UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020March 31, 2021

 

or

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

1934 For the transition period from _______ to _______

 

Commission file number: 001-34577

 

IT TECH PACKAGING, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 20-4158835
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)

 

Science Park, Juli Rd, Xushui District, Baoding City

Hebei Province, The People’s Republic of China 072550

(Address of principal executive offices and Zip Code)

 

011 - (86) 312-8698215

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 ITP NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes No

 

As of AugustMay 11, 2020,2021, there were 28,514,81699,049,900 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

 

 

TABLE OF CONTENTS

TABLE OF CONTENTS
Part I. - FINANCIAL INFORMATION1
  
Item 1. Financial Statements1
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations2526
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk4240
  
Item 4. Controls and Procedures4240
  
Part II. - OTHER INFORMATION4341
  
Item 1. Legal Proceedings4341
  
Item 1A. Risk Factors4341
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds4341
Item 3.Defaults Upon Senior Securities41
Item 4.Mine Safety Disclosures41
Item 5.Other Information41
Item 6.Exhibits41
  
Item 3. Defaults Upon Senior Securities43
Item 4. Mine Safety Disclosures43
Item 5. Other Information43
Item 6. Exhibits43
SIGNATURES4442

 

i

i

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2020MARCH 31, 2021 AND DECEMBER 31, 20192020

(Unaudited)

 

  March 31,  December 31, 
  2021  2020 
ASSETS        
         
Current Assets        
Cash and bank balances $37,440,991  $4,142,437 
Restricted cash  -   - 
Accounts receivable (net of allowance for doubtful accounts of $85,637 and $34,391 as of March 31, 2021 and December 2020, respectively)  5,211,806   2,389,057 
Inventories  7,431,502   1,233,801 
Prepayments and other current assets  10,655,539   7,051,515 
Due from related parties  400,650   92,795 
         
Total current assets  61,140,488   14,909,605 
         
Prepayment on property, plant and equipment  21,000,411   21,149,749 
Finance lease right-of-use assets, net  2,340,142   2,397,653 
Property, plant, and equipment, net  140,109,827   145,142,642 
Value-added tax recoverable  2,502,526   2,566,195 
Deferred tax asset non-current  14,194,939   13,708,630 
         
Total Assets $241,288,333  $199,874,474 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current Liabilities        
Short-term bank loans $6,389,908  $6,435,348 
Current portion of long-term loans from credit union  4,960,967   4,996,245 
Lease liability  188,723   182,852 
Accounts payable  2,355,798   592,391 
Advance from customers  82,042   82,625 
Due to related parties  727,433   727,433 
Accrued payroll and employee benefits  308,838   224,930 
Other payables and accrued liabilities  4,715,970   4,838,601 
Income taxes payable  482,209   259,649 
         
Total current liabilities  20,211,888   18,340,074 
         
Loans from credit union  4,565,307   4,597,772 
Deferred gain on sale-leaseback  347,158   387,087 
Lease liability - non-current  301,654   354,107 
Derivative liability  11,581,027   1,115,260 
         
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $19,683,842 and $17,950,224 as of March 31, 2021 and December 31, 2020, respectively)  37,007,034   24,794,300 
         
Commitments and Contingencies        
         
Stockholders’ Equity        
Common stock, 500,000,000 shares authorized, $0.001 par value per share, 99,049,900 and 28,535,816 shares issued and outstanding as of March 31, 2021 and December, 31,2020, respectively  99,050   28,536 
Additional paid-in capital  88,927,786   53,989,548 
Statutory earnings reserve  6,080,574   6,080,574 
Accumulated other comprehensive income  4,271,952   5,740,722 
Retained earnings  104,901,937   109,240,794 
         
Total stockholders’ equity  204,281,299   175,080,174 
         
Total Liabilities and Stockholders’ Equity $241,288,333  $199,874,474 

  June 30,  December 31, 
  2020  2019 
ASSETS      
       
Current Assets      
Cash and bank balances $12,828,030  $5,837,745 
Restricted cash  -   - 
Accounts receivable (net of allowance for doubtful accounts of $57,531 and $59,922 as of June 30, 2020 and December 31, 2019, respectively)  3,164,142   3,119,311 
Inventories  5,852,472   1,607,463 
Prepayments and other current assets  5,874,642   11,613,241 
Due from related parties  85,526   1,863,479 
         
Total current assets  27,804,812   24,041,239 
         
Prepayment on property, plant and equipment  1,412,529   1,433,445 
Property, plant, and equipment, net  142,422,375   151,616,852 
Value-added tax recoverable  2,444,304   2,621,841 
Deferred tax asset non-current  11,348,246   10,485,053 
         
Total Assets $185,432,266  $190,198,430 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current Liabilities        
Short-term bank loans $6,073,875  $6,163,814 
Current portion of long-term loans from credit union  3,658,450   1,605,459 
Accounts payable  848,390   250,486 
Advance from customers  184,132   98,311 
Notes payable  -   - 
Due to related parties  657,433   539,985 
Accrued payroll and employee benefits  251,868   291,924 
Other payables and accrued liabilities  4,518,691   6,503,010 
Income taxes payable  399,051   1,382,471 
         
Total current liabilities  16,591,890   16,835,460 
         
Loans from credit union  5,183,982   7,367,908 
Derivative liability  717,070   - 
         
Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $16,746,095 and $19,460,257 as of June 30, 2020 and December 31, 2019, respectively)  22,492,942   24,203,368 
         
Commitments and Contingencies        
         
Stockholders' Equity        
Common stock, 500,000,000 shares authorized, $0.001 par value per share, 28,514,816 and 22,054,816 shares issued  28,515   22,055 
Additional paid-in capital  53,974,869   51,155,174 
Statutory earnings reserve  6,080,574   6,080,574 
Accumulated other comprehensive loss  (8,523,112)  (6,057,537)
Retained earnings  111,378,478   114,794,796 
         
Total stockholders' equity  162,939,324   165,995,062 
         
Total Liabilities and Stockholders' Equity $185,432,266  $190,198,430 

See accompanying notes to condensed consolidated financial statements. 

1

IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(Unaudited)

   Three Months Ended
   March 31,
   2021  2020 
          
Revenues  $24,209,427  $8,743,851 
          
Cost of sales   (22,378,422)  (8,913,570)
          
Gross Profit (Loss)   1,831,005   (169,719) 
          
Selling, general and administrative expenses   (2,555,318)  (2,696,963)
Gain on acquisition of a subsidiary   -   - 
          
Loss from Operations   (724,313)  (2,866,682)
          
Other Income (Expense):         
Interest income   4,333   5,790 
Subsidy income   196,787   142,998 
Interest expense   (278,901)  (244,718)
Loss on derivative liability   (3,636,967)  - 
          
Loss before Income Taxes   (4,439,061)  (2,962,612)
          
Provision for Income Taxes   100,205   526,325 
          
Net Loss   (4,338,856)   (2,436,287) 
          
Other Comprehensive Loss         
Foreign currency translation adjustment   (1,468,770)  (2,589,754)
          
Total Comprehensive Loss  $(5,807,626) $(5,026,041)
          
Losses Per Share:         
          
Basic and Diluted Losses per Share  $              (0.12) $              (0.11)
          
Outstanding – Basic and Diluted   36,156,280   22,054,816 

 

See accompanying notes to condensed consolidated financial statements.


IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMECASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2021 AND 2020 AND 2019

(Unaudited)

 

  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
             
Revenues $26,362,273  $33,619,948  $35,106,124  $51,070,240 
                 
Cost of sales  (23,803,444)  (30,711,819)  (32,717,014)  (48,354,577)
                 
Gross Profit  2,558,829   2,908,129   2,389,110   2,715,663 
                 
Selling, general and administrative expenses  (3,357,472)  (2,407,859)  (6,054,435)  (5,389,332)
Gain on acquisition of a subsidiary  -   31,397   -   31,397 
                 
(Loss) Income from Operations  (798,643)  531,667   (3,665,325)  (2,642,272)
                 
Other Income (Expense):                
Interest income  9,451   1,556   15,241   60,374 
Subsidy income  (979)  236,288   142,019   236,288 
Interest expense  (241,436)  (238,771)  (486,154)  (494,040)
Loss on derivative liability  (27,865)  -   (27,865)  - 
                 
(Loss) Income before Income Taxes  (1,059,472)  530,740   (4,022,084)  (2,839,650)
                 
Provision for Income Taxes  79,441   (80,670)  605,766   567,125 
                 
Net (Loss) Income  (980,031)  450,070   (3,416,318)  (2,272,525)
                 
Other Comprehensive Income (Loss)                
Foreign currency translation adjustment  124,179   (3,548,683)  (2,465,575)  (255,003)
                 
Total Comprehensive Loss $(855,852) $(3,098,613) $(5,881,893) $(2,527,528)
                 
(Losses) Earnings Per Share:                
                 
Basic and Diluted (Losses) Earnings per Share $(0.04) $0.02  $(0.14) $(0.10)
                 
Outstanding – Basic and Diluted  24,444,761   22,022,316   24,444,761   22,022,316 
  Three Months Ended 
  March 31, 
  2021  2020 
         
Cash Flows from Operating Activities:        
Net income $(4,338,856) $(2,436,287)
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  4,092,487   3,774,674 
Loss on derivative liability  3,636,967     
(Recovery from) Allowance for bad debts  52,018   (22,650)
Deferred tax  (589,094)  (541,042)
Changes in operating assets and liabilities:        
Accounts receivable  (2,920,798)  1,315,128 
Prepayments and other current assets  (3,645,323)  5,486,216 
Inventories  (6,270,151)  (373,470)
Accounts payable  1,785,742   (41,405)
Advance from customers  -   54,930 
Related parties  (311,679)  1,814,228 
Accrued payroll and employee benefits  86,375   (62,252)
Other payables and accrued liabilities  (84,719)  (728,633)
Income taxes payable  226,699   (1,379,130)
Net Cash (Used in) Provided by Operating Activities  (8,280,332)  6,860,307 
         
Cash Flows from Investing Activities:        
Purchases of property, plant and equipment  (44,599)  (756,514)
         
Net Cash Used in Investing Activities  (44,599)  (756,514)
         
Cash Flows from Financing Activities:        
Proceeds from issuance of shares and warrants, net  41,837,553   - 
Payment of capital lease obligation  (43,230)  - 
         
Net Cash Provided by Financing Activities  41,794,323   - 
         
Effect of Exchange Rate Changes on Cash and Cash Equivalents  (170,838)  (229,386)
         
Net Increase in Cash and Cash Equivalents  33,298,554   5,874,407 
         
Cash, Cash Equivalents and Restricted Cash - Beginning of Period  4,142,437   5,837,745 
         
Cash, Cash Equivalents and Restricted Cash - End of Period $37,440,991  $11,712,152 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid for interest, net of capitalized interest cost $97,642  $116,019 
Cash paid for income taxes $262,191  $1,379,130 
         
Cash and bank balances  37,440,991   11,712,152 
Restricted cash  -   - 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows  37,440,991   11,712,152 

 

See accompanying notes to condensed consolidated financial statements.

2


IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

  Six Months Ended 
  June 30, 
  2020  2019 
       
Cash Flows from Operating Activities:      
Net income $(3,416,318) $(2,272,525)
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  7,496,314   7,789,459 
Loss on derivative liability  27,865   - 
(Recovery from) Allowance for bad debts  (1,525)  6,224 
Share-based compensation and expenses  1,242,000   - 
Gain on acquisition of a subsidiary  -   (31,397)
Deferred tax  (1,021,699)  (1,259,134)
Changes in operating assets and liabilities:        
Accounts receivable  (89,311)  (311,265)
Prepayments and other current assets  5,739,395   60,694 
Inventories  (4,291,622)  (2,920,950)
Accounts payable  604,823   502,310 
Advance from customers  87,729   102,170 
Notes payable  -   (3,691,999)
Related parties  1,878,231   161,857 
Accrued payroll and employee benefits  (35,990)  39,237 
Other payables and accrued liabilities  (1,394,793)  558,026 
Income taxes payable  (968,474)  454,984 
Net Cash Provided by (Used in) Operating Activities  5,856,625   (812,309)
         
Cash Flows from Investing Activities:        
Purchases of property, plant and equipment  (981,150)  (3,472,355)
Acquisition of a subsidiary  -   (1,549,384)
         
Net Cash Used in Investing Activities  (981,150)  (5,021,739)
         
Cash Flows from Financing Activities:        
Proceeds from issuance of shares and warrants, net  2,273,360   - 
Proceeds from short term bank loans  -   3,987,359 
Proceeds from credit union loans  -   2,362,879 
Repayment of bank loans  -   (11,637,180)
         
Net Cash Provided by (Used in) Financing Activities  2,273,360   (5,286,942)
         
Effect of Exchange Rate Changes on Cash and Cash Equivalents  (158,550)  137,936 
         
Net Increase (Decrease) in Cash and Cash Equivalents  6,990,285   (10,983,054)
         
Cash, Cash Equivalents and Restricted Cash - Beginning of Period  5,837,745   12,117,425 
         
Cash, Cash Equivalents and Restricted Cash - End of Period $12,828,030  $1,134,371 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid for interest, net of capitalized interest cost $288,463  $445,860 
Cash paid for income taxes $1,369,690  $222,278 
         
Cash and bank balances  12,828,030   1,134,371 
Restricted cash  -   - 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows  12,828,030   1,134,371 

See accompanying notes to condensed consolidated financial statements.


