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, 2024 was $75,837,943, representing a decrease of $10,709,007, or 12.37%, from $86,546,950 for the previous year. This was
mainly due to the decrease in sales quantity of Corrugating Medium Paper (“CMP”), offset printing paper and tissue paper products
and 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, 2024 was $75,702,427, a decrease of $10,709,631, or 12.39%,
from $86,412,058 for the year ended December 31, 2023. This was mainly due to the decrease in ASPs of CMP and the decrease in sales volume
of offset printing paper and tissue paper products.
Total quantities of offset
printing paper, CMP and tissue paper products sold during the year ended December 31, 2024 amounted to 220,552 tonnes, a decrease of 10,049
tonnes, or 4.36%, compared to 230,601 tonnes sold during the year ended December 31, 2023. Total quantities of CMP and offset printing
paper sold decreased by 8,844 tonnes in the year of 2024 as compared to 2023. Production of CMP was suspended in January and February
of 2024 and resumed in mid of March 2024, and production of offset printing paper and tissue paper products was suspended in 2024. The
changes in revenue and quantity sold for the year ended December 31, 2024 and 2023 are summarized as follows:
48
Monthly revenue (excluding revenue of digital
photo paper and tissue paper products) for the 24 months ended December 31, 2024, are summarized below:
The average selling price,
or ASP, for our major products for the years ended December 31, 2024 and 2023 are summarized as follows:
Decrease by percentage - % (6.25 )% (6.20 )% - %
The following is a chart
showing the month-by-month ASPs for the 24 month period ended December 31, 2024:
49
Corrugating Medium Paper
Revenue from CMP amounted
to $75,702,427 (100.00% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2024,
representing a decrease of $6,189,249, or 7.56%, from $81,891,676 during 2023.
We sold 220,552 tonnes of
CMP in the year ended December 31, 2024 as compared to 223,823 tonnes in the year ended December 31, 2023, representing a 1.46% decrease
in quantity sold.
ASP for regular CMP dropped
from $368/tonne in 2023 to $345/tonne in 2024, representing a 6.25% decrease. ASP in RMB for regular CMP in 2023 and 2024 was RMB2,599
and RMB2,458, respectively, representing a 5.43% decrease. The quantity of regular CMP sold increased by 102 tonnes, from 182,870 tonnes
in 2023 to 182,972 tonnes in 2024.
ASP for light-weight
CMP dropped from $355/tonne in 2023 to $333/tonne in 2024, representing a $6.2% decrease. ASP in RMB for light-weight CMP in 2023
and 2024 was RMB2,502 and RMB2,368, respectively, representing a 5.36% decrease. The quantity of light-weight CMP sold decreased by
3,373 tonnes, from 40,953 tonnes in 2023, to 37,580 tonnes in 2024.
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, 2024 and 2023 were 49.75% and
51.98%, respectively, representing a decrease of 2.23%.
Quantities sold for regular
CMP that was produced by the PM6 production line from January 2023 to December 2024 are as follows:
50
Revenue of Face Mask
Revenue generated from selling
face masks were $nil and $106,064 for the year ended December 31, 2024 and 2023.
Cost of Sales
Total cost of sales
for CMP, offset printing paper and tissue paper products in the year ended December 31, 2024 was $69,145,658, a decrease of $16,273,164,
or 19.05%, from $85,418,822 for the year ended December 31, 2023. This was mainly due to the decrease in unit material costs of CMP and
decrease in sales volume of offset printing paper and tissue paper products.
Cost of sales for CMP was
$69,145,658 for the year ended December 31, 2024, as compared to $77,962,837 in 2023. The decrease in the cost of sales of $8,817,179
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 2024. Average cost of sales per tonne for CMP decreased by 9.77%, from $348 for the year ended December 31, 2023, to $314
in 2024. 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 $nil for the year ended December 31, 2024, as compared to $3,137,646 in 2023.
Cost of sales for tissue
paper products was $nil for the year ended December 31, 2024, as compared to $4,318,339 in 2023.
Changes in cost of sales
and cost per tonne by product for the year ended December 31, 2024 and 2023 are summarized below:
Year Ended Year Ended
December 31, 2024 December 31, 2023 Change in Change in percentage
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, 2024 was RMB 1,214/tonne (approximately $171/tonne), as compared to RMB 1,350/tonne (approximately $191/tonne) in 2023.
