in the amount of $4,233,999
provided by Baoding Shengde to Tengsheng Paper; (ii) loans in the amount of $2,822,666 provided by Baoding Shengde to Dongfang Paper;
(iii) the payment in the amount of 5,468,122 made by Dongfang Paper to Baoding Shengde for purchase of raw materials; and (iv) funding
through Shengde Holdings Inc. to Qianrong, with an amount of $500,000 as capital contributions. We do not have an established cash management
policy that dictates how funds are transferred between us, our PRC Subsidiaries, consolidated VIE and its subsidiary. We do not, at this
time, intend to distribute earnings or settle amounts owed under the VIE Agreements.
34
In the future, cash proceeds
raised from overseas financing activities may be transferred by ITP to our PRC Subsidiaries and other subsidiaries or the consolidated
VIE and its subsidiary via capital contributions or loans, as the case may be. Amounts owed under the VIE Agreements may be returned by
Baoding Shengde or the consolidated VIE and its subsidiary through repayment of loans or payment of service fees according to the exclusive
technical service and business consulting agreement, subject to satisfaction of applicable government registration and approval requirements.
To the extent cash in the business is in the PRC, the funds may not be available to fund operations or for other use outside of the PRC
due to interventions in or the imposition of restrictions and limitations on the ability of us, our PRC Subsidiaries, or the consolidated
VIE by the PRC government to transfer cash.
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.
IT Tech Packaging Inc. is
a Nevada holding company and conducts all of its business through its operating subsidiaries and the VIE. IT Tech Packaging Inc. relies
principally on dividends and other distributions on equity from our PRC Subsidiaries for cash requirements, including for services of
any debt IT Tech Packaging Inc. may incur.
Our PRC Subsidiaries’
ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC Subsidiaries to pay dividends
to its shareholders only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
If our PRC Subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay
dividends or make other payments to us. Any limitation on the ability of our PRC Subsidiaries to distribute dividends or other payments
to its shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial
to our business, pay dividends or otherwise fund and conduct our business.
In addition, the
Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends
payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements
between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are incorporated.
Governmental control of currency conversion may limit our ability
to utilize our revenues effectively and affect the value of investors’ investment.
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.
We receive a significant portion of our revenues in Renminbi. Under our current corporate structure, our Nevada holding company may rely
on dividend payments from our PRC Subsidiaries to fund any cash and financing requirements we 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 SAFE by complying with certain procedural requirements.
Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC
subsidiaries in China may be used to pay dividends to our Nevada holding company.
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 our 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.
The PRC government has imposed
more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment.
More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital
account. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions.
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 our shareholders of our common stock.
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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.
Any funds IT Tech Packaging
Inc. transfers to its PRC Subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval
by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign invested enterprises,
or FIEs, in China, capital contributions to our PRC Subsidiaries are subject to the approval of or report investment information to the