IT TECH PACKAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2021 AND 2020 AND 2019

(Unaudited)

 

              Accumulated       
        Additional  Statutory  Other       
  Common Stock  Paid-in  Earnings  Comprehensive  Retained    
  Shares  Amount  Capital  Reserve  Income (loss)  Earnings  Total 
                      
Balance at December 31, 2019  22,054,816  $22,685  $51,154,544  $6,080,574  $(6,057,537) $114,794,796  $165,995,062 
                             
Issuance of shares to officer and directors  2,000,000   2,000   1,198,000               1,200,000 
Issuance of shares  4,400,000   4,400   1,579,755               1,584,155 
Issuance of shares to a consultant  60,000   60   41,940               42,000 
Foreign currency translation adjustment                  (2,465,575)      (2,465,575)
Net income                      (3,416,318)  (3,416,318)
Balance at June 30, 2020  28,514,816  $28,515  $53,974,869  $6,080,574  $(8,523,112) $111,378,478  $162,939,324 

          Accumulated       
      Additional Statutory Other       
  Common Stock Paid-in Earnings Comprehensive  Retained    
  Shares Amount Capital Reserve Income (loss)  Earnings  Total 
                         
Balance at December 31, 2019  22,054,816 $22,055 $51,155,174 $6,080,574 $(6,057,537) $114,794,796  $165,995,062 
                         
Foreign currency translation adjustment              (2,589,754)      (2,589,754)
Net income                  (2,436,287)  (2,436,287)
Balance at March 31, 2020  22,054,816 $22,055 $51,155,174 $6,080,574 $(8,647,291) $112,358,509  $160,969,021 
                         
Balance at December 31, 2020  28,535,816 $28,536 $53,989,548 $6,080,574 $5,740,722  $109,240,794  $175,080,174 
Issuance of shares to institutional investors  26,181,818  26,182  8,002,488             8,028,669 
Issuance of shares to public investors  29,277,866  29,278  15,585,867             15,615,144 
Exercise of warrants  15,054,400  15,054  11,349,884             11,364,939 
Foreign currency translation adjustment              (1,468,769)      (1,468,769)
Net income                  (4,338,858)  (4,338,858)
Balance at March 31, 2021  99,049,900 $99,050 $88,927,786 $6,080,574 $4,271,952  $104,901,937  $204,281,299 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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, and effective December 21, 2007, we changed our name to “Orient Paper, Inc.”.2007.

 

Effective onOn 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 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,Inc., a Nevada corporation. Shengde Holdings IncInc. was incorporated in the State of Nevada on February 25, 2009. On June 1, 2009, Shengde Holdings IncInc. 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,Inc., it is regarded as a wholly foreign-owned entity under PRC law.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 IncInc. (“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. An 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. Because of the Company’s decision to fund future business expansions through Baoding Shengde instead of Dongfang Paper, the $10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over Dongfang Paper and its businesses in the PRC.

 

An agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010, reiterating that Baoding Shengde is entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the aboveabove- mentioned Contractual Agreements. In addition, Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s unappropriated earnings as dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and thereafter.

 

On June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“ (“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. Upon full payment of the consideration in the amount of RMB 320 million (approximately $45 million), Hebei Tengsheng will become a wholly owned subsidiarygain control over substantial parcels of Dongfang Paperland that manufactures and sells tissue paper products.under the possession of Hebei Tengsheng.

 

The Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang Paper being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”). The revenue generated from Dongfang Paper for the three months ended June 30,March 31, 2021 and 2020 and 2019 was accounted for 96.79% and 100% of the Company’s total revenue, repectively. The revenue generated from Dongfang Paper for the six months ended June 30, 2020 and 2019 was accounted for 97.59%99.46% and 100% of the Company’s total revenue, respectively. Dongfang Paper also accounted for 90.15%78.02% and 91.01%90.70% of the total assets of the Company as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, details of the Company’s subsidiaries and variable interest entities are as follows:

 

  Date of Place of    
  Incorporation Incorporation or Percentage of  
Name or Establishment Establishment Ownership Principal Activity
Subsidiary:        
Dongfang Holding November 13, 2006 BVI 100%100% Inactive investment holding
Shengde Holdings February 25, 2009 State of Nevada 100%100% Investment holding
Baoding Shengde June 1, 2009 PRC 100%100% Paper production and distribution
         
Variable interest entity (“VIE”):      
Dongfang Paper March 10, 1996 PRC Control* Paper production and distribution

 

*Dongfang Paper is treated as a 100% controlled variable interest entity of the Company.

 

However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the aforementioned agreements.

 

In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or being required to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has aggregated the financial information of Dongfang Paper in the table below. The aggregate carrying value of Dongfang Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets as of June 30, 2020March 31, 2021 and December 31, 20192020 are as follows:

 

 June 30, December 31,  March 31, December 31, 
 2020  2019  2021  2020 
             
ASSETS             
             
Current Assets             
Cash and bank balances $10,497,051  $5,675,374  $5,607,107  $3,315,778 
Restricted cash  -   -   -   - 
Accounts receivable  3,077,201   3,119,312   5,200,164   2,389,057 
Inventories  5,820,389   1,603,038   7,407,625   1,223,020 
Prepayments and other current assets  5,872,022   11,610,576   6,663,371   7,051,381 
Due from related parties  85,525   1,863,479   400,650   92,795 
                
Total current assets  25,352,188   23,871,779   25,278,917   14,072,031 
                
Prepayment on property, plant and equipment  1,412,529   1,433,445   19,478,642   19,617,159 
Finance lease right-of-use assets, net  2,340,142   2,397,653 
Property, plant, and equipment, net  130,563,350   138,920,440   128,612,757   133,134,932 
Deferred tax asset non-current  9,834,828   8,869,385   12,537,630   12,040,962 
        
                
Total Assets $167,162,895  $173,095,049  $188,248,088  $181,262,737 
                
LIABILITIES                
                
Current Liabilities                
Short-term bank loans $6,073,875  $6,163,814  $6,389,908  $6,435,348 
Current portion of long-term loans from credit union  409,633   315,358   547,837   551,733 
Lease liability  188,723   182,852 
Accounts payable  821,310   250,486   2,355,798   592,391 
Advance from customers  184,132   98,311   82,042   82,625 
Due to related parties  -   56,552   -   - 
Accrued payroll and employee benefits  233,844   287,584   300,810   221,482 
Other payables and accrued liabilities  4,471,918   6,502,974   4,469,554   4,672,265 
Income taxes payable  399,051   1,382,471   482,209   259,649 
                
Total current liabilities  12,593,763   15,057,550   14,816,881   12,998,345 
                
Loans from credit union  4,336,464   4,501,018   4,565,307   4,597,772 
Loans from a related party      - 
Lease liability - non-current  301,654   354,107 
        
                
Total liabilities $16,930,227  $19,558,568  $19,683,842  $17,950,224 

 

The Company and its consolidated subsidiaries are not required to provide financial support to the VIE, and no creditor (or beneficial interest holders) of the VIE have recourse to the assets of Company unless the Company separately agrees to be subject to such claims. There are no terms in any agreements or arrangements, implicit or explicit, which require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE does require financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIE.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(2) Basis of Presentation and Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for10-Kfor the year ended December 31, 20192020 of the Company, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “the Company”, “we”, “us” or “our”).

 

Principles of Consolidation

 

Our unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of June 30, 2020March 31, 2021 and the results of operations for the sixthree months ended June 30, 2020March 31, 2021 are not necessarily indicative of the results to be expected for any future period.

 

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments 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 period. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.

 

Valuation of long-lived asset

 

The Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

 

Fair Value Measurements

 

The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

 

The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that the Company could realize in a current market exchange. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the carrying value of the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank of China.

 

Management determined that liabilities created by beneficial conversion features associated with the issuance of certain warrants (see “Derivative liabilities”under Note (10)), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities was determined based on management’s estimate of the expected future cash flows required to settle the liabilities. This valuation technique involves management’s estimates and judgment based on unobservable inputs and is classified in level 3.

 

Non-Recurring Fair Value Measurements

 

The Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the possibility of impairment. For the continuing operations, long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. For discontinued operations, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. The fair value of these assets were determined using models with significant unobservable inputs which were classified as Level 3 inputs, primarily the discounted future cash flow.

 

Share-Based Compensation

 

The Company uses the fair value recognition provision of ASC Topic 718, Compensation-Stock Compensation, which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments over the vesting period.

 

The Company also applies the provisions of ASC Topic 505-50, Equity Based Payments to Non-Employees to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of the instruments issued in exchange for such services, whichever is more reliably measurable.

 

(3) Restricted Cash

 

Restricted cash was nil as of June 30, 2020March 31, 2021 and December 31, 2019.

2020.

10


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4) Inventories

 

Raw materials inventory includes mainly recycled paper board and recycled white scrap paper. Finished goods include mainly products of corrugating medium paper, offset printing paper and tissue paper products. Inventories consisted of the following as of June 30, 2020March 31, 2021 and December 31, 2019:2020:

 

 June 30, December 31,  March 31,  December 31, 
 2020  2019  2021  2020 
Raw Materials             
Recycled paper board $4,116,442  $40,032  $5,040,597  $19,459 
Recycled white scrap paper  130,972   10,541   189,976   11,193 
Gas  111,573   41,675   75,620   55,473 
Base paper, mask fabric and other raw materials  309,692   293,935 
Base paper and other raw materials  389,281   181,426 
  4,668,680   386,183   5,695,474   267,551 
Semi-finished Goods  122,010   83,266   259,758   176,703 
Finished Goods  1,061,782   1,212,849   1,476,270   789,547 
Total inventory, gross  5,852,472   1,682,298   7,431,502   1,233,801 
Inventory reserve  -   (74,835)  -   - 
Total inventory, net $5,852,472  $1,607,463  $7,431,502  $1,233,801 

 

(5) Prepayments and other current assets

 

Prepayments and other current assets consisted of the following as of June 30, 2020March 31, 2021 and December 31, 2019:2020:

 

 June 30, December 31,  March 31,  December 31, 
 2020  2019  2021  2020 
Prepaid land lease $169,504  $301,023  $182,613  $183,912 
Prepayment for purchase of materials  60,510   5,394,297   4,003,350   10,945 
Value-added tax recoverable  5,408,783   5,666,975   6,067,438   5,864,989 
Others  235,845   250,946   402,138   991,669 
 $5,874,642  $11,613,241  $10,655,539  $7,051,515 

 

(6) Property, plant and equipment, net

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, property, plant and equipment consisted of the following:

 

 June 30, December 31,  March 31, December 31, 
 2020  2019  2021  2020 
Property, Plant, and Equipment:             
Land use rights $11,518,553  $11,689,114  $12,409,356  $12,497,601 
Building and improvements  69,778,558   70,811,803   80,659,574   81,233,162 
Machinery and equipment  150,856,392   152,954,020   162,639,111   163,787,807 
Vehicles  579,229   587,806   655,751   628,462 
Construction in progress  6,646,105   6,399,986   582,077   586,216 
Totals  239,378,837   242,442,729   256,945,869   258,733,248 
Less: accumulated depreciation and amortization  (96,956,462)  (90,825,877)  (116,836,042)  (113,590,606)
Property, Plant and Equipment, net $142,422,375  $151,616,852  $140,109,827  $145,142,642 

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, land use rights represented two parcelparcels of state-owned lands located in Xushui District and Wei County of Hebei Province in China, with lease terms of 50 years expiring in 2061 and 2066, respectively.

 

11

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Construction in progress mainly represents payments for paper machine of a new tissue paper production line PM10 and improvement of the office building and essentially all industrial-use buildings in the Headquarters Compound.PM10.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, certain property, plant and equipment of Dongfang Paper with net values of $3,013,792$1,882,319 and $3,935,270,$2,349,796, respectively, have been pledged pursuant to a long-term loan from credit union forof Dongfang Paper. Land use right of Dongfang Paper with net values of $5,606,524$5,931,823 and $5,757,546$6,010,359, respectively, as of June 30, 2020March 31, 2021 and December 31, 2019, respectively,2020 was pledged for the bank loan from Industrial & Commercial Bank of China. Land use right of Hebei Tengsheng with net value of $5,124,570$5,520,886 and $5,200,452$5,560,146, respectively, as of June 30, 2020March 31, 2021 and December 31, 2019, respectively,2020 was pledged for a long-term loan from credit union of Baoding Shengde. In addition, land use right of Hebei Tengsheng with net value of $7,939,368$8,553,369 and $8,056,930$8,614,194, respectively, as of June 30, 2020March 31, 2021 and December 31, 2019, respectively,2020 was pledged for another long-term loan from credit union of Baoding Shengde. See Short-term bank loansand “Long-term loans from credit union” under Note (7), Loans Payable, for details of the transaction and asset collaterals.