These changes (in US dollars) represent a year-over-year decrease of 10.47% 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 2023 to December 2024 are shown below:
Electricity and gas are
our two main energy sources. Electricity and gas accounted for approximately 5% and 13.6% of total sales in 2024, respectively, compared
to 5% and 15.3% of total sales in 2023. 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, 2024 are summarized as follows:
Gross Profit
Gross profit for December
31, 2024 was $6,691,740 (representing 8.82% of the total revenue), representing an increase of $5,691,855, or 569.25%, from the gross
profit of $999,885 (representing 1.16% of the total revenue) for the year ended December 31, 2023. The increase was mainly due to the
decrease in unit cost of materials of CMP, partially offset by the decrease in ASP of CMP.
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, 2024 was $6,556,769, an increase of $5,563,533, or 560.14%, from
the gross profit of $993,236 for the year ended December 31, 2023. The increase was mainly the result of the factors discussed above.
The overall gross profit
margin for offset printing paper, CMP and tissue paper products increased by 7.51 percentage points, from 1.15% for the year ended December
31, 2023, to 8.66% for the year ended December 31, 2024.
Gross profit margin for regular
CMP for the year ended December 31, 2024 was 8.79%, or 3.52 percentage points higher, as compared to gross profit margin of 5.27% for
the year ended December 31, 2023. Such increase was primarily due to the decrease in material costs, partially offset by the decrease
in ASP of regular CMP.
Gross profit margin for
light-weight CMP for the year ended December 31, 2024 was 8.03%, or 5.44 percentage points higher, as compared to gross profit margin
of 2.59% for the year ended December 31, 2023. Such increase was primarily due to the decrease in material costs, partially offset by
the decrease in ASP of light-weight CMP.
Monthly gross profit margins
for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2024 are as follows:
Face Masks
Gross loss for face mask
for the year ended December 31, 2024 and 2023 was $nil and $11,127, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses for the year ended December 31, 2024 were $14,799,969, an increase of $5,724,494, or 63.08% from $9,075,475 for the year ended
December 31, 2023. The increase was mainly due to the increase in i) depreciation of idle fixed assets during the production suspension
of $3.9 million; ii) accrued liability related to a legal proceeding in which the Company was jointly liable for repaying a loan of $0.4
million and iii) impairment reserve for obsolete inventory of $0.7 million and allowance for doubtful receivables of $0.9 million.
Loss from Operations
Operating loss for the year
ended December 31, 2024 was $8,210,719, a decrease of loss of $1,365,169, or 14.26%, from $9,575,888 for the year ended December 31, 2023.
The decrease was primarily due to the increase in gross profit, partially offset by the increase in selling, general and administrative
expenses.
53
Other Income and Expenses
Interest expense for the
year ended December 31, 2024 decreased by $222,141, from $984,518 for the year ended December 31, 2023, to $762,377. The Company had short-term
and long-term interest-bearing loans that aggregated $9,124,422 as of December 31, 2024, as compared to $11,801,996 as of December 31,
2023.
Provision for Income Taxes
Full allowance for deferred
tax asset loss was provided in the year of 2024 and 2023. Income tax for the year ended December 31, 2024 was $879,194 as compared to
the income tax $346,954 for the year ended December 31, 2023.
Net Loss
As a result of the above,
net loss was $9,843,094 for the year ended December 31, 2024, representing a decrease of loss of $102,941, or 1.03%, from $9,946,035 for
the year ended December 31, 2023.
Accounts Receivable
Net accounts receivable
decreased by $287,950, or 50.03%, to $287,576 as of December 31, 2024, as compared with $575,526 as of December 31, 2023. We usually collect
accounts receivable within 30 days of delivery and completion of sales.
Inventories
Inventories consist of raw
materials (accounting for 59.29% of total value of inventory as of December 31, 2024), semi-finished goods and finished goods. As of December
31, 2024, the recorded value of inventory decreased by 33.85% to $2,351,876 from $3,555,235 as of December 31, 2023. As of December 31,
2024, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $1,353,543, approximately $1,154,799,
or 581.05%, higher than the balance as of December 31, 2023. In anticipation of the rising energy prices, we enhanced the production capacity
for CMP during the fourth quarter of 2023. As a result, by December 31, 2023, our raw material balance had decreased, whereas the inventory
balance of our finished goods had increased significantly, compared to the balances recorded on December 31, 2024. This was due to a substantial
portion of the materials being processed and converted into finished goods during that period.
