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. This discussion contains forward-looking
statements that involve risks and uncertainties. For a complete discussion of forward-looking statements,
see the section in this report entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance
or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors,
see the sections in this report entitled “Risk Factors” and “Forward-Looking Statements”. Our historical
results are not necessarily indicative of the results that may be expected for any period in the future.
Results of Operations
Revenue for the year ended
December 31, 2023 was $86,546,950, representing a decrease of $13,805,484, or 13.76%, from $100,352,434 for the previous year. This was
mainly due to the decrease in average selling price (“ASP”) of CMP.
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, 2023 was $86,412,058, a decrease of $13,669,606, or 13.66%,
from $100,081,664 for the year ended December 31, 2022. This was mainly due to the decrease in ASP of CMP, partially offset by increase
in sales volume of regular CMP, light-weight CMP and offset printing paper.
Total quantities of offset
printing paper, CMP and tissue paper products sold during the year ended December 31, 2023 amounted to 230,601 tonnes, an increase of
10,997 tonnes, or 5.01%, compared to 219,604 tonnes sold during the year ended December 31, 2022. Total quantities of CMP and offset printing
paper sold increased by 11,065 tonnes in the year of 2023 as compared to 2022. We sold 1,205 tonnes of tissue paper products in the year
of 2023 as opposed to 1,273 tonnes in 2022. Production of offset printing paper was resumed in May 2023. The changes in revenue and quantity
sold for the year ended December 31, 2023 and 2022 are summarized as follows:
Sales Revenue
48
Monthly revenue (excluding revenue of digital
photo paper and tissue paper products) for the 24 months ended December 31, 2023, are summarized below:
The average selling price, or ASP, for our major products
for the years ended December 31, 2023 and 2022 are summarized as follows:
Increase (Decrease) by percentage - % -19.12 % -19.32 % 1.69 %
The following is a chart showing the month-by-month ASPs for
the 24 month period ended December 31, 2023:
49
Corrugating Medium Paper
Revenue from CMP amounted
to $81,891,676 (94.77% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2023,
representing a decrease of $16,833,733, or 17.05%, from $98,725,409 during 2022.
We sold 223,823 tonnes of
CMP in the year ended December 31, 2023 as compared to 218,331 tonnes in the year ended December 31, 2022, representing a 2.52% increase
in quantity sold.
ASP for regular CMP dropped
from $455/tonne in 2022 to $368/tonne in 2023, representing a 19.12% decrease. ASP in RMB for regular CMP in 2022 and 2023 was RMB3,073
and RMB2,599, respectively, representing a 15.42% decrease. The quantity of regular CMP sold increased by 1,893 tonnes, from 180,977 tonnes
in 2022 to 182,870 tonnes in 2023.
ASP for light-weight CMP
dropped from $440/tonne in 2022 to $355/tonne in 2023, representing a $19.32% decrease. ASP in RMB for light-weight CMP in 2022 and 2023
was RMB2,972 and RMB2,502, respectively, representing a 15.82% decrease. The quantity of light-weight CMP sold increased by 3,599 tonnes,
from 37,354 tonnes in 2022, to 40,953 tonnes in 2023.
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, 2023
and 2022 were 51.98% and 49.28%, respectively, representing an increase of 2.70%.
Quantities sold for regular
CMP that was produced by the PM6 production line from January 2022 to December 2023 are as follows:
Offset Printing Paper
Revenue from offset
printing paper was $3,215,190 (3.72% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December
31, 2023, representing an increase of $3,215,190, or 100%, from year of 2022. We sold 5,573 tonnes of offset printing paper in the year
ended December 31, 2023.
50
Tissue Paper Products
Revenue from tissue paper
products was $1,305,192 (1.51% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December
31, 2023, representing a decrease of $51,063, or 3.76%, from $1,356,255 in 2022. We sold 1,205 tonnes of tissue paper products in the
year ended December 31, 2023, as compared to 1,273 tonnes in 2022, a decrease of 68 tonnes, or 5.34%.
ASP for tissue paper products
was $1,065/tonne and $1,083/tonne in the year ended December 31, 2022 and 2023, respectively, representing a 1.69% increase. ASP in RMB
for tissue paper products for the year ended 2022 and 2023 was RMB7,198 and RMB7,640, respectively, representing a 6.14% increase.