 

Depreciation and amortization of property, plant and equipment was $3,721,640$4,089,067 and $3,859,399$3,774,674 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Depreciation and amortization of property, plant and equipment was $7,496,314 and $7,789,459 for the six months ended June 30, 2020 and 2019, respectively.

 

(7) Loans PayableFinancing with Sale-Leaseback

 

The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $15) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of $2,349,452 was recorded as right of use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020.

Hebei Tengsheng made payments due according to the schedule. The balance of Leased Equipment net of amortization was $2,340,142 and $2,397,653 as of March 31, 2021 and December 31, 2020, respectively. The lease liability was $490,377 and $536,959, and its current portion in the amount of $188,723 and $182,852 as of March 31, 2021 and December 31, 2020, respectively.

Amortization of the Leased Equipment was $40,997 and nil for the three months ended March 31, 2021 and 2020. Total interest expenses for the sale-leaseback arrangement was $20,418 and nil for the three months ended March 31, 2021 and 2020.

As a result of the sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to amortization of the Leased Equipment.

The future minimum lease payments of the capital lease as of March 31, 2021 were as follows:

March 31, Amount 
2022  252,005 
2023  252,005 
2024  84,002 
Less: unearned discount  (97,635)
     
   490,377 
Less: Current portion lease liability  (188,723)
  $301,654 

(8) Loans Payable

Short-term bank loans

  June 30,  December 31, 
  2020  2019 
Industrial and Commercial Bank of China (“ICBC”) Loan 1 $6,073,875  $6,163,814 
         
Total short-term bank loans $6,073,875  $6,163,814 

 

On December 20, 2019,11, 2020, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,073,875$ $6,389,908 and $6,163,814$6,435,348 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The working capital loan was secured by landthe Land use right of Hebei TengshengDongfang Paper as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by December 23, 2020.7, 2021.

 

As of June 30, 2020,March 31, 2021, there were guaranteed short-term borrowings of $6,073,875$6,389,908 and unsecured bank loans of $nil. As of December 31, 2019,2020, there were guaranteed short-term borrowings of $6,163,814$6,435,348 and unsecured bank loans of $nil.

 

The average short-term borrowing rates for the three months ended June 30,March 31, 2021 and 2020 and 2019 were approximately 4.79% and 4.77%, respectively. The average short-term borrowing rates for the six months ended June 30, 2020 and 2019 were approximately 4.79% and 4.76%, respectively.

.

12


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Long-term loans from credit union

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443$9,526,274 and $8,973,367,$9,594,017, respectively.

 

 June 30, December 31,  March 31,  December 31, 
 2020  2019  2021  2020 
Rural Credit Union of Xushui District Loan 1 $1,214,775  $1,232,763  $1,308,721  $1,318,028 
Rural Credit Union of Xushui District Loan 2  3,531,322   3,583,613   3,804,423   3,831,476 
Rural Credit Union of Xushui District Loan 3  2,260,047   2,293,512   2,434,830   2,452,145 
Rural Credit Union of Xushui District Loan 4  1,836,288   1,863,479   1,978,300   1,992,368 
Total  8,842,432   8,973,367   9,526,274   9,594,017 
Less: Current portion of long-term loans from credit union  (3,658,450)  (1,605,459)  (4,960,967)  (4,996,245)
Long-term loans from credit union $5,183,982  $7,367,908  $4,565,307  $4,597,772 

 

As of June 30, 2020,Mar 31, 2021, the Company’s long-term debt repayments for the next fivecoming years were as follows:

 

 Amount    Amount 
Fiscal year          
Remainder of 2020 $1,582,033 
2021  3,022,812 
Remainder of 2021   $4,960,967 
2022  1,553,782     1,673,946 
2023  2,683,805     2,891,361 
Total  8,842,432     9,526,274 

 

On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, total outstanding loan balance was $1,214,775$1,308,721 and $1,232,763, respectively.$1,318,028, respectively, Out of the total outstanding loan balance, current portion amounted were $169,503$213,048 and $143,345$214,563 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,045,272$1,095,673 and $1,089,418$11,103,465 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $3,013,792$1,882,319 and $3,935,270$2,349,796 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the total outstanding loan balance was $3,531,322$3,804,423 and $3,583,613,$3,831,476, respectively. Out of the total outstanding loan balance, current portion amounted were $240,130$334,789 and $172,013$337,169 as of June 30, 2020March 31, 2021 and December 31, 2019,2020 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,291,192$3,469,633 and $3,411,600$3,494,307 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

On April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank.credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the total outstanding loan balance was $2,260,047$2,434,830 and $2,293,512,$2,452,145, respectively. Out of the total outstanding loan balance, current portion amounted were $2,260,047$2,434,830 and $1,146,756$2,452,145 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank.credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the total outstanding loan balance was $1,836,288$1,978,300 and $1,863,479,$1,992,368, respectively. Out of the total outstanding loan balance, current portion amounted were $988,770$1,978,300 and $143,345$1,992,368 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $847,518 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

Total interest expenses for the short-term bank loans and long-term loans for the three months ended June 30,March 31, 2021 and 2020 were $258,483 and 2019 were $241,436 and $214,907, respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months ended June 30, 2020 and 2019 were $486,154 and $445,860,$244,718, respectively.

 

(8)(9) Related Party Transactions

 

Mr. Zhenyong Liu, the Company’s CEO 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 $362,079$390,081 and $367,441$392,855 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 June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083$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 Companycompany paid off the remaining balance, together with interest of $20,400. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, approximately $42,376$45,653 and $43,003$45,978 of interest, respectively 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 $ 16,950,350$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 Companycompany 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 Companycompany repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the Companycompany paid off the remaining balance, together with interest of 94,636. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the outstanding loan balance were $nil and the accrued interest was $194,134$209,148 and $197,009,$210,635, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil and $23,865 for the three months ended June 30, 2020March 31, 2021 and 2019, respectively. The interest expenses incurred for such related party loans are $nil and $48,180 for the six months ended June 30, 2020 and 2019, respectively.2020. The accrued interest owedowing to Mr. Zhenyong Liu was approximately $598,589$644,882 and $607,453,$649,468, as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which was recorded in other payables and accrued liabilities.

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, amount due to shareholder are $657,433 and $483,433, respectively,was $727,433, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.

 

Lease of Headquarters Compound Real Properties from a Related Party

 

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. Sales of the LUR and the Industrial Buildings were completed in year 2013.

 

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 $142,019$153,740 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same rental payment as original lease agreement.

 

14


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(9)(10) Other payables and accrued liabilities

 

Other payables and accrued liabilities consist of the following:

 

 June 30, December 31,  March 31, December 31, 
 2020  2019  2021  2020 
Accrued electricity $118,688  $129,466  $190,726  $14,544 
Value-added tax payable  99,729   854,728   14,664   428,481 
Accrued interest to a related party  598,589   607,453   644,882   649,468 
Payable for purchase of equipment  3,376,452   3,936,047   3,234,511   3,262,153 
Accrued commission to salesmen  13,660   17,162   18,487   10,917 
Accrued bank loan interest  196,624   -   605,664   429,279 
Others  114,949   958,154   7,036   43,759 
Totals $4,518,691  $6,503,010  $4,715,970  $4,838,601 

 

(10)(11) Derivative Liabilities

 

The Company analyzed the warrant for derivative accounting consideration under ASC 815, Derivatives“Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.

 

ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.

 

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of June 30, 2020.March 31, 2021. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the June 30, 2020:March 31, 2021:

 

  SixThree months ended 
  June 30,
2020March 31, 2021 
Expected term  2.68-2.30 - 2.75 
Expected average volatility  8585% - 88%105% 
Expected dividend yield  - 
Risk-free interest rate  0.180.19% - 0.24%0.35% 

 

The following table summarizes the changes in the derivative liabilities during the sixthree months ended June 30, 2020:March 31, 2021:  

 

Fair Value Measurements Using Significant Observable Inputs (Level 3)Fair Value Measurements Using Significant Observable Inputs (Level 3)   
      
Balance at December 31, 2019 $- 
Balance at December 31, 2020 $1,115,260 
Addition of new derivatives recognized as warrant  689,205   9,730,919 
Addition of new derivatives recognized as loss on derivatives  306,215   10,813,347 
Exercise of warrants  (2,902,119)
Change in fair value of derivative liability  (278,350)  (7,176,380)
Balance at June 30, 2020 $717,070 
Balance at March 31, 2021 $11,581,027 

15

 

The following table summarizes the loss on derivative liability included in the income statement for the six months ended June 30, 2020 and 2019, respectively.

  Six Months Ended 
  June 30, 
  2020  2019 
Day one loss due to derivative liabilities as warrant $306,215  $- 
Loss on change in fair value of derivative liability  (278,350)  - 
   27,865   - 


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(11)(12) Common Stock

 

Issuance of common stock to investors

 

On August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our common stock. Eachstock.Each share of common stock and accompanying warrant was sold at a price of $1.60.

 

On April 29, 2020, the Company and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020 (the “2020 Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered direct offering and warrants to purchase up to 4,400,000 shares of the Company’s common stock in a concurrent private placement, for gross proceeds of approximately $2.55 million (net proceeds of approximately 2.27 million). The purchase price for each share of Common Stock and the corresponding warrant was $0.58. The exercise price of the warrant was $0.7425 per share.

 

On January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818warrants to purchase up to 26,181,818 shares of common stock in a best-efforts public offering for gross proceeds of approximately $14.4 million. The purchase price for each share of common stock and the corresponding warrant was $0.55. The exercise price of the warrant was $0.55 per share.

On March 1, 2021, the Company offered and sold to the public investors an aggregate of 29,277,866 shares of common stock and 14,638,933 warrants to purchase up to 14,638,933 shares of common stock in a firm commitment underwritten public offering for gross proceeds of approximately $21.9 million. The purchase price for each share of common stock and accompanying warrant was $0.75. The exercise price of the warrant was $0.75 per share,

Issuance of common stock pursuant to the 2012 Incentive Stock Plan, 2015 Omnibus Equity Incentive and 2019 Omnibus Equity Incentive

 

On January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans to nine officers, directors and employees of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416 shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus Equity Incentive. Please see Note (14), Stock Incentive Plans for more details. Total fair value of the stock was calculated at $1,417,395 as of the date of grant.

 

On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen officers, directors and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance.

 

On April 2, 2020, the compensation committee granted an aggregate of 2,000,000 shares of restricted common stock to fifteen officers, directors and employees of the Company, which were granted under the 2019 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share.

 

Issuance of common stock to Weitian

On October 15, 2018, the Company entered into an agreement with Weitian Group LCC (“Weitian”) and agreed as compensation to issue to Weitian in the aggregate of 70,000 shares of common stock for investor relation consulting service rendered from October 15, 2018 to October 15, 2019. 37,500 shares of common stock were issued to Weitian on November 12, 2018. Total fair value of the shares of common stock granted was calculated at $32,625 at $0.87 per share. 32,500 shares of common stock were issued to Weitian on August 13, 2019. Total fair value of the shares of common stock granted was calculated at $17,550 at $0.54 per share.

Issuance of common stock to a consultant

 

On January 2, 2020, the Company entered into an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 60,000 shares of common stock for mergemerger and acquisition consulting service rendered from January 2, 2020 to January 2, 2021. 60,000 shares of common stock were issued to this consultant on April 28, 2020. Total fair value of the shares of common stock issued was calculated at $42,000 at $0.70 per share.

 

Issuance of common stock to a consultant

(12)

On November 2, 2020, the Company entered into an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 21,000 shares of common stock for investor relations consulting service rendered from November 2, 2020 to November 2, 2021. 21,000 shares of common stock were issued to this consultant on November 30, 2020. Total fair value of the shares of common stock issued was calculated at $14,700 at $0.70 per share.

16

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(13) Warrants

 

Pursuant to the 2020 Purchase Agreement, the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock and warrants to purchase up to 4,400,000 shares of the Common Stock in a concurrent private placement.placement (the “May 2020 Warrants”).. The exercise price of the warrantMay 2020 Warrant is $0.7425 per share. These warrants are exercisable on November 4,July 23, 2020 and have a term of exercise equal to five years and six months from the date of issuance till November 4,July 23, 2025. 880,000 May 2020 Warrants were exercised in February 2021 at the exercise price of $0.7425 per share and 3,520,000 May 2020 Warrants were outstanding as of March 31, 2021. The Company classified warrant as liabilities and accounted for the issuance of the Warrants as a derivative.

 

On January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818warrants to purchase up to 26,181,818 shares of common stock (the “January 2021 Warrants”). The January 2021 Warrants are exercisable commencing on January 20, 2021 at an exercise price of $0.55 and will expire on January 20, 2026.14,106,900 January 2021 Warrants were exercised in January and February of 2021 at the exercise price of $0.55 per share. 12,074,918 January 2021 Warrants were outstanding as of March 31, 2021.