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 $140,515 (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, 2024
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, 2024,
we had approximately $3.4 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.
Cash, Cash Equivalents and restricted cash
Our cash, cash equivalents
and restricted cash as of December 31, 2024 was $6,950,576, an increase of $2,558,655, from $4,391,921 as of December 31, 2023. The increase
of cash and cash equivalents for the year ended December 31, 2024 was attributable to a number of factors including:
i. Net cash provided by operating activities
Net cash provided by operating
activities was $6,299,469 for the year ended December 31, 2024. The balance represented a decrease of cash of $6,571,617, or 51.06%, from
$12,871,086 provided for the year ended December 31, 2023. Net loss for the year ended December 31, 2024 was $9,843,094, representing
a decrease of loss of $102,941, or 1.03%, from a net loss of $9,946,035 for the year ended December 31, 2023. Changes in various asset
and liability account balances throughout the year ended December 31, 2024 also contributed to the net change in cash from operating activities
in year ended December 31, 2024. Chief among such changes is the decrease of accounts receivable in the amount of $240,346 during the
year of 2024. There was also a decrease of $432,189 in the ending inventory balance as of December 31, 2024 (an increase to net cash for
the year ended December 31, 2024 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization
in the amount of $14,221,082. The Company also had a net increase of $6,090 in prepayment and other current assets (a decrease to net
cash) and a net decrease of $447,899 in other payables and accrued liabilities and related parties (a decrease to net cash), as well as
an increase in income tax payable of $81,720 (an increase to net cash) during the year ended December 31, 2024.
55
ii. Net cash used in investing activities
We incurred $329,611 in
net cash expenditures for investing activities during the year ended December 31, 2024, as compared to $22,239,297 for the year ended
December 31, 2023. Payments in 2023 were mainly for the payment for land use right.
iii. Net cash (used in) provided by financing activities
Net cash used in financing
activities was $3,256,696 for the year ended December 31, 2024, as compared to net cash provided by financing activities in the amount
of $4,410,099 for the year ended December 31, 2023.
In December 2024, we refinanced
$4 million existing long-term debt by securing new loans at lower market rates, to repay our obligations to Rural Credit Union. This refinancing
transaction did not involve any cash inflows or outflows. As a result, it was not reflected in the financing activities in the cash flow
statement. Although the new loans have distinct terms and interest rates compared to the old ones, they do not qualify as a traditional
debt restructuring according to U.S. GAAP. We anticipate financial benefits from this refinancing, particularly lower interest expenses
over the loan’s remaining term.
December 31, December 31,
Rural Credit Union of Xushui District Loan 1 $ 1,808,469 $ -
Rural Credit Union of Xushui District Loan 2 2,225,808 -
Industrial and Commercial Bank of China (“ICBC”) Loan 1 - 2,824
On December 24, 2024, the
Company entered into a loan agreement with the Rural Credit Union of Xushui District to borrow $1,808,469 (RMB13,000,000) to repay the
existing long-term loan of the same amount. The loan was secured by the equipment of Baoding Shengde as collateral for the benefit of
the bank. The loan bears a fixed rate of 6% and is due for repayment by December 23, 2025.
On December 24, 2024, the
Company entered into a loan agreement with the Rural Credit Union of Xushui District to borrow $2,225,808(RMB16,000,000) to repay the
existing long-term loan of the same amount. The loan was secured by the equipment of Baoding Shengde as collateral for the benefit of
the bank and guaranteed by a third party company. The loan bears a fixed rate of 6% and is due for repayment by December 23, 2025.
On September 15, 2023, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $2,824 as of December 31, 2024 and 2023,
respectively. The loan bore a fixed interest rate of 3.45% per annum. The loan was repaid in June 2024.
56
On September 22, 2023, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $70,594 as of December 31, 2024 and 2023,
respectively. The loan bore a fixed interest rate of 3.45% per annum. The loan was repaid in June 2024.
On September 22, 2023, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $350,149 as of December 31, 2024 and 2023,
respectively. The loan bore a fixed interest rate of 3.45% per annum. The loan was repaid in June 2024.