Revenue of Face Mask
Revenue generated from selling
face masks were $106,064 and $257,820 for the year ended December 31, 2023 and 2022. We sold 3,383 thousand pieces of face masks in 2023,
as compared to 5,625 thousand pieces in 2022, a decrease of 2,242 thousand pieces, or 39.86%.
Cost of Sales
Total cost of sales for CMP, offset printing paper
and tissue paper products in the year ended December 31, 2023 was $85,418,822, a decrease of $9,965,512, or 10.45%, from $95,384,334 for
the year ended December 31, 2022. This was mainly due to the decrease of material costs of CMP.
Cost of sales for CMP was $77,962,837 for the
year ended December 31, 2023, as compared to $91,093,891 in 2022. The decrease in the cost of sales of $13,131,054 for CMP was mainly
due to the decrease in average cost of sales, partially offset by the increase in the quantities of regular CMP sold in the year of 2023.
Average cost of sales per tonne for CMP decreased by 16.55%, from $417 for the year ended December 31, 2022, to $348 in 2023. This was
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 $3,134,832
for the year ended December 31, 2023.
Cost of sales for tissue paper products was $4,318,339
for the year ended December 31, 2023, as compared to $4,290,443 in 2022. Average cost of sales per tonne of tissue paper products increased
by 6.35%, from $3,370 for the year ended December 31, 2022, to $3,584 for 2023.
Changes in cost of sales and cost per tonne by product for
the year ended December 31, 2023 and 2022 are summarized below:
Our average unit purchase
costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31, 2023
were RMB 1,350/tonne (approximately $191/tonne) as compared to RMB 1,690/tonne (approximately $250/tonne) for the year ended December
31, 2022. These changes (in US dollars) represent a year-over-year decrease of 23.60% 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.
51
The pricing trends of our major raw materials for the 24-month
period from January 2022 to December 2023 are shown below:
Electricity and gas are
our two main energy sources. Electricity and gas accounted for approximately 5% and 15.3% of total sales in 2023, respectively, compared
to 4% and 12.4% of total sales 2022. 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, 2023are summarized as follows:
Gross Profit
Gross profit for December
31, 2023 was $999,885 (representing 1.16% of the total revenue), representing a decrease of $3,754,311, or 78.97%, from the gross profit
of $4,754,196 (representing 4.74% of the total revenue) for the year ended December 31, 2022. The decrease was mainly due to the decrease
in ASP of CMP, partially offset by the decrease of material costs of CMP, and (ii) the increase in material costs of tissue paper products.
52
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, 2023 was $993,236, a decrease of $3,704,094, or 78.86%,
from the gross profit of $4,697,330 for the year ended December 31, 2022. 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 3.54 percentage points, from 4.69% for the year ended December
31, 2022, to 1.15 for the year ended December 31, 2023.
Gross profit margin for
regular CMP for the year ended December 31, 2023 was 5.27%, or 2.12 percentage points lower, as compared to gross profit margin of 7.39%
for the year ended December 31, 2022. Such decrease was primarily due to the decrease in ASP of regular CMP, partially offset by the decrease
in material costs.
Gross profit margin for
light-weight CMP for the year ended December 31, 2023 was 2.59%, or 6.83 percentage points lower, as compared to gross profit margin of
9.42% for the year ended December 31, 2022. Such decrease was primarily due to the decrease in ASP of light-weight CMP, partially offset
by the decrease in material costs.
Gross profit margin for
offset printing paper was 2.41% for the year ended December 31, 2023.
Gross profit margin for
tissue paper products was -230.86% for the year ended December 31, 2023, a decrease of 14.52 percentage points, as compared to -216.34%
for the year ended December 31, 2022. 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, 2023 are as follows:
Face Masks
Gross loss for face mask
for the year ended December 31, 2023 was $11,127, representing a gross margin of -10.49% compared with a gross profit of $67,328, representing
a gross margin of 26.11%, for the year ended December 31, 2022.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses for the year ended December 31, 2023 were $9,075,475, a decrease of $983,248, or 9.78% from $10,058,723 for the year ended December
31, 2022. The decrease was mainly due to the decrease in depreciation of idle fixed assets during production suspension.
Loss from Operations
Operating loss for
the year ended December 31, 2023 was $9,575,888, a decrease of $4,271,361, or 80.52%, from $5,304,527 for the year ended December 31,
2022. The decrease was primarily due to the decrease in gross profit and recognition of impairment and disposal loss on assets, partially
offset by the decrease in selling, general and administrative expenses.