On March 1, 2021, the Company offered and sold to the public investors an aggregate of 29,277,866 shares of common stock and 14,638,933 warrants to purchase up to 14,638,933 shares of common stock (the “March 2021 Warrants”). The March 2021Warrants are exercisable commencing on March 1, 2021 at an exercise price of $0.75 and will expire on March 1, 2026.67,500 March 2021 Warrants were exercised in January and March 2021 at the exercise price of $0.75 per share and 14,571,433 March 2021 Warrants were outstanding as of March 31, 2021.

The Company classified warrants as liabilities and accounted for the issuance of the warrants as a derivative.

A summary of stock warrant activities is as below:

 

  Six Months Ended 
  June 30, 2020 
     Weight 
     average 
     exercise 
  Number  price 
Outstanding and exercisable at beginning of the period     $  
Issued during the period  4,400,000   0.7425 
Exercised during the period  -   - 
Cancelled or expired during the period  -   - 
Outstanding and exercisable at end of the period  4,400,000  $0.7425 

  Three months Ended 
  March 31, 2021 
     Weight 
     average 
     exercise 
  Number  price 
       
Outstanding and exercisable at beginning of the period  4,400,000  $0.7425 
Issued during the period  40,820,751   0.622 
Exercised during the period  (15,054,400)  0.5621 
Cancelled or expired during the period  -   - 
Outstanding and exercisable at end of the period  30,166,351  $0.6691 

 


17

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes information relating to outstanding and exercisable warrants as of June 30, 2020.March 31,2021.

 

Warrants OutstandingWarrants Outstanding Warrants Exercisable Warrants Outstanding  Warrants Exercisable 
  Weighted Average        
  Remaining        
Number ofNumber of Weighted Average Remaining
Contractual life
 Weighted Average Number of Weighted Average Number of Contractual life Weighted Average Number of Weighted Average 
SharesShares (in years) Exercise Price Shares Exercise Price Shares  (in years)  Exercise Price  Shares  Exercise Price 
4,400,000   5.34  $0.7425   4,400,000  $0.7425 30,166,351   4.84  $0.6691   30,166,351  $0.6691 

 

Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at June 30,December 31, 2020 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). There is noThe intrinsic value of the warrants as of June 30, 2020.March 31, 2021 is $1,333,071.

 

(13)(14) Earnings Per Share

 

For the three months ended June 30,March 31, 2021 and 2020, and 2019, basic and diluted net income per share are calculated as follows:

 

  Three Months Ended
June 30,
 
  2020  2019 
Basic (loss) income per share      
Net (loss) income for the period - numerator $(980,031) $450,070 
Weighted average common stock outstanding - denominator  24,444,761   22,022,316 
         
Net (loss) income per share $(0.04) $0.02 
         
Diluted income per share        
Net income for the period- numerator $(980,031) $450,070 
Weighted average common stock outstanding - denominator  24,444,761   22,022,316 
         
Effect of dilution  -   - 
Weighted average common stock outstanding - denominator  24,444,761   22,022,316 
         
Diluted (loss) income per share $(0.04) $0.02 

For the six months ended June 30, 2020 and 2019, basic and diluted net income per share are calculated as follows:

 Six Months Ended
June 30,
  Three Months Ended March 31, 
 2020  2019  2021  2020 
Basic loss per share             
Net loss for the period - numerator $(3,416,318) $(2,272,525) $(4,338,856) $(2,436,287)
Weighted average common stock outstanding - denominator  24,444,761   22,022,316   36,156,280   22,054,816 
                
Net loss per share $(0.14) $(0.10) $(0.12) $(0.11)
                
Diluted loss per share        
Net loss for the period - numerator $(3,416,318) $(2,272,525)
Diluted income per share        
Net income for the period- numerator $(4,338,856) $(2,436,287)
Weighted average common stock outstanding - denominator  24,444,761   22,022,316   36,156,280   22,054,816 
                
Effect of dilution  -   -   -   - 
Weighted average common stock outstanding - denominator  24,444,761   22,022,316   36,156,280   22,054,816 
                
Diluted loss per share $(0.14) $(0.10) $(0.12) $(0.11)

 

For the three and six months ended June 30,March 31, 2021 and 2020 and 2019 there were no securities with dilutive effect issued and outstanding.

 


18

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(14)(15) Income Taxes

 

United States

 

The Company and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJAAct”TCJA Act”), which significantly changed U.S. tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA.

 

In connection with the Company’s initial analysis of the impact of the enactment of the 2017 TCJA, the Company recorded a net tax expense of approximately $80,000 in the fourth quarter of 2017. For various reasons that are discussed more fully below, including the issuance of additional technical and interpretive guidance, the Company has not completed its accounting for the income tax effects of certain elements of the 2017 TCJA. However, with respect to the following, the Company was able to make reasonable estimates of the 2017 TCJA’s effects and, as such, recorded provisional amounts:

Transition tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional income tax expense of approximately $80,000 in the fourth quarter of 2017. However, the Company is continuing to gather additional information and will consider additional technical guidance to more precisely compute and account for the amount of the transition tax. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable over eight years beginning in 2018. Hence, the Company only provided $6,528 for the year ended 31 December 2017.

 

PRC

 

Dongfang Paper and Baoding Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.

 

The provisions for income taxes for three months ended June 30,March 31, 2021 and 2020 and 2019 were as follows:

 

  Three Months Ended 
  June 30, 
  2020  2019 
Provision for Income Taxes      
Current Tax Provision U.S. $14,717  $14,747 
Current Tax Provision PRC  386,499   677,262 
Deferred Tax Provision PRC  (480,657)  (611,339)
Total Provision for (Deferred tax benefit)/ Income Taxes $(79,441) $80,670 

The provisions for income taxes for the six months ended June 30, 2020 and 2019 were as follows:

  Six Months Ended 
  June 30, 
  2020  2019 
Provision for Income Taxes      
Current Tax Provision U.S. $14,747  $14,747 
Current Tax Provision PRC  401,186   677,262 
Deferred Tax Provision PRC  (1,021,699)  (1,259,134)
Total Provision for (Deferred tax benefit)/ Income Taxes $(605,766) $(567,125)

  Three Months Ended 
  March 31, 
   2021   2020 
Provision for Income Taxes        
Current Tax Provision U.S. $-  $14,717 
Current Tax Provision PRC  488,889   - 
Deferred Tax Provision PRC  (589,094)  (541,042)
Total Provision for (Deferred tax benefit)/ Income Taxes $(100,205) $(526,325)

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In addition to the reversible future PRC income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset depreciation, the Company was incorporated in the United States and incurred aggregate net operating losses of approximately $nil$2,508,797 and $6,710,939$0 for U.S. income tax purposes for the years ended December 31, 20182020 and 2017,2019, respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized, during the period of 2030 through 2035. As of DecemberMarch 31, 2019,2021, management believed that the realization of all the U.S. income tax benefits from these losses, which generally would generate a deferred tax asset if it can be expected to be utilized in the future, appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, As of DecemberMarch 31, 2019,2021, the Company provided a 100% valuation allowance on the U.S. deferred tax asset benefit to reduce the total deferred tax asset to the amount realizable for the PRC income tax purposes. Management reviews this valuation allowance periodically and will make adjustments as warranted. A summary of the otherwise deductible (or taxable) deferred tax items is as follows:

 

 June 30, December 31,  March 31, December 31, 
 2020  2019  2021  2020 
Deferred tax assets (liabilities)             
Depreciation and amortization of property, plant and equipment $10,271,940  $9,277,009  $12,879,907  $12,397,323 
Impairment of property, plant and equipment  506,368   521,803   697,023   680,800 
Miscellaneous  244,644   277,511   249,188   258,963 
Net operating loss carryover of PRC company  325,294   408,730   368,821   371,544 
Total deferred tax assets  11,348,246   10,485,053   14,194,939   13,708,630 
Less: Valuation allowance  -     -     -   - 
Total deferred tax assets, net $11,348,246  $10,485,053  $14,194,939   13,708,630 

 

The following table reconciles the statutory rates to the Company’s effective tax rate for:rate:

 

  Three Months Ended 
  June 30 
  2020  2019 
PRC Statutory rate  25.0%  25.0%
Effect of different tax jurisdiction  -   - 
Effect of reconciling items in the PRC for tax purposes  (17.5)  (9.8)
Change in valuation allowance  -   - 
Effective income tax rate  7.5%  15.2%

 Six Months Ended  Three Months Ended 
 June 30  March 31, 
 2020  2019  2021  2020 
PRC Statutory rate  25.0%  25.0%     
Effect of different tax jurisdiction  -   -   25.0%  25.0%
Effect of reconciling items in the PRC for tax purposes  (9.9)  (5)  (22.7)  (7.2)
Change in valuation allowance  -   -   -   - 
Effective income tax rate  15.1%  20%  -   - 
  2.3%  17.8%

 

During the three months ended June 30,March 31, 2021 and 2020, and 2019, the effective income tax rate was estimated by the Company to be 7.5%2.3% and 15.2%, respectively.

During the six months ended June 30, 2020 and 2019, the effective income tax rate was estimated by the Company to be 15.1% and 20%17.8%, respectively.

 

As of December 31, 2017, except for the one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated foreign E&Ps, the Company does not believe that its future dividend policy and the available U.S. tax deductions and net operating losses will cause the Company to recognize any other substantial current U.S. federal or state corporate income tax liability in the near future. Nor does it believesbelieve that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of March 31, 2021 and December 31, 2019 and 2018,2020, management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial statements for the yearsthree months ended DecemberMarch 31, 20192021 and 2018,2020, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority.

 

(15)(16) Stock Incentive Plans

 

Issuance of common stock pursuant to the 2011 Incentive Stock Plan and 2012 Incentive Stock Plan

On August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance.

On September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012 ISP’s administration. On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which 265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $790,020 as of the date of grant.

2015 Incentive Stock Plan

 

On August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2015 ISP”) as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company may grant an aggregate of 1,500,000 shares of the Company’s common stock to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On January 12, 2016, the Compensation Committee granted restricted common shares of 1,133,916, of which 168,416 shares were granted under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors, employees and a consultant of the Company as compensation for their services in the past years. Total fair value of the stock was calculated at $1,417,395 as of the date of issuance at $1.25 per share.

 

On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors and employees of the Company, which were granted under the 2015 ISP. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance at $0.88 per share.

 

2019 Incentive Stock Plan

 

On October 31, 2019, the shareholders of the Company at the Company’s Annual Shareholders General Meeting adopted and approved the 2019 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2019 ISP”). Under the 2019 ISP, the Company has reserved a total of 2,000,000 shares of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On April 2, 2020, 2,000,000 shares of common stock were granted under the 2019 ISP. Total fair value of the shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(16)(17) Commitments and Contingencies

 

Operating Lease

 

The Company leases 32.95 acres of land from a local government in Xushui District, Baoding City, Hebei, China through a real estate lease with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,042$18,449 (RMB120,000). This operating lease is renewable at the end of the 30-year term.

 

As mentioned in Note (8) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial Buildings back to the Company at an annual rental of $142,019$153,740 (RMB1,000,000), for a total term of up to five years.

 

Future minimum lease payments of all operating leases are as follows:

 

June 30, Amount 
2021  158,203 
March 31, Amount 
2022  158,203   116,342 
2023  13,822   68,987 
2024  16,950   18,261 
2025  16,950   18,261 
2026  18,261 
Thereafter  110,177   105,002 
Total operating lease payments $474,307  $345,115 

 

Capital commitment

 

As of June 30,December 31, 2020, the Company has signedentered into several contracts for the purchase of paper machine of a new tissue paper production line PM10 and the improvement of Industrial Buildings. Total outstanding commitments under these contracts were $5,205,861$4,528,844 and $1,101,989$4,570,331 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The Company expected to pay off all the balances within 1-3 years.

 

On June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“ (“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. The consideration for the acquisition is RMB320 million (approximately $45$49 million), of which $1.4$20 million was paid by the Company, and the balance consideration of $43.6$29 million is payable by December 31, 2021.

 

Guarantees and Indemnities

 

The Company agreed with Baoding Huanrun Trading Co., Ltd.(“Baoding Huanrun”), a major supplier of raw materials, to guarantee certain obligations of this third party, and as of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company guaranteed its long-term loan from financial institutions amounting to $4,378,840$4,717,484 (RMB31,000,000) and $4,751,031 (RMB31,000,000), respectively, that matured at various times in 2020-2023.2018-2023. If Baoding Huanrun Trading Co., were to become insolvent, the Company could be materially adversely affected.

 

(17)(18) Segment Reporting

 

Since March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business operating segments: Dongfang Paper, which produces offset printing paper and corrugating medium paper, and Baoding Shengde, which produces digital photo paper and single-use face masks.paper. They are managed separately because each business requires different technology and marketing strategies.