On June 11, 2024, the
Company entered into a working capital loan agreement with the ICBC, with a balance of $2,782 as of December 31, 2024. The loan bears
a fixed interest rate of 3.45% per annum. The loan is due for repayment by June 11, 2025.
On June 21, 2024, the Company
entered into a working capital loan agreement with the ICBC, with a balance of $139,113 as of December 31, 2024. The loan bears a fixed
interest rate of 3.45% per annum. The loan is due for repayment by June 21, 2025.
On June 22, 2024, the Company
entered into a working capital loan agreement with the ICBC, with a balance of $139,113 as of December 31, 2024. The loan bears a fixed
interest rate of 3.45% per annum. The loan is due for repayment by June 22, 2025.
On June 24, 2024, the Company
entered into a working capital loan agreement with the ICBC, with a balance of $136,331 as of December 31, 2024. The loan bears a fixed
interest rate of 3.45% per annum. The loan is due for repayment by June 24, 2025.
As of December 31, 2024,
there were guaranteed short-term borrowings of $2,225,808 and unsecured bank loans of $417,339. 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, 2024, and 2023 were approximately 4.6% and 4.48%, respectively.
Long-term loans
As of December 31, 2024, and 2023, long-term loan
balance is $4,672,806 and $11,378,429, respectively.
On July 15, 2013, the Company
entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable
in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and 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 as of December 31, 2024 and 2023. 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, 2024 and 2023, the total outstanding loan balance
was $3,476,434 and $3,528,315. Out of the total outstanding loan balance, current portion amounted was $2,641,756 and $1,269,290, which
is presented as current liabilities in the consolidated balance sheet and the remaining balance of $834,678 and $2,259,025 is presented
as non-current liabilities in the consolidated balance sheet as of December 31, 2024 and 2023, respectively.
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, December 24, 2021 and April 16, 2024 and
extended for additional 5 years in total, which is due on April 15, 2026 according to the new schedule. The loan was secured by Tengsheng
Paper with its land use right as collateral for the benefit of the credit union. Interest payment was due quarterly and bore a rate of
7.2% per annum. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. On December 24, 2024, the Company entered
into a one-year loan agreement with the Rural Credit Union of Xushui District for same amount to repay the loan. This refinancing arrangement
secured a lower market rate and did not involve any cash inflows or outflows. As of December 31, 2024 and 2023, the total outstanding
loan balance was $nil and $2,259,026, respectively, which are presented as current liabilities in the consolidated balance sheet as of
December 31, 2024 and 2023.
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 was due on December 11, 2024 according to the new schedule. The loan was 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. On December 24, 2024, the Company entered into
a one-year loan agreement with the Rural Credit Union of Xushui District for same amount to repay the loan. This refinancing arrangement
secured a lower market rate and did not involve any cash inflows or outflows. As of December 31, 2024 and 2023, the total outstanding
loan balance was $nil and $1,835,458, respectively, which are presented as current liabilities in the consolidated balance sheet as of
December 31, 2024 and 2023, 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. The loan was repaid in July 2024.
As of December 31, 2024 and 2023, the total outstanding loan balance was $nil and $2,541,404. Out of the total outstanding loan balance,
current portion amounted was $nil and $1,284,820, which is presented as current liabilities in the consolidated balance sheet and the
remaining balance of $nil and $1,256,584 is presented as non-current liabilities in the consolidated balance sheet as of December 31,
2024 and 2023, 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 is guaranteed by an independent third party. Interest payment is due monthly and bears
a rate of 7% per annum. As of December 31, 2024 and 2023, total outstanding loan balance was $1,196,372 and $1,214,226, respectively.
Out of the total outstanding loan balance, current portion amounted $918,146 and $225,903, which is presented as current liabilities and
the remaining balance of $278,226 and $988,323 is presented as non-current liabilities in the consolidated balance sheet as of December
31, 2024 and 2023, respectively.
Total interest expenses
for the short-term bank loans and long-term loans for the years ended December 31, 2024, and 2023 were $762,377 and $977,678, respectively.