53
Other Income and Expenses
Interest expense for the
year ended December 31, 2023 decreased by $43,433, from $1,027,951 for the year ended December 31, 2022, to $984,518. The Company had
short-term and long-term interest-bearing loans and lease obligation that aggregated $12,386,346 as of December 31, 2023, as compared
to $15,442,807 as of December 31, 2022.
Provision for Income Taxes
Full allowance for
deferred tax asset loss was provided in the year of 2023 and 2022. Income tax for the year ended December 31, 2023 is $346,954 as compared
to the income tax $11,711,339 for the year ended December 31, 2022.
Net Loss
As a result of the above,
net loss was $9,946,035 for the year ended December 31, 2023, representing an increase of $6,625,273, or 39.98%, from $16,571,308 for
the year ended December 31, 2022.
Accounts Receivable
Net accounts receivable
was $575,526 as of December 31, 2023, as compared with $nil as of December 31, 2022. We usually collect accounts receivable within 30
days of delivery and completion of sales.
Inventories
Inventories consist of raw
materials (accounting for 10.48% of total value of inventory as of December 31, 2023), semi-finished goods and finished goods. As of December
31, 2023, the recorded value of inventory increased by 23.87% to $3,558,193 from $2,872,622 as of December 31, 2022. The increase is mainly
due to the increase of finished goods, partially offset by the decrease of recycle paper board. More CMP products were produced in December
2023 to mitigate the impact of energy price rise starting from January 2024. As of December 31, 2023, the inventory of recycled paper
board, which is the main raw material for the production of CMP, was $198,744, approximately $1,059,417, or 84.20%, lower than the balance
as of December 31, 2022. As a result of better control over stock turnover and volatility of recycled paper board price, inventory was
kept in a minimum level.
A summary of changes in
major inventory items is as follows:
December 31, December 31,
Raw Materials
54
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 $141,727 (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, 2023
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, 2023,
we had approximately $3.5 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$2.3 million). Under the sale-leaseback arrangement,
Tengsheng Paper sold the Leased Equipment to TLCL for 16 million (approximately US$2.3 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 $14) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount
of $2,349,452 was recorded as right of use assets and the net present value of the minimum lease payments was recorded as lease liability
and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the inception of the lease on August
17, 2020.
Tengsheng Paper made payments
due according to the schedule. On July 17, 2023, the Company made a final payment on outstanding obligations and bought back the Lease
Equipment at nominal price according to the agreement. The lease assets were reclassified as own assets and balance of Leased Equipment
net of amortization were $nil and $1,939,970 as of December 31, 2023 and 2022, respectively.
55
Cash, Cash Equivalents and restricted cash
Our cash, cash equivalents and restricted cash
as of December 31, 2023 was $4,391,921, a decrease of $5,132,947, from $9,524,868 as of December 31, 2022. The decrease of cash and cash
equivalents for the year ended December 31, 2023 was attributable to a number of factors including:
i. Net cash provided by operating activities
Net cash provided by operating
activities was $12,871,086 for the year ended December 31, 2023. The balance represented an increase of cash of $2,151,698, or 20.07%,
from $10,719,388 provided for the year ended December 31, 2022. Net loss for the year ended December 31, 2023 was $9,946,035, representing
a decrease of loss $6,625,273, or 39.98%, from a net loss of $16,571,308 for the year ended December 31, 2022. Changes in various asset
and liability account balances throughout the year ended December 31, 2023 also contributed to the net change in cash from operating activities
in year ended December 31, 2023. Chief among such changes is the decrease of accounts receivable in the amount of $280,970 during the
year of 2023. There was also an increase of $736,267 in the ending inventory balance as of December 31, 2023 (a decrease to net cash for
the year ended December 31, 2023 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization
in the amount of $14,225,990. The Company also had a net decrease of $9,322,532 in prepayment and other current assets (an increase to
net cash) and a net decrease of $999,812 in other payables and accrued liabilities and related parties (a decrease to net cash), as well
as a decrease in income tax payable of $412,504 (a decrease to net cash) during the year ended December 31, 2023.
ii. Net cash used in investing activities
We incurred $22,239,297
in net cash expenditures for investing activities during the year ended December 31, 2023, as compared to $10,898,531 for the year ended
December 31, 2022. Payments in 2023 were mainly for the payment for Land Use Right.
iii. Net cash provided by financing activities
Net cash provided by financing
activities was $4,410,099 for the year ended December 31, 2023, as compared to net cash used in financing activities in the amount of
$879,596 for the year ended December 31, 2022.