 

The Company evaluates performance of its operating segments based on net income. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui District,County, Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC.


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Summarized financial information for the three reportable segments is as follows:

 

  Three Months Ended 
  June 30, 2020 
  Dongfang  Hebei  Baoding  Not Attributable  Elimination of  Enterprise-wide, 
  Paper  Tengsheng  Shengde  to Segments  Inter-segment  consolidated 
                   
Revenues $23,136,915  $2,379,806  $845,552  $-  $           -  $26,362,273 
Gross profit  2,429,407   (373,977)  503,399   -   -   2,558,829 
Depreciation and amortization  1,617,412   2,105,130   (902)  -   -   3,721,640 
Interest income  7,577   464   1,410   -   -   9,451 
Interest expense  165,416   -   76,020   -   -   241,436 
Income tax expense(benefit)  357,463   (525,769)  88,865   -   -   (79,441)
Net income (loss)  1,441,234   (1,349,174)  324,495   (1,396,586)  -   (980,031)

  Three Months Ended 
  June 30, 2019 
  Dongfang  Hebei  Baoding  Not Attributable  Elimination of  Enterprise-wide, 
  Paper  Tengsheng  Shengde  to Segments  Inter-segment  consolidated 
                   
Revenues $32,413,830  $1,206,118  $-  $-  $-  $33,619,948 
Gross profit  3,581,797   (673,668)  -   -   -   2,908,129 
Depreciation and amortization  1,656,695   2,202,698   6   -   -   3,859,399 
Interest income  1,468   26   62   -   -   1,556 
Interest expense  199,615   -   39,156   -   -   238,771 
Income tax expense(benefit)  631,292   (550,448)  (14,921)  14,747   -   80,670 
Net income (loss)  2,480,493   (1,980,144)  (33,415)  (48,261)  31,397   450,070 

 Six Months Ended  Three Months Ended 
 June 30, 2020  March 31, 2021 
 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide,  Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, 
 Paper Tengsheng Shengde to Segments Inter-segment consolidated  Paper  Tengsheng  Shengde  to Segments  Inter-segment  consolidated 
                                     
Revenues $30,874,417  $3,386,155  $845,552  $-  $         -  $35,106,124  $22,827,553  $1,251,416  $130,458  $-  $-  $24,209,427 
Gross profit  2,971,562   (1,085,851)  503,399   -   -   2,389,110   2,262,681   (456,207)  24,531   -   -   1,831,005 
Depreciation and amortization  3,124,039   4,240,501   131,774   -   -   7,496,314   1,833,101   2,257,067   2,319   -   -   4,092,487 
Interest income  13,094   547   1,600   -   -   15,241   2,366   206   1,761   -   -   4,333 
Interest expense  332,997   -   153,157   -   -   486,154   176,386   20,418   82,097   -   -   278,901 
Income tax expense(benefit)  349,100   (1,048,685)  79,102   14,717   -   (605,766)  416,855   (515,629)  (1,431)  -   -   (100,205)
Net income (loss)  945,149   (2,944,112)  124,098   (1,541,453)  -   (3,416,318)  1,087,209   (1,478,604)  (68,045)  (3,879,416)  -   (4,338,856)
                        
 As of March 31, 2021 
 Dongfang Hebei Baoding Not Attributable Elimination Enterprise-wide, 
 Paper  Tengsheng  Shengde  to Segments  of Inter-segment  consolidated 
                        
Total assets $88,412,001   99,836,087   24,493,355   28,546,890   -   241,288,333 

IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 Six Months Ended 
 June 30, 2019  Three Months Ended March 31, 2020 
 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide,  Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, 
 Paper Tengsheng Shengde to Segments Inter-segment consolidated  Paper  Tengsheng  Shengde  to Segments  Inter-segment  consolidated 
                                     
Revenues $49,864,122  $1,206,118  $-  $-  $-  $51,070,240  $7,737,502  $1,006,349  $-  $-  $-  $8,743,851 
Gross profit  3,389,331   (673,668)  -   -   -   2,715,663   542,155   (711,874)  -   -   -   (169,719)
Depreciation and amortization  5,586,749   2,202,698   12   -   -   7,789,459   1,506,627   2,135,371   132,676   -   -   3,774,674 
Loss from impairment and disposal of property, plant and equipment  -   -   -   -   -   - 
Interest income  60,195   26   153   -   -   60,374   5,517   83   190   -   -   5,790��
Interest expense  412,491   -   81,549   -  ��-   494,040   167,581   -   77,137   -   -   244,718 
Income tax expense(benefit)  8,988   (550,448)  (40,412)  14,747   -   (567,125)  (8,363)  (522,916)  (9,763)  14,717   -   (526,325)
Net income (loss)  39,665   (1,980,144)  (72,222)  (291,221)  31,397   (2,272,525)  (496,085)  (1,594,938)  (200,397)  (144,867)  -   (2,436,287)
                           
 As of June 30, 2020  As of December 31, 2020 
 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide,  Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, 
 Paper Tengsheng Shengde to Segments Inter-segment consolidated  Paper  Tengsheng  Shengde  to Segments  Inter-segment  consolidated 
                                                     
Total assets $70,525,495   96,637,401   18,062,459   206,911   -   185,432,266  $79,206,447   102,056,291   18,589,570   199,874,474 
                        
 As of December 31, 2019 
 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, 
 Paper  Tengsheng  Shengde  to Segments  Inter-segment  consolidated 
                                    
Total assets $73,347,811   99,747,236   17,031,392   71,991   -   190,198,430 

 

(18)(19) Concentration and Major Customers and Suppliers

 

For the three months ended June 30,March 31, 2021, the Company had no single customer contributed over 10% of total sales.

For the three months ended March 31, 2020, the Company had no single customer contributed over 10% of total sales.

 

For the three months ended June 30, 2019,March 31, 2021, the Company had no single customer contributed over 10% of total sales.

For the three months ended June 30, 2020, the Company had fourtwo major suppliers accounted for 74%, 11%, 4%81% and 3%10% of total purchases.

 

For the three months ended June 30, 2019,March 31, 2020, the Company had three major suppliers accounted for 80%70%, 9%11% and 4%9% of total purchases.

 

For the six months ended June 30, 2020, the Company had four major suppliers accounted for 73%, 11%, 4% and 4% of total purchases. For the six months ended June 30, 2019, the Company had three major suppliers accounted for 80%, 9% and 4% of total purchases.24


IT TECH PACKAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(19)(20) Concentration of Credit Risk

 

Financial instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of June 30, 2020as of March 31, 2021 and December 31, 2019.2020. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB500,000 (US$70,626) 76,088) per depositor per insured financial intuition, including both principal and interest. For the cash placed in financial institutions in the United States, the Company’s U.S. bank accounts are all fully covered by the FDIC insurance as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB87,769,319RMB55,707,023 (US$12,397,672)8,477,322) as of June 30, 2020.March 31, 2021.

 

(20)(21) Risks and Uncertainties

 

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various laws and restrictions.

 

Our business, financial condition and results of operations may be materially adversely affected by global health epidemics, including the recent COVID-19 outbreak.

Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. While the COVID-19 pandemic is still growing worldwide, international stock markets have reflected the uncertainty associated with the slow-down in the global economy and the reduced levels of international travel experienced since the beginning of January, large declines in oil prices and the significant decline in the Dow Industrial Average at the end of February and beginning of March 2020 was largely attributed to the effects of COVID-19. Any resulting financial impact cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. During the quarter ended June 30, 2020, our revenue was affected by the temporary suspension in production as a result of the pandemic outbreak. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.

(21)(22) Recent Accounting Pronouncements

 

In August 2018,June 2016, the FASB issued ASU 2018-13, Disclosure Framework-Changes2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to the Disclosure Requirementsinform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for Fair Value Measurement. The amendments in this standard will remove, modifyaccounts receivables, loans, and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness.other financial instruments. ASU 2018-13 will be2016-13 is effective for the Company’s fiscal yearyears beginning April 1, 2020,after December 15, 2019, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.

In DecemberOctober 2019, the FASB issued ASU 2019-12, Income TaxesNo. 2019-10, “Financial Instruments-Credit Losses (Topic 740) Simplifying326): Effective Dates”, to finalize the Accountingeffective date delays for Income Taxes.private companies, not-for-profits, and smaller reporting companies applying the CECL standards. The amendments in this Update related to separate financial statementsASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We do not expect the adoption of ASU 2019-12 to have a material impact2016-13 on our condensed consolidated financial statements.

 

(22)(23) Subsequent Event

 

None.


25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Notice Regarding Forward-Looking Statements

 

The following discussion of the financial condition and results of operations of the Company for the periods ended June 30,March 31, 2021 and 2020 and 2019 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly report.

 

In this quarterly report, references to “the Company,” “we,” “our” and “us” refer to IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise.

 

We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our products, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”, “may”, “should”, “will”, “would”, and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking statements. In evaluating the forward-looking statements contained in this report, you should consider various factors, including, without limitation, the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitably, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities laws.

 

Impact of COVID-19 on Our Operations and Financial Performance

Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. During the early part of 2020, COVID-19 caused temporary closure of our CMP production, and as a result, our revenue of CMP decreased by 49.89 % in the first quarter of 2020. It is, however, still unclear how the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues.

While we have resumed business operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic. Hence, the extent of the business disruption and the related impact on our financial results and outlook for the rest of 2021 cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.

Recent Development

In November 2020, we completed inviting bids for the 75 tonne per hour biomass boiler procurement for our biomass cogeneration project (the “Cogeneration Project”). Multiple well-known enterprises in the biomass industry participated in tendering opening bids. In February 2021, we completed evaluation on the bidding proposals and announced that Tai Shan Group Co., Ltd., a top manufacturer in the biomass industry in China, has won the bid. Installation of the boilers is expected to commence in the near future. We expect to participate in the bidding process for urban central heating projects. In April 2021, the Company obtained qualification to supply central heating in industrial parks after month-long review process for the Cogeneration Project.

On April 2021, the Company announced it has completed fundamental constructions on its new tissue paper production line (the “PM10”) and is working on the installation of accessory equipment.

Results of Operations

 

Comparison of the Three months ended June 30,March 31, 2021 and 2020 and 2019

 

Revenue for the three months ended June 30, 2020March 31, 2021 was $26,362,273, a decrease$24,209,427, an increase of $7,257,675,$15,465,576, or 21.59%176.87%, from $33,619,948$8,743,851 for the same period in the previous year. This was mainly due to the decreaseincrease in sales volume of regular CMPcorrugating medium paper (“CMP”) and offset printing paper and increase in Average Selling Prices (ASPs) of CMP offset printing paper and tissue paper products.


26

Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products

 

Revenue from sales of offset printing paper, corrugating medium paper (“CMP”) and tissue paper products for the three months ended June 30, 2020March 31, 2021 was $25,516,720, a decrease$24,078,969, an increase of $8,103,228,$15,335,118, or 24.10%175.38%, from $33,619,948$8,743,851 for the secondfirst quarter of 2019.2020. Total offset printing paper, CMP and tissue paper products sold during the three months ended June 30, 2020March 31, 2021 amounted to 64,65845,558 tonnes, a decreasean increase of 5,73125,696 tonnes, or 8.14%129.37%, compared to 70,38919,862 tonnes sold in the comparable period in the previous year. CMPThe increase was mainly due to the production was suspendedsuspension in mid-January to early Marchthe first quarter of 2020 due to Chines New Year and COVID-19 outbreak. We resumed fullCOVID-19. Full capacity of CMP production was resumed in May 2020. The2020 and the production and sales of offset printing paper was suspended during January to May 2020 and resumed in June 2020. The changes in revenue dollar amount and in quantity sold for the three months ended June 30,March 31, 2021 and 2020 and 2019 are summarized as follows:

 

 Three Months Ended Three Months Ended       Percentage  Three Months Ended Three Months Ended  Percentage 
 June 30, 2020  June 30, 2019  Change in  Change  March 31, 2021 March 31, 2020 Change in Change 
Sales Revenue Quantity
(Tonne)
  Amount  Quantity
(Tonne)
  Amount  Quantity
(Tonne)
  Amount  Quantity  Amount  Quantity
(Tonne)
 Amount Quantity
(Tonne)
 Amount Quantity
(Tonne)
 Amount Quantity  Amount 
                                          