Shareholder Loans
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
$356,594 and $361,915 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, 2024, and 2023, 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, 2024, and 2023, approximately $41,734 and $42,357 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 2024, and 2023, the outstanding
interest was $191,193 and $194,047, 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, 2024,
and 2023, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans were $nil
for the years ended December 31, 2024, and 2023. The net interest owe to Mr. Zhenyong Liu was approximately $304,600 and $598,319, as
of December 31, 2024, and 2023, respectively, which was recorded in other payables and accrued liabilities.
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 years ended December 31, 2024 and 2023 were $nil and $290,275.
As of December 31, 2024,
and 2023, amount due to shareholder was $nil and $727,433, respectively, 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,
2024 and 2023, we recorded $102,490 and $292,922 loss from impairment of property, plant and equipment, respectively.
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, 2024 and 2023 to translate the Chinese RMB to the U.S. Dollars are 7.1884:1 and 7.0827:1, respectively.
Revenues and expenses are translated using the prevailing average exchange rates at 7.1167:1, and 7.0558:1 for the years ended December
31, 2024 and 2023, 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 $4,312,503 (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 December 2023, the FASB
issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Under this ASU, public entities must annually (1)
disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative
threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax
income or loss by the applicable statutory income tax rate). This ASU’s amendments are effective for all entities that are subject
to Topic 740, Income Taxes, for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating
the impact of this pronouncement on our disclosures.
In November 2024, the FASB
issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures, which emphasizes the importance
of providing more granular and detailed expense information in financial statements. The update requires entities to disaggregate expenses
by nature and function on the income statement, offering a clearer picture of an entity’s cost structure and operational efficiency. This
enhanced disclosure is intended to improve the transparency and comparability of financial reporting. Entities must apply the new guidance
retrospectively to all periods presented in the financial statements. The amendments are effective for annual reporting periods beginning
after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is
in the process of assessing the impact of these changes on its financial reporting and will implement the necessary adjustments to comply
with the updated standards.
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, 2024 and 2023, 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, 2024, and 2023, 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, 2024, 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, 2024, and 2023, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, 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
We have served as the Company’s auditor since March 1, 2024.
Guangzhou, Guangdong, China
PCAOB NO: 2729
April 11, 2025
F-1
IT TECH PACKAGING, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2024 AND 2023
December 31, December 31,
ASSETS
Current Assets
Deferred tax asset non-current - -
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Income taxes payable 80,905 -
Commitments and Contingencies
Stockholders’ Equity
See accompanying notes to consolidated financial
statements.
F-2
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Year Ended
December 31,
Other Income (Expense):
Gain (Loss) on derivative liability (5,597 ) 646,229
Other Comprehensive Loss
Losses Per Share:
Basic and Diluted Losses per Share $ (0.98 ) $ (0.99 )
F-3
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Accumulated
Additional Statutory Other
Common Stock Paid-in Earnings Comprehensive Retained
Shares Amount Capital Reserve Income (loss) Earnings Total
See accompanying notes to consolidated financial
statements.
F-4
IT TECH PACKAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Year Ended
December 31,
Cash Flows from Operating Activities:
(Gain) Loss on derivative liability 5,597 (646,229 )
Changes in operating assets and liabilities:
Accrued payroll and employee benefits (27,107 ) 74,908
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment - 53,573
Cash Flows from Financing Activities:
Repayments of related party loans (727,433 ) -
Proceeds from long term loans - 3,769,948
Payment of capital lease obligation - (74,154 )
Loan to a related party (net) - 7,086,369
Net Cash (Used in) Provided by Financing Activities (3,256,696) 4,410,099
Effect of Exchange Rate Changes on Cash and Cash Equivalents (154,507) (174,835)
Net Increase (Decrease) in Cash and Cash Equivalents 2,558,655 (5,132,947 )
Cash, Cash Equivalents and Restricted Cash - End of Year $ 6,950,576 $ 4,391,921
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of capitalized interest cost $ 1,812,864 $ 1,484,461
See accompanying notes to consolidated financial
statements.
F-5
IT TECH PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business Background
IT Tech Packaging, Inc. (the “Company”)
was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described
immediately below, we became the holding company for Hebei Baoding Dongfang Paper Milling Company Limited (“Dongfang Paper”),
a producer and distributor of paper products in China, on October 29, 2007.