December 31, December 31,
Industrial and Commercial Bank of China (“ICBC”) Loan 1 $ - $ 5,023,978
ICBC Loan 4 - -
China Construction Bank Loan - 143,583
ICBC Loan 5 -
On November 10, 2022, the
Company entered into a working capital loan agreement with the ICBC. The 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 bore a fixed interest rate of 4.785% per annum. The Company repaid $71,743
in May 2023 and paid off the remaining balance of the loan in August 2023. The balance of the loan was $nil and $5,023,978 as of December
31, 2023 and 2022, respectively.
On November 30, 2022, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $287,167 as of December 31, 2023 and 2022,
respectively. The loan bore an interest rate of 4.25% per annum. The loan was fully repaid in May 2023.
56
On November 30, 2022, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $143,583 as of December 31, 2023 and 2022,
respectively. The loan bore an interest rate of 4.25% per annum. The loan was fully repaid in May 2023.
On May 29, 2023, the Company
entered into a working capital loan agreement with the ICBC, to borrow $423,567 at a fixed interest rate of 4.25% per annum. The loan
was repaid in November 2023.
On July 29, 2022, the Company
entered into a working capital loan agreement with the China Construction Bank, with a balance of $nil and $143,583 as of December 31,
2023 and 2022, respectively. The loan bore a fixed interest rate of 3.95% per annum. The loan was fully repaid in July 2023.
On June 29, 2023, the Company
entered into a working capital loan agreement with the ICBC, to borrow $423,567 at a fixed interest rate of 3.55% per annum. The loan
was repaid in September, 2023.
On September 15, 2023, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $2,824 as of December 31, 2023. The loan bears
a fixed interest rate of 3.45% per annum. The loan will be due by September 14, 2024.
On September 22, 2023, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $ 70,594 as of December 31, 2023. The loan bears
a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024.
On September 22, 2023, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $ 350,149 as of December 31, 2023. The loan bears
a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024.
As of December 31, 2022,
there were guaranteed short-term borrowings of $5,023,978 and unsecured bank loans of $574,333. As of December 31, 2023, there were guaranteed
short-term borrowings of $nil and unsecured bank loans of $423,567.
The average short-term borrowing rates for the
years ended December 31, 2023, and 2022 were approximately 4.48% and 4.72%, respectively.
Long-term loans
As of December 31, 2023, and 2022, long-term loan balance
is $11,378,429 and $9,040,002, 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 was guaranteed by an independent third party. Interest payment was due quarterly and
bore a rate of 7.68% per annum. Effective from November 15, 2022, the interest rate was 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. The loan was fully repaid in December 2023. As of December 31, 2023 and 2022, total outstanding loan balance was $nil and $1,234,816,
respectively, which are presented as current liabilities in the consolidated balance sheet.
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 was due and payable in various
installments from December 21, 2018 to June 20, 2023. On August 24, 2023, the loan was extended for another 3 years and will be due and
payable on August 24, 2026. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $nil
and $280,466 as of December 31, 2023 and 2022, respectively. Interest payment is due monthly and bore a rate of 7.68% per annum. Effective
from November 15, 2022, the interest rate was reduced to 7% per annum. As of December 31, 2023 and 2022, the total outstanding loan balance
was $3,528,315 and $3,589,582. Out of the total outstanding loan balance, current portion amounted was $1,269,290, which is presented
as current liabilities in the consolidated balance sheet and the remaining balance of $2,259,025 is presented as non-current liabilities
in the consolidated balance sheet as of December 31, 2023.
57
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. Effective
from November 15, 2022, the interest rate was reduced to 7% per annum. As of December 31, 2023 and 2022, the total outstanding loan balance
was $2,259,026 and $2,297,332, respectively, which are presented as current liabilities and non-current liabilities in the consolidated
balance sheet as of December 31, 2023 and 2022, 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 7.56% per annum. Effective
from November 15, 2022, the interest rate was reduced to 7% per annum. As of December 31, 2023 and 2022, the total outstanding loan balance
was $1,835,458 and $1,866,582, respectively, which are presented as current liabilities and non-current liabilities in the consolidated
balance sheet as of December 31, 2023 and 2022, respectively.