Regular CMP  46,979  $17,372,097   47,994  $20,883,320   (1,014) $(3,511,223)  -2.11%  -16.81%  33,626 $16,964,038 13,788 $5,721,939 19,838 $11,242,099 143.88%  196.47%
Light-Weight CMP  12,611  $4,502,628   12,582  $5,310,771   29  $(808,143)  0.23%  -15.22%  7,670 $3,747,733  4,889 $2,015,563 2,781 $1,732,170  56.88%  85.94%
Total CMP  59,590  $21,874,725   60,576  $26,194,091   (986) $(4,319,366)  -1.63%  -16.49%  41,296 $20,711,771 18,677 $7,737,502 22,619 $12,974,269 121.11%  167.68%
Offset Printing Paper  2,183  $1,262,188   8,559  $6,236,965   (6,376) $(4,974,777)  (74.49)%  (79.76)%  3,142 $2,115,782 - $- 3,142 $2,115,782 %  %
Tissue Paper Products  2,884  $2,379,807   1,254  $1,188,892   1,630  $1,190,915   129.98%  100.17%Tissue Paper Products1,120 $1,251,416 1,185 $1,006,349 (65) $245,067 -5.49%  24.35%
Total CMP, Offset Printing Paper and Tissue Paper Revenue  64,658  $25,516,720   70,389  $33,619,948   (5,731) $(8,103,228)  -8.14%  -24.10%  45,558 $24,078,969  19,862 $8,743,851 25,696 $15,335,118  129.37%  175.38%

 

Monthly sales revenue for the 24 months ended June 30, 2020,March 31, 2021, are summarized below:

 

 

The Average Selling Prices (ASPs) for our main products in the three months ended June 30,March 31, 2021 and 2020 and 2019 are summarized as follows:

 

  Offset Printing
Paper ASP
  Regular
CMP ASP
  Light-Weight
CMP ASP
  Tissue Paper
Products ASP
 
Three Months ended June 30, 2019 $729  $435  $422  $948 
Three Months ended June 30, 2020 $578  $370  $357  $825 
Decrease from comparable period in the previous year $(151) $(65) $(65) $(123)
Decrease by percentage  -20.71%  -14.94%  -15.40%  -12.97%
  Offset
Printing
Paper ASP
  Regular
CMP ASP
  Light-Weight
CMP ASP
  Tissue Paper
Products ASP
 
Three Months ended March 31, 2020 $-  $415  $412  $849 
Three Months ended March 31, 2021 $673  $504  $489  $1,117 
Increase from comparable period in the previous year $673  $89  $77  $268 
Increase by percentage  -   21.45%  18.69%  31.57%

The following chart shows the month-by-month ASPs for the 24-month period ended June 30, 2020:March 31, 2021:

 

 

Corrugating Medium Paper

 

Revenue from CMP amounted to $21,874,725 (85.73%$20,711,771 (86.02% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended June 30, 2020,March 31, 2021, representing a decreasean increase of $4,319,366,$12,974,269, or 16.49%167.68%, from $26,194,091$7,737,502 for the comparable period in 2019.2020.

 

We sold 59,59041,296 tonnes of CMP in the three months ended June 30, 2020March 31, 2021 as compared to 60,57618,677 tonnes for the same period in 2019,2020, representing a 1.63% decrease121.11% increase in quantity sold.

 

ASP for regular CMP droppedincreased from $435/$415/tonne for the three months ended June 30, 2019March 31, 2020 to $370/$504/tonne for the three months ended June 30, 2020,March 31, 2021, representing a 14.94% decrease.21.45% increase. ASP in RMB for regular CMP for the secondfirst quarter of 20192020 and 20202021 was RMB2,962RMB2,902 and RMB2,610,RMB3,282, respectively, representing an 11.88% decrease.a 13.09% increase. The quantity of regular CMP sold decreasedincreased by 1,01419,838 tonnes, from 47,99413,788 tonnes in the secondfirst quarter of 20192020 to 46,97933,626 tonnes in the secondfirst quarter of 2020.2021.

 

ASP for light-weight CMP decreasedincreased from $422/$412/tonne for the three months ended June 30, 2019March 31, 2020 to $357/$489/tonne for the three months ended June 30, 2020,March 31, 2021, representing a 15.40% decrease.18.69% increase. ASP in RMB for light-weight CMP for the secondfirst quarter of 20192020 and 20202021 was RMB2,875RMB2,883 and RMB2,522,RMB3,178, respectively, representing a 12.28% decrease.10.23% increase. The quantity of light-weight CMP sold increased by 292,781 tonnes, from 12,5824,889 tonnes in the secondfirst quarter of 2019,2020, to 12,6117,670 tonnes in the secondfirst quarter of 2020.2021.

 

Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the secondfirst quarter of 2021 and 2020 were 38.42% and 2019 were 52.47% and 52.78%14.86%, respectively, representing a decreasean increase of 0.31%23.56%.


28

Quantities sold for regular CMP that was produced by the PM6 production line from July 2018April 2019 to June 2020March 2021 are as follows:

 

 

 

Tissue Paper Products

 

We produce tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the brand “Qingmu”. In December 2018 and November 2019, we completed the construction, installation and test of operation of our PM8 and PM9 production lines. We launched the complete line of processing base tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue paper products with designated capacity of 15,000 tonnes/year.

 

Revenue from tissue paper products was $2,379,807 (9.33%$1,251,416 (5.20% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended June 30, 2020,March 31, 2021, representing an increase of $1,190,915,$245,067, or 100.17%24.35%, from $1,188,892$1,006,349 for the three months ended June 30, 2019.March 31, 2020. We sold 2,8841,120 tonnes of tissue paper in the secondfirst quarter of 2020,2021, as compared to 1,2541,185 tonnes in the comparable period of 2019,2020, representing an increasea decrease of 1,63065 tonnes, or 129.98%5.49%.

 

ASP for tissue paper products decreasedincreased from $948/$849/tonne for the three months ended June 30, 2019March 31, 2020 to $825/$1,117/tonne for the three months ended June 30, 2020,March 31, 2021, representing a 12.97% decrease.31.57% increase. ASP in RMB for tissue paper products for the secondfirst quarter of 20192020 and 20202021 was RMB6,512RMB5,941 and RMB5,827,RMB7,267, respectively, representing a 10.52% decrease.22.32% increase.

 

Offset printing paper

 

Revenue from offset printing paper was $1,262,188 (4.95%$2,115,782 (8.79% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended June 30, 2020,March 31, 2021, representing a decreasean increase of $4,974,777, or 79.76%,$2,115,782 from $6,236,965$nil for the three months ended June 30, 2019.March 31, 2020. We sold 2,1833,142 tonnes of offset printing paper in the secondfirst quarter of 2020,2021, as compared to 8,559 tonnes0 tonne in the comparable period of 2019, a decrease of 6,376 tonnes, or 74.49%. ASPs2020. ASP for offset printing paper for the secondfirst quarter of 20192021 was $673 and 2020 were $729 and $578, respectively, representing a 20.71% decrease. ASP in RMB for offset printing paper for the secondfirst quarter of 2019 and 20202021 was RMB4,934 and RMB4,071, respectively, representing a 17.49% decrease.RMB4,381.


29

Revenue of Face Mask

 

On April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials preparation, trial run of the equipment and the sample products inspection. Revenue generated from selling face masksmask were $845,553$130,458 for the three months ended June 30, 2020.March 31, 2021. We sold 6,2803,836 thousand pieces of face masks in the secondfirst quarter of 2020.2021.

 

Cost of Sales

 

Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended June 30, 2020March 31, 2021 was $23,461,291, a decrease$22,272,495, an increase of $7,250,528,$13,358,925, or 23.61%149.87%, from $30,711,819$8,913,570 for the comparable period in 2019.2020. This was mainly due to the decreaseincrease in sales quantity of CMP and offset printing paper and the decreaseincrease in material costs.

 

Cost of sales for CMP was $19,743,977$18,858,935 for the quarter ended June 30, 2020,March 31, 2021, as compared to $24,231,791$7,195,348 for the comparable period in 2019.2020. The decreaseincrease in the cost of sales of $4,487,814$11,663,587 for CMP was mainly due to the decreaseincrease in sales volume of regular CMP and light-Weight CMP and the decreaseincrease in average cost of sales. Average cost of sales per tonne for CMP decreasedincreased by 17.25%18.70%, from $400$385 in the secondfirst quarter of 20192020 to $331$457 in the secondfirst quarter of 2020.2021. The decreaseincrease in average cost of sales was mainly attributable to the lowerhigher average unit purchase costs (net of applicable value added tax) of recycled paper board in secondfirst quarter of 20202021 compared to the secondfirst quarter of 2019.2020.

 

Cost of sales for offset printing paper was $963,531$1,705,938 for the quarter ended June 30, 2020, as compared to $4,617,156 for the comparable period in 2019. AverageMarch 31, 2021 and average cost of sales per tonne of offset printing paper decreased by 18.18%, from $539was $543 in the three months ended June 30, 2019, to $441 during the comparable period in 2020. The decrease in average costfirst quarter of sales of offset printing paper was mainly due to the decrease in manufacturing overhead costs (i.e. utilities, repair and maintenance etc.).2021.

 

Cost of sales for tissue paper products was $2,753,783$1,707,622 for the quarter ended June 30, 2020,March 31, 2021, as compared to $1,862,872$1,718,222 for the comparable period in 2019. The increase in the cost of sales of $890,911 for tissue paper products was mainly due to the increase in sales volume of tissue paper products, partially offset by the decrease in average cost of sales.2020. Average cost of sales per tonne of tissue paper products decreasedincreased by 35.73%5.17%, from $1,486$1,450 in the three months ended June 30, 2019,March 31, 2020, to $955$1,525 for the comparable period in 2020.2021. This is mainly due to the decrease in cost of tissue base paper.

 

Changes in cost of sales and cost per tonne by product for the quarters ended June 30,March 31, 2021 and 2020 and 2019 are summarized below:

 

 Three Months Ended Three Months Ended       Three Months Ended
March 31, 2021
  Three Months Ended
March 31, 2020
  Change in  Change in percentage 
 June 30, 2020  June 30, 2019  Change in  Change in percentage  Cost of Sales  Cost per
Tonne
  Cost of Sales  Cost per
Tonne
  Cost of Sales  Cost per
Tonne
  Cost of
Sales
  Cost per
Tone
 
 Cost of
Sales
  Cost per
Tonne
  Cost of
Sales
  Cost per
Tonne
  Cost of
Sales
  Cost per
Tonne
  Cost of
Sales
  Cost per
Tone
                  
Regular CMP $15,804,679  $336  $19,274,205  $402  $(3,469,526) $(66)  -18.00%  -16.42% $15,521,382  $462  $5,439,510  $395  $10,081,872  $67   185.35%  16.96%
Light-Weight CMP $3,939,298  $312  $4,957,586  $394  $(1,018,288) $(82)  -20.54%  -20.81% $3,337,553  $435  $1,755,838  $359  $1,581,715  $76   90.08%  21.17%
Total CMP $19,743,977  $331  $24,231,791  $400  $(4,487,814) $(69)  -18.52%  -17.25% $18,858,935  $457  $7,195,348  $385  $11,663,587  $72   162.10%  18.70%
Offset Printing Paper $963,531  $441  $4,617,156  $539  $(3,653,625) $(98)  -79.13%  -18.18% $1,705,938  $543  $-  $-  $1,705,938  $543   n/a  n/a
Tissue Paper Products $2,753,783  $955   1,862,872  $1,486  $890,911  $(531)  47.82%  -35.73% $1,707,622  $1,525    1,718,222  $1,450  $(10,600) $75   -0.62%  5.17%
Total CMP, Offset Printing Paper and Tissue Paper $23,461,291  $n/a  $30,711,819  $n/a  $(7,250,528) $n/a   -23.61%  n/a  $22,272,495   $ n/a  $8,913,570   $ n/a  $13,358,925   $ n/a   149.87%   n/a 

 

Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper in the three months ended June 30, 2020 were RMB1,371/March 31, 2021 was RMB 1,878/tonne (approximately $195/$289/tonne), as compared to RMB1,559/RMB 1,388/tonne (approximately $230/$198/tonne) for the three months ended June 30, 2019.March 31, 2020. These changes (in US dollars) represent a year-over-year decreaseincrease of 15.22%45.96% for the 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.


30

The pricing trends of our major raw materials for the 24-month period from July 2018April 2019 to June 2020March 2021 are shown below:

 

 

Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 10.3%9.7% of total sales in the secondfirst quarter of 2020,2021, respectively, compared to 7%4% and 10.3%8.7% of total sales in the secondfirst quarter of 2019.2020. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended June 30, 2020March 31, 2021 are summarized as follows:

 

 

Gross Profit

 

Gross profit for the three months ended June 30, 2020March 31, 2021 was $2,558,829 (9.71%$1,831,005 (7.56% of the total revenue), representing a decreasean increase of $349,300,$2,000,724, or 12.01%1178.84%, from the gross profitloss of $2,908,129 (8.65%$169,719 (1.94% of the total revenue) for the three months ended June 30, 2019,March 31, 2020, as a result of factors described above.


Offset Printing Paper, CMP and Tissue Paper Products

 

Gross profit for offset printing paper, CMP and tissue paper products for the three months ended June 30, 2020March 31, 2021 was $2,055,429, a decrease$1,806,474, an increase of $852,700,$1,976,193, or 29.32%1164.39%, from the gross profitloss of $2,908,129$169,719 for the three months ended June 30, 2019. 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 0.59 percentage points, from 8.65% for the three months ended June 30, 2019, to 8.06% for the three months ended June 30, 2020.