Effective on August 1, 2018, we changed our corporate
name to IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc.,
our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. In
connection with the name change, our common stock began being traded under a new NYSE symbol, “ITP,” and a new CUSIP number,
46527C100, at such time.
On June 9, 2022, the Board of Directors of the
Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share
(the “Common Stock”), at a ratio of 1-for-10 (the “Reverse Stock Split”). The Reverse Stock Split become effective
on July 7, 2022 (the “Effective Date”), and the shares began trading on the split-adjusted basis on the NYSE American under
the Company’s existing trading symbol “ITP” at market open on July 8, 2022. The new CUSIP number following the Reverse
Stock Split will be 46527C 209. All references made to share or per share amounts in the accompanying consolidated financial statements
and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
On October 29, 2007, pursuant to an agreement
and plan of merger (the “Merger Agreement”), the Company acquired Dongfang Zhiye Holding Limited (“Dongfang Holding”),
a corporation formed on November 13, 2006 under the laws of the British Virgin Islands, and issued the shareholders of Dongfang Holding
an aggregate of 7,450,497 (as adjusted for a four-for-one reverse stock split effected in November 2009) shares of our common stock, which
shares were distributed pro-rata to the shareholders of Dongfang Holding in accordance with their respective ownership interests in Dongfang
Holding. At the time of the Merger Agreement, Dongfang Holding owned all of the issued and outstanding stock and ownership of Dongfang
Paper and such shares of Dongfang Paper were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and
Mr. Zhao (the original shareholders of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in
Dongfang Paper on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Dongfang
Paper’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of Dongfang Paper’s shares.
As a result of the merger transaction, Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s
wholly owned subsidiary, Dongfang Paper, became an indirectly owned subsidiary of the Company.
Dongfang Holding, as the 100% owner of Dongfang
Paper, was unable to complete the registration of Dongfang Paper’s capital under its name within the proper time limits set forth
under PRC law. In connection with the consummation of the restructuring transactions described below, Dongfang Holding directed the trustees
to return the shares of Dongfang Paper to their original shareholders, and the original Dongfang Paper shareholders entered into certain
agreements with Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”) to transfer the control of Dongfang Paper over to Baoding
Shengde.
On June 24, 2009, the Company consummated a number
of restructuring transactions pursuant to which it acquired all of the issued and outstanding shares of Shengde Holdings Inc., a Nevada
corporation. Shengde Holdings Inc. was incorporated in the State of Nevada on February 25, 2009. On June 1, 2009, Shengde Holdings Inc.
incorporated Baoding Shengde, a limited liability company organized under the laws of the PRC. Because Baoding Shengde is a wholly-owned
subsidiary of Shengde Holdings Inc., it is regarded as a wholly foreign-owned entity under PRC law.
F-6
IT TECH PACKAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To ensure proper compliance of the Company’s
control over the ownership and operations of Dongfang Paper with certain PRC regulations, on June 24, 2009, the Company entered into a
series of contractual agreements (the “Contractual Agreements”) with Dongfang Paper and Dongfang Paper Equity Owners via the
Company’s wholly owned subsidiary Shengde Holdings Inc. (“Shengde Holdings”) a Nevada corporation and Baoding Shengde
Paper Co., Ltd. (“Baoding Shengde”), a wholly foreign-owned enterprise in the PRC with an original registered capital of $10,000,000
(subsequently increased to $60,000,000 in June 2010). Baoding Shengde is mainly engaged in production and distribution of digital photo
paper and single-use face masks and is 100% owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included
(i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Baoding Shengde shall provide exclusive
technical, business and management consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80%
of Dongfang Paper’s total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate
principal amount of $10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its
proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other
things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each owner’s
equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang
Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper Equity
Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations under the other
agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity interests in the event
that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails to pay the service fees to
Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides
that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights
and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Dongfang Paper
or with respect to any equity owner action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association.
The terms of the agreement are binding on the parties for as long as Dongfang Paper Equity Owners continue to hold any equity interest
in Dongfang Paper. A Dongfang Paper Equity Owner will cease to be a party to the agreement once it transfers its equity interests with
the prior approval of Baoding Shengde. As the Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the
trust until June 24, 2009 and continued to control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution
of the Contractual Agreements is considered as a business combination under common control.
On February 10, 2010, Baoding Shengde and the
Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentioned $10,000,000 Loan Agreement.