On February 26, 2023, 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 August 21, 2023 to February 24, 2025. The loan is secured by Dongfang 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% per annum. As of December 31, 2023, the total outstanding loan
balance was $2,541,404. Out of the total outstanding loan balance, current portion amounted was $1,284,820, which is presented as current
liabilities in the consolidated balance sheet and the remaining balance of $1,256,584 is presented as non-current liabilities in the consolidated
balance sheet as of December 31, 2023.
On July 1, 2022, the Company entered into a loan
agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowed RMB 400,000 from Jiangna Yu for a term of
five years. The loan is payable in monthly installment of RMB10,667 from July 2022 to July 2027. The company repaid the loan in November
2023. As of December 31, 2023 and 2022, the total outstanding loan balance was $nil and $51,690, respectively. Out of the total outstanding
loan balance, current portion amounted $nil and $11,486, respectively, which are presented as current liabilities and the remaining balance
of $nil and $40,204 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2023 and 2022, respectively.
On December 5, 2023, the
Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 3 years, which was due in various installments
from June 21, 2024 to December 5, 2026. The loan was guaranteed by an independent third party. Interest payment was due monthly and bore
a rate of 7% per annum. As of December 31, 2023, total outstanding loan balance was $1,214,226. Out of the total outstanding loan balance,
current portion amounted $225,903, which is presented as current liabilities and the remaining balance of $ 988,323 is presented as non-current
liabilities in the consolidated balance sheet as of December 31, 2023.
Total interest expenses
for the short-term bank loans and long-term loans for the years ended December 31, 2023, and 2022 were $977,678 and $988,997 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
$361,915 and $368,052 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, 2023, and 2022, respectively.
58
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, 2023, and 2022, approximately $42,357 and $43,075 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 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 2023, and 2022, the outstanding
interest was $194,047 and $197,338, 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, 2023,
and 2022, 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, 2023, and 2022. The accrued interest owe to Mr. Zhenyong Liu was approximately $598,319 and $608,465,
as of December 31, 2023 and 2022, 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 allows Mr. Zhenyong Liu to borrow from the Company an amount of $6,507,431
(RMB44,089,085). The loan was unsecured and carried 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 $7,059,455 (RMB50,000,000) in total. The loans were unsecured and carried a fixed interest rate of 4.35% per annum. $4,235,673 (RMB30,000,000)
was repaid by Mr. Zhengyong Liu in August 2023 and the remaining balance was repaid in December 2023. Interest income of the loan for
the year ended December 31, 2023 was $290,275.
As of December 31, 2023,
and 2022, 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,
2023 and 2022, 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.
59
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, 2023 and 2022 to translate the Chinese RMB to the U.S. Dollars are 7.0827:1 and 6.9646:1, respectively.
Revenues and expenses are translated using the prevailing average exchange rates at 7.0558:1, and 6.7573:1 for the years ended December
31, 2023 and 2022, 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 $4,376,862 (RMB31,000,000), which matures at various times in
2028. 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 October 2021, the FASB
issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities
in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The new amendments are effective for fiscal
years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments should be applied prospectively
to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. 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, 2023 and 2022, together with the report of the independent certified public accounting firms thereon
and the notes thereto, are presented beginning at page F-1.
60
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, 2023, and 2022, 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, 2023,
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, 2023, and 2022, and the results of its operations and
its cash flows for each of the years in the two-year period ended December 31, 2023, 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.
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/ GGF CPA LTD
GGF CPA LTD Certified Public Accountants
We have served as the Company’s auditor since March 1, 2024.
Guangzhou, Guangdong, China
PCAOB NO: 2729
March 27, 2024
F-1
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-2
IT TECH PACKAGING, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2023 AND 2022
December 31, December 31,
ASSETS
Current Assets
Prepayment on property, plant and equipment - 1,031,502
Finance lease right-of-use assets, net - 1,939,970
Deferred tax asset non-current - -
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Advance from customers 136,167 -
Deferred gain on sale-leaseback - 52,314
Commitments and Contingencies
Stockholders’ Equity
See accompanying notes to consolidated financial
statements.
F-3
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Year Ended
December 31,
Other Income (Expense):
Gain on acquisition - 30,994
Other Comprehensive Loss
Losses Per Share:
Basic and Diluted Losses per Share $ (0.99 ) $ (1.66 )
F-4
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
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-5
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Year Ended
December 31,
Cash Flows from Operating Activities:
Allowances for inventories, net 2,970 -
Share-based compensation and expenses - 156,000
Gain on acquisition - (30,992 )