Gross profit margin for regular CMP for the three months ended June 30, 2020 was 9.02%, or 1.31 percentage points higher, as compared to gross profit margin of 7.71% for the three months ended June 30, 2019. Such increase was mainly due to the decrease in cost of recycled paper board, partially offset by the decrease in ASP of regular CMP in the second quarter of 2020.

Gross profit margin for light-weight CMP for the three months ended June 30, 2020 was 12.51%, or 5.86 percentage points higher, as compared to gross profit margin of 6.65% for the three months ended June 30, 2019. The increase was mainly due to decrease in cost of recycled paper board, partially offset by the decrease in ASP of light-weight CMP in the second quarter of 2020.

Gross profit margin for offset printing paper was 23.66% for the three months ended June 30, 2020, a decrease of 2.31 percentage points, as compared to 25.97% for the three months ended June 30, 2019. The decrease was mainly due to the decrease in ASP of offset printing paper in the second quarter of 2020.

Gross profit margin for tissue paper products for the three months ended June 30, 2020 was -15.71%, or 40.98 percentage points higher, as compared to gross profit margin of -56.69% for the three months ended June 30, 2019.


Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended June 30, 2020 are as follows:

Face Mask

Gross profit for face masks for the three months ended June 30, 2020 was $503,400, representing a gross margin of 59.53%.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2020 were $3,357,472, an increase of $949,613, or 39.44% from $2,407,859 for the three months ended June 30, 2019. The increase was mainly due to the issuance of 2,000,000 shares of common stock to officers, directors and employees of the Company, as compensatory incentive, valued at $1,200,000 and the issuance of 60,000 shares of common stock to a consultant as compensation of service, valued at $42,000 in April 2020.

Income (Loss) from Operations

Operating loss for the quarter ended June 30, 2020 was $798,643, a decrease of $1,330,310, or 250.21%, from income from operations of $531,667 for the quarter ended June 30, 2019. The decrease in income from operations was primarily due to the decrease in gross profit and increase in selling, general and administrative expenses.

Other Income and Expenses

Interest expense for the three months ended June 30, 2020 increased by $2,665, from $238,771 in the three months ended June 30, 2019, to $241,436. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $14,916,307 as of June 30, 2020, as compared to $15,942,513 as of June 30, 2019.

Net Income (Loss)

As a result and the factors discussed above, net loss was $980,031 for the quarter ended June 30, 2020, representing a decrease of $1,430,101, or 317.75%, from net income of $450,070 for the quarter ended June 30, 2019.


Comparison of the six months ended June 30, 2020 and 2019

Revenue for the six months ended June 30, 2020 was $35,106,124, a decrease of $15,964,116, or 31.26%, from $51,070,240 for the same period in the previous year.

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 six months ended June 30, 2020 was $34,260,571, a decrease of $16,809,669, or 32.91%, from $51,070,240 for the six months ended June 30, 2019. This was mainly due to the decrease in sales volume of Regular CMP and offset printing paper and the decrease in ASP of CMP, offset printing paper and tissue paper products. Total quantities of offset printing paper, CMP and tissue paper products sold during the six months ended June 30, 2020 amounted to 84,519 tonnes, a decrease of 21,190 tonnes, or 20.05%, compared to 105,709 tonnes sold during the six months ended June 30, 2019. Total quantities of CMP and offset printing paper sold decreased by 22,402 tonnes in the six months of 2020 as compared to the same period of 2019. We sold 4,069 tonnes of tissue paper products in the six months of 2020 as opposed to 2,857 tonnes in the same period of 2019. The changes in revenue and quantity sold for the six months ended June 30, 2020 and 2019 are summarized as follows:

A summary of the above changes and further analyses of the changes in our sales revenue are as follows:

  Six Months Ended  Six Months Ended     Percentage 
  June 30, 2020  June 30, 2019  Change in  Change 
Sales Revenue Quantity (Tonne)  Amount  Quantity (Tonne)  Amount  Quantity (Tonne)  Amount  Quantity  Amount 
                         
Regular CMP  60,767  $23,094,037   74,286  $33,108,199   (13,519) $(10,014,162)  -18.20%  -30.25%
Light-Weight CMP   17,500  $6,518,191   20,006  $8,675,903   (2,506) $(2,157,712)  -12.53%  -24.87%
Total CMP  78,267  $29,612,228   94,292  $41,784,102   (16,025) $(12,171,874)  -17.00%  -29.13%
Offset Printing Paper  2,183  $1,262,188   8,560  $6,236,965   (6,377) $(4,974,777)  -74.50%  -79.76%
Tissue Paper Products  4,069  $3,386,155   2,857   3,049,173   1,212  $336,982   42.42%  11.05%
Total CMP, Offset Printing Paper and Tissue Paper Revenue   84,519  $34,260,571   105,709  $51,070,240   (21,190) $(16,809,669)  -20.05%  -32.91%

ASPs for our main products in the six-month period ended June 30, 2020 and 2019 are summarized as follows:

  Offset Printing
Paper ASP
  Regular
CMP ASP
  Light-Weight
CMP ASP
  Tissue Paper
Products ASP
 
Six Months Ended June 30, 2019 $729  $446  $434  $1,067.00 
Six Months Ended June 30, 2020 $578  $380  $372  $832 
Decrease from comparable period in the previous year $-151  $-66  $-62  $-235 
Decrease by percentage  -20.71%  -14.80%  -14.29%  -22.02%

Revenue of Face Mask

Revenue generated from selling face masks were $845,553 for the six months ended June 30, 2020. We sold 6,280 thousand pieces of face masks for the six months ended June 30, 2020.

Cost of Sales

Total cost of sales for CMP, offset printing paper and tissue paper products in the six months ended June 30, 2020 was $32,374,861, a decrease of $15,979,716, or 33.05%, from $48,354,577 for the six months ended June 30, 2019. This was mainly a result of the decrease in volume sold, partially offset by decrease in cost of recycled paper board. Cost of sales for CMP was $26,939,324 for the six months ended June 30, 2020, as compared to $40,047,877 in the same period of 2019. The decrease in the cost of sales of $13,108,553 for CMP was mainly due to the decrease in the quantities of regular CMP sold, partially offset by the decrease in cost of recycled paper board in the six months of 2020. Average cost of sales per tonne for CMP decreased by 19.06%, from $425 for the six months ended June 30, 2019, to $344 in the same period ofMarch 31, 2020. The decrease 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 $963,531 for the six months ended June 30, 2020, as compared to $4,617,156 in the same period of 2019. Average cost of sales per tonne of offset printing paper decreased by 18.18%, from $539 for the six months ended June 30, 2019, to $441 in the same period of 2020. Cost of sales for tissue paper products was $4,472,006 for the six months ended June 30, 2020, as compared to $3,689,544 in the same period of 2019. Average cost of sales per tonne of tissue paper products decreased by 14.87%, from $1,291 for the six months ended June 30, 2019, to $1,099 in the same period of 2020.

Changes in cost of sales and cost per tonne by product for the six months ended June 30, 2020 and 2019 are summarized below:

  Six Months Ended  Six Months Ended       
  June 30, 2020  June 30, 2019  Change in  Change in percentage 
  Cost of
Sales
  Cost per
Tonne
  Cost of
Sales
  Cost per
tonne
  Cost of
Sales
  Cost per
Tonne
  Cost of
Sales
  Cost per
Tone
 
Regular CMP $21,244,189  $350  $31,545,280  $425  $(10,301,091) $(75)  -32.65%  -17.65%
Light-Weight CMP $5,695,135  $325  $8,502,597  $425  $(2,807,462) $(100)  -33.02%  -23.53%
Total CMP $26,939,324  $344  $40,047,877  $425  $(13,108,553) $(81)  -32.73%  -19.06%
Offset Printing Paper $963,531  $441  $4,617,156  $539  $(3,653,625) $(98)  -79.13%  -18.18%
Tissue Paper Products $4,472,006  $1,099  $3,689,544  $1,291   782,462  $(192)  21.21%  -14.87%
Total CMP, Offset Printing Paper and Tissue Paper Revenue $32,374,861  $n/a  $48,354,577  $n/a  $(15,979,716) $n/a   -33.05%  n/a%

Gross Profit

Gross profit for the six months ended June 30, 2020 was $2,389,110 (6.81% of the total revenue), representing a decrease of $326,553, or 12.02%, from the gross profit of $2,715,663 (5.32% of the total revenue) for the six months ended June 30, 2019. The decrease was mainly due to (i) the decrease in quantities sold of regular CMP and offset printing paper and (ii) the decrease of ASP of CMP, offset printing paper and tissue paper products, partially offset by the decrease of material purchase price of CMP and tissue paper products.

Offset Printing Paper, CMP and Tissue Paper Products

Gross profit for offset printing paper, CMP and tissue paper products for the six months ended June 30, 2020 was $1,885,710, a decrease of $829,953, or 30.56%, from the gross profit of $2,715,663 for the six months ended June 30, 2019. The decreaseincrease 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 0.189.44 percentage points, from 5.32%-1.94% for the sixthree months ended June 30, 2019,March 31, 2020, to 5.50%7.50% for the sixthree months ended June 30, 2020.March 31, 2021.

 

Gross profit margin for regular CMP for the sixthree months ended June 30, 2020March 31, 2021 was 8.01%8.50%, or 3.293.56 percentage points higher, as compared to gross profit margin of 4.72%4.94% for the sixthree months ended June 30, 2019.March 31, 2020. Such increase was primarilymainly due to decrease of material purchase price, partially offset by the decreaseincrease in ASP of regular CMP.CMP in the first quarter of 2021.

 

Gross profit margin for light-weight CMP for the sixthree months ended June 30, 2020March 31, 2021 was 12.63%10.94%, or 10.631.95 percentage points lower, as compared to gross profit margin of 12.89% for the three months ended March 31, 2020. The decrease was mainly due to increase in cost of recycled paper board, partially offset by the increase in ASP of light-weight CMP in the first quarter of 2021.

Gross profit margin for offset printing paper was 19.37% for the three months ended March 31, 2021.

Gross profit margin for tissue paper products for the three months ended March 31, 2021 was -36.46%, or 34.28 percentage points higher, as compared to gross profit margin of 2.00%-70.74% for the sixthree months ended June 30, 2019.March 31, 2020. The increase was mainly due to the increase in ASP of tissue paper products and decrease in cost of base paper in the first quarter of 2021.

 

Gross32

Monthly gross profit margin formargins on the sales of our CMP and offset printing paper was 23.66% for the six months24-month period ended June 30, 2020, a decrease of 2.31 percentage points,March 31, 2021 are as compared to 25.97% for the six months ended June 30, 2019.follows:

 

Gross profit margin for tissue paper products was -32.07% for the six months ended June 30, 2020, a decrease of 11.07 percentage points, as compared to -21.00% for the six months ended June 30, 2019.

 

Face MaskMasks

 

Gross profit for face masks for the sixthree months ended June 30, 2020March 31, 2021 was $503,400,$24,531, representing a gross margin of 59.53%18.8%.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the sixthree months ended June 30, 2020March 31, 2021 were $6,012,435, an increase$2,555,318, a decrease of $623,103,$141,645, or 11.56%5.25% from $5,389,332$2,696,963 for the sixthree months ended June 30, 2019. The increase was net impact of issuance of 2,000,000 shares of common stock valued at $1,200,000 to officers, directors and employees, issuance of 60,000 shares of common stock valued at $42,000 to a consultant and decrease in sales commission to staff.March 31, 2020.

 

Loss from Operations

 

Operating loss for the six monthsquarter ended June 30, 2020March 31, 2021 was $3,665,325, a decrease$724,313, an increase of $1,023,053,$2,142,369, or 38.72%74.73%, from $2,642,272$2,866,682 for the six monthsquarter ended June 30, 2019.March 31, 2020. The decreaseincrease in income from operations was primarily due to the decreaseincrease in gross profit and increase in selling, general and administrative expenses.profit.

 


Other Income and Expenses

 

Interest expense for the sixthree months ended June 30, 2020 decreasedMarch 31, 2021 increased by $7,886,$34,183, from $494,040 for$244,718 in the sixthree months ended June 30, 2019,March 31, 2020, to $486,154.$278,901. The Company had short-term and long-term interest-bearing loans and related party loansleasing obligations that aggregated $14,916,307$16,406,559 as of June 30, 2020,March 31, 2021, as compared to $15,942,514$14,904,518 as of June 30, 2019.March 31, 2020.

 

SubsidyLoss on derivative liability

The Company analyzed the warrant for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The loss recognized on addition and change in fair value of $142,019derivative liability for the three monthmonths ended March 31, 2020 represents funding by the government to finance various expenditures during the COVID-19 pandemic period.2021 was $3,636,967.

 

Net Loss

 

As a result ofand the factors discussed above, net loss was $3,416,318$4,338,856 for the six monthsquarter ended June 30, 2020,March 31, 2021, representing a decrease of $1,143,793,income of $1,902,569, or 50.33%78.09%, from $2,272,525$2,436,287 for six monthsthe quarter ended June 30, 2019.

March 31, 2020.

 

33

Accounts Receivable

 

Net accounts receivable increased by $44,831,$2,822,749, or 1.44%118.15%, to $3,164,142$5,211,806 as of June 30, 2020,March 31, 2021, as compared with $3,119,311$2,389,057 as of December 31, 2019.2020. We usually collect accounts receivable within 30 days of delivery and completion of sales.

 

Inventories

 

Inventories consist of raw materials (accounting for 79.77%76.64% of total value of inventory as of June 30, 2020)March 31, 2021), semi-finished goods and finished goods. As of June 30, 2020,March 31, 2021, the recorded value of inventory increased by 247.89%502.33% to $5,852,473$7,431,502 from $1,682,298$1,233,801 as of December 31, 2019.2020. As of June 30, 2020,March 31, 2021, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $4,116,442,$5,040,597, approximately $4,076,410,$5,021,138, or 10182.88%25803.68%, higher than the balance as of December 31, 2019.2020. Due to the volatility of recycled paper board price, a minimum level of inventory was maintained at the end of 2019.2020.

 

A summary of changes in major inventory items is as follows:

 

 

June 30,

2020

 

December 31,

2019

  $ Change  % Change  March 31,
2021
  December 31,
2020
  $ Change  % Change 
Raw Materials                  
Recycled paper board $4,116,442  $40,032   4,076,410   10182.88% $5,040,597  $19,459   5,021,138   25803.20%
Recycled white scrap paper  130,972   10,541   120,431   1142.51%  189,976   11,193   178,783   1597.24%
Tissue base paper  83,084   122,648   -39,564   -32.26%  205,718   14,027   191,691   1366.59%
Gas  111,573   41,675   69,898   167.72%  75,620   55,473   20,147   36.32%
Mask fabric and other raw materials  226,609   171,287   55,322   32.30%  183,563   167,399   16,164   9.66%
Total Raw Materials  4,668,680   386,183   4,282,497   1108.93%  5,695,474   267,551   5,427,923   2028.74%
                
Semi-finished Goods  122,010   83,266   38,744   46.53%  259,758   176,703   83,055   47.00%
Finished Goods  1,061,782   1,212,849   -151,067   -12.46%  1,476,270   789,547   686,723   86.98%
Total inventory, gross  5,852,473   1,682,298   4,170,175   247.89%  7,431,502   1,233,801   6,197,701   502.33%
Inventory reserve  -   (74,835)  74,835   -100.00%  -   -   -     
Total inventory, net $5,852,473  $1,607,463   4,245,010   264.08% $7,431,502  $1,233,801   6,197,701   502.33%

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 $142,019$153,740 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as provided for in the original lease agreement. The accrued rental owed to Hebei Fangsheng was $nil and $56,552 as of June 30, 2020 and December 31, 2019, respectively, and such amounts were recorded as part of the current liabilities.

 

Capital Expenditure Commitment as of June 30, 2020March 31, 2021

 

On May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company has 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 June 30, 2020,March 31, 2021, we had approximately $5$4.5 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 improvement of Industrial Buildings.the associated ancillary facilities are working in the 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$2.4 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.4 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $15) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of $2,349,452 was recorded as right-of-use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020.

Hebei Tengsheng made payments due according to the schedule. The balance of Leased Equipment net of amortization was $2,340,142 and $2,397,653 as of March 31, 2021 and December 31, 2020, respectively. The lease liability was $490,377 and $536,959, and its current portion in the amount of $188,723 and $182,852 as of March 31, 2021 and December 31, 2020, respectively.

Amortization of the Leased Equipment was $40,997 and nil for the three months ended March 31, 2021 and 2020. Total interest expenses for the sale-leaseback arrangement was $20,418 and nil for the three months ended March 31, 2021 and 2020.

As a result of the sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to amortization of the Leased Equipment.

Cash and Cash Equivalents

 

Our cash, cash equivalents and restricted cash as of June 30, 2020March 31, 2021 was $12,828,030,$37,440,991, an increase of $6,990,285,$33,298,554, from $5,837,745$4,142,437 as of December 31, 2019.2020. The increase of cash and cash equivalents for the sixthree months ended June 30, 2020March 31, 2021 was attributable to a number of factors:

 

i. Net cash provided by (used in) operating activities

 

Net cash provided by operating activities was $5,856,625 for the six months ended June 30, 2020. The balance represented an increase of cash of $6,668,934, or 820.98%, from $812,309 used in operating activities was $8,280,332 for the sixthree months ended June 30, 2019.March 31, 2021. The balance represented a decrease of cash of $15,140,639, or 220.70%, from $6,860,307 provided for the three months ended March 31, 2020. Net loss for the sixthree months ended June 30, 2020March 31, 2021 was $3,416,318,$4,338,856, representing a decrease of $1,143,793,income of $1,902,569, or 50.33%-78.09%, from a net loss of $2,272,525$2,436,287 for the sixthree months ended June 30, 2019.March 31, 2020. Changes in various asset and liability account balances throughout the sixthree months ended June 30, 2020March 31, 2021 also contributed to the net change in cash from operating activities in sixthree months ended June 30, 2020.March 31, 2021. Chief among such changes is the increase of $4,291,622accounts receivable in the amount of $2,920,798 during the first three months of 2021. There was also an increase of $6,270,151 in the ending inventory balance as of June 30, 2020March 31, 2021 (a decrease to net cash for the sixthree months ended June 30, 2020March 31, 2021 cash flow purposes). An increase of $1,785,742 in accounts payable (an increase to net cash) in the three months ended March 2021. In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $7,496,314.$4,092,487 and loss on derivative liability of $3,636,967. The Company also had a net decreaseincrease of $5,739,395$3,645,323 in prepayment and other current assets (an increase(a decrease to net cash) and a net decrease of $447,448$310,023 in other payables and accrued liabilities and related parties (an increase(a decrease to net cash), as well as a decreasean increase in income tax payable of $968,474 (a decrease$226,699 (an increase to net cash) during the sixthree months ended June 30, 2020.March 31, 2021.


ii. Net cash used in investing activities

 

We incurred $981,150$44,599 in net cash expenditures for investing activities during the sixthree months ended June 30, 2020,March 31, 2021, as compared to $5,021,739$756,514 for the same period of 2019.2020. Payments in the sixthree months ended June 30, 2020March 31, 2021 were for the expenditures on improvementpayments for purchase of Industrial Buildings.vehicles.

 

iii. Net cash provided by financing activities

 

Net cash provided by financing activities was proceeds from issuance of shares and warrants and repayment of $2,273,360lease liability of $41,794,323 for the sixthree months ended June 30, 2020,March 31, 2021, as compared to net cash used inprovided by financing activities in the amount of $5,286,942$nil for the sixthree months ended June 30, 2019.March 31, 2020.

 

Short-term bank loans

 

  June 30,  December 31, 
  2020  2019 
Industrial and Commercial Bank of China (“ICBC”) Loan 1 $6,073,875  $6,163,814 
         
Total short-term bank loans $6,073,875  $6,163,814 
    March 31,  December 31,
    2021  2020
Industrial and Commercial Bank of China (“ICBC”)   $6,389,908  $6,435,348

 

On December 20, 2019,11, 2020, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,073,875$ $6,389,908 and $6,163,814$6,435,348 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The working capital loan was secured by landthe Land use right of Hebei TengshengDongfang Paper as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by December 23, 2020.7, 2021.

 

As of June 30, 2020,March 31, 2021, there were guaranteed short-term borrowings of $6,073,875$6,389,908 and unsecured bank loans of $nil. As of December 31, 2019,2020, there were guaranteed short-term borrowings of $6,163,814$6,435,348 and unsecured bank loans of $nil.

 

The average short-term borrowing rates for the three months ended June 30,March 31, 2021 and 2020 and 2019 were approximately 4.79% and 4.77%, respectively. The average short-term borrowing rates for the six months ended June 30, 2020 and 2019 were approximately 4.79% and 4.76%, respectively..

 

Long-term loans from credit union

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, loans payable to Rural Credit Union of Xushui District, amounted to $8,835,443$9,526,274 and $8,973,367,$9,594,017, respectively.

 


36

On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, total outstanding loan balance was $1,214,775$1,308,721 and $1,232,763, respectively.$1,318,028, respectively, Out of the total outstanding loan balance, current portion amounted were $169,503$213,048 and $143,345$214,563 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,045,272$1,095,673 and $1,089,418$11,103,465 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $3,013,792$1,882,319 and $3,935,270$2,349,796 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the total outstanding loan balance was $3,531,322$3,804,423 and $3,583,613,$3,831,476, respectively. Out of the total outstanding loan balance, current portion amounted were $240,130$334,789 and $172,013$337,169 as of June 30, 2020March 31, 2021 and December 31, 2019,2020 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,291,192$3,469,633 and $3,411,600$3,494,307 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

On April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank.credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the total outstanding loan balance was $2,260,047$2,434,830 and $2,293,512,$2,452,145, respectively. Out of the total outstanding loan balance, current portion amounted were $2,260,047$2,434,830 and $1,146,756$2,452,145 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, 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 is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the bank.credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the total outstanding loan balance was $1,836,288$1,978,300 and $1,863,479,$1,992,368, respectively. Out of the total outstanding loan balance, current portion amounted were $988,770$1,978,300 and $143,345$1,992,368 as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $847,518 and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

Total interest expenses for the short-term bank loans and long-term loans for the three months ended June 30,March 31, 2021 and 2020 were $258,483 and 2019 were $241,436 and $214,907, respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months ended June 30, 2020 and 2019 were $486,154 and $445,860,$244,718, respectively.


Shareholder Loans

 

Mr. Zhenyong Liu, the Company’s CEO 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 $362,079$390,081 and $367,441$392,855 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 June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,483,083$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 June 30, 2020March 31, 2021 and December 31, 2019,2020, approximately $42,376$45,653 and $43,003$45,978 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 $ 16,950,350$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 June 30, 2020March 31, 2021 and December 31, 2019,2020, the outstanding loan balance were $nil and the accrued interest was $194,134$209,148 and $197,009,$210,635, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil and $23,865 for the three months ended June 30, 2020March 31, 2021 and 2019, respectively. The interest expenses incurred for such related party loans are $nil and $48,180 for the six months ended June 30, 2020 and 2019, respectively.2020. The accrued interest owedowing to the CEO was approximately $598,589$644,882 and $607,453,$649,468, as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which was recorded in other payables and accrued liabilities.

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, amount due to shareholder are $657,433 and $483,433, respectively,was $727,433, which represents 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 three months ended June 30,March 31, 2021 and 2020, and 2019, 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.

 

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 June 30, 2020March 31, 2021 and December 31, 20192020 to translate the Chinese RMB to the U.S. Dollars are 7.0795:6.5713:1 and 6.9762:6.5249:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 7.0413:6.5045:1 and 6.7087:6.9931:1 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Translation adjustments are included in other comprehensive income (loss).

 

Off-Balance Sheet Arrangements

 

We were the guarantor for Baoding Huanrun Trading Co., Ltd.(“Baoding Huanrun”) for its long-term bank loans in an amount of $4,378,840$4,717,484 (RMB31,000,000), which matures at various times in 2020 -2023.2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Baoding 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.

 

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Recent Accounting Pronouncements

 

In August 2018,June 2016, the FASB issued ASU 2018-13, Disclosure Framework-Changes2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to the Disclosure Requirementsinform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for Fair Value Measurement. The amendments in this standard will remove, modifyaccounts receivables, loans, and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness.other financial instruments. ASU 2018-13 will be2016-13 is effective for the Company’s fiscal yearyears beginning April 1, 2020,after December 15, 2019, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.


In DecemberOctober 2019, the FASB issued ASU 2019-12, Income TaxesNo. 2019-10, “Financial Instruments-Credit Losses (Topic 740) Simplifying326): Effective Dates”, to finalize the Accountingeffective date delays for Income Taxes.private companies, not-for-profits, and smaller reporting companies applying the CECL standards. The amendments in this Update related to separate financial statementsASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. We do not expect the adoption of ASU 2019-12 to have a material impact2016-13 on our condensed consolidated financial statements.

 

Item 3. 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 4. Controls and Procedures.

 

As required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Securities Act”), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, which were designed to provide reasonable assurance of achieving their objectives. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2020,March 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the quarterly period ended June 30, 2020.March 31, 2021.


PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None..None.

 

Item 6. Exhibits.

 

(a) Exhibits

 

31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
101.DEF XBRL Definition Linkbase Document

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 IT TECH PACKAGING, INC.
  
Date: AugustMay 11, 20202021/s/ Zhenyong Liu
 Name:Zhenyong Liu
 Title:Chief Executive Officer
  (Principal Executive Officer)
  
Date: AugustMay 11, 20202021/s/ Jing Hao
 Name:Jing Hao
 Title:Chief Financial Officer
  (Principal Financial Officer)

 

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