IT TECH PACKAGING, INC. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information IT Tech Packaging’s common stock is traded on the NYSE MKT exchange under the symbol “ITP”. As of March 23, 2020, we had approximately 3,100 shareholders of record of our common stock. Dividends On November 21, 2013, the Company declared another quarterly dividend of $0.005 per share to shareholders of record as of November 29, 2013. The dividend was paid on December 10, 2013. Total dividends declared and paid for the year ended December 31, 2013 were $323,032. We do not expect to pay dividends in the near future. Future declaration of dividends will depend on, among other things, the Company’s results of operations, capital requirements, financial condition and on such other factors as the Company’s Board of Directors may in its discretion consider relevant and in the best long term interest of the shareholders. Equity Compensation Plan Information On August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan (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. 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 2011 ISP’s administration. On January 11, 2012, the Compensation Committee granted 109,584 shares of restricted common stock to certain officers and directors of the Company. On December 31, 2013, the Compensation Committee granted remaining 265,416 shares of restricted common stock to 39 recipients who are employees, officers and directors of the Company. On September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan (the “2012 ISP”). 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 31,584 shares of restricted common stock under the 2012 ISP to 39 recipients who are employees, officers and directors of the Company. 24 On August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan (the “2015 ISP”). 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. The 2015 ISP provides for the granting of non-qualified stock options, incentive stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, performance unit awards, unrestricted stock awards, distribution equivalent rights or any combination of the foregoing. The 2015 ISP is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the 2015 ISP, the Compensation Committee has the sole authority, in its discretion, to make all determinations under the plan, including but not limited to (i) determining which employees, directors or consultants shall receive an award, (ii) the time or times when an award shall be made, (iii) what type of award shall be granted, (iv) the term of an award, (v) the date or dates on which an award vests, (vi) the form of any payment to be made pursuant to an award, (vii) the terms and conditions of an award, (viii) the restrictions under a restricted stock award, (ix) the number of shares which may be issued under an award, (x) performance goals applicable to any award and certification of the achievement of such goals, and (xi) the waiver of any restrictions or performance goals, subject in all cases to compliance with applicable laws. 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. 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 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 at $0.88 per share. On August 14, 2019, the Company’s Annual General Meeting approved the 2019 Incentive Stock Plan (the “2019 ISP”). Under the 2019 ISP, the Company may grant an aggregate of 2,000,000 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 2019 ISP’s administration. All shares of common stock under the 2011, 2012 and 2015 ISPs, including shares originally authorized by equity holders and shares remaining for future issuance as of December 31, 2019, has been issued. No shares of restricted common stock under the 2019 ISP was issued.. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. 25 Item 6. Selected Financial Data The selected financial data set forth below is derived from the consolidated financial statements of the Company. The selected consolidated statements of income and comprehensive income data for the years ended December 31, 2018 and 2019, and the selected consolidated balance sheet data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statements of income and comprehensive income data for the year ended December 31, 2015, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2015, 2016 and 2017 have been derived from our audited consolidated financial statements not included in this annual report. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and notes thereto and the other information contained in this Form 10-K. The financial information has been prepared in accordance with U.S. GAAP. All financial information referred to herein is expressed in U.S. dollars unless otherwise noted. Year Ended December 31, 2019 2018 2017 2016 2015 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME DATA (in thousands, except per share data) Revenues $ 117,615 $ 86,747 $ 117,024 $ 134,745 $ 135,303 Gross profit $ 13,680 $ 5,820 $ 19,956 $ 25,532 $ 27,861 Selling, general and administrative expenses $ 9,782 $ 13,098 $ 11,307 $ 12,402 $ 9,664 Gain (Loss) from impairment and disposal of property, plant and equipment $ - $ (3,904 ) $ (3,968 ) $ (178 ) $ - Income from operations $ 3,929 $ (11,182 ) $ 4,680 $ 12,952 $ 18,197 Depreciation $ 15,304 $ 14,291 $ 14,634 $ 15,288 $ 13,399 Interest expense $ 926 $ 1,492 $ 2,434 $ 2,621 $ 3,158 Net Income (Loss) $ 2,221 $ (10,546 ) $ 1,660 $ 7,313 $ 11,542 Basic and Diluted Earnings (Losses) per Share $ 0.10 $ (0.49 ) $ 0.16 $ 0.34 $ 0.57 CONSOLIDATED BALANCE SHEETS DATA Cash and bank balances $ 5,838 $ 8,475 $ 2,896 $ 2,333 $ 2,642 Accounts receivable, net $ 3,119 $ 2,877 $ 1,844 $ 3,894 $ 1,904 Inventories $ 1,607 $ 2,924 $ 8,474 $ 5,632 $ 9,205 Property, plant, and equipment, net $ 151,617 $ 167,830 $ 189,389 $ 187,690 $ 206,191 Total assets $ 190,198 $ 203,076 $ 218,989 $ 208,378 $ 238,627 Total liabilities $ 24,203 $ 36,526 $ 33,664 $ 35,622 $ 62,817 Total stockholders’ equity $ 165,995 $ 166,550 $ 185,325 $ 172,755 $ 175,809 26 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data, the financial statements, and the notes to those statements that are included elsewhere in this annual report. Results of Operations Revenue for the year ended December 31, 2019 was $117,614,886, an increase of $30,868,128, or 35.58%, from $86,746,758 for 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 year ended December 31, 2019 was $117,613,736, an increase of $30,880,600, or 35.60%, from $86,733,136 for the year ended December 31, 2018. This was mainly due to the increase in sales volume of CMP, offset printing paper and tissue paper, which was partially offset by the decrease in ASP of CMP and offset printing paper. Total quantities of offset printing paper, CMP and tissue paper products sold during the year ended December 31, 2019 amounted to 250,144 tonnes, an increase of 93,295 tonnes, or 59.48%, compared to 156,849 tonnes sold during the year ended December 31, 2018. Total quantities of CMP and offset printing paper sold increased by 86,505 tonnes in the year of 2019 as compared to 2018. We sold 6,790 tonnes of tissue paper products in the year of 2019. The increase was mainly due to the production suspension that took place from late January 2018 to March 13, 2018 due to a government-mandated restriction on the natural gas supply, and the launch of our PM8 production line in December 2018 for production and sales of tissue paper products. The changes in revenue and quantity sold for the year ended December 31, 2019 and 2018 are summarized as follows: Year Ended Year Ended Percentage December 31, 2019 December 31, 2018 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 168,837 $ 72,050,122 116,012 $ 63,199,071 52,825 $ 8,851,051 45.53 % 14.01 % Light-Weight CMP 45,310 $ 18,776,316 34,646 $ 18,397,173 10,664 $ 379,143 30.78 % 2.06 % Total CMP 214,147 $ 90,826,438 150,658 $ 81,596,244 63,489 $ 9,230,194 42.14 % 11.31 % Offset Printing Paper 29,207 $ 20,436,130 6,191 $ 5,136,892 23,016 $ 15,299,238 371.77 % 297.83 % Tissue Paper Products 6,790 $ 6,351,168 - - 6,790 $ 6,351,168 % % Total CMP, Offset Printing Paper and Tissue Paper Revenue 250,144 $ 117,613,736 156,849 $ 86,733,136 93,295 $ 30,880,600 59.48 % 35.60 % 27 Monthly revenue (excluding revenue of digital photo paper and tissue paper products) for the 24 months ended December 31, 2019, are summarized below: The average selling price, or ASP, for our major products for the years ended December 31, 2019 and 2018 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light-Weight CMP ASP Tissue Paper Products ASP Year Ended December 31, 2018 $ 830 $ 545 $ 531 $ - Year Ended December 31, 2019 $ 700 $ 427 $ 414 $ 935 Decrease from comparable period in the previous year $ -130 $ -118 $ -117 $ - Decrease by percentage -15.66 % -21.65 % -22.03 % - % 28 The following is a chart showing the month-by-month ASPs (excluding the ASPs of digital photo paper and tissue paper products) for the 24 month period ended December 31, 2019: 29 Corrugating Medium Paper Revenue from CMP amounted to $90,826,438 (77.22% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2019, representing an increase of $9,230,194, or 11.31%, from $81,596,244 during 2018. We sold 214,147 tonnes of CMP in the year ended December 31, 2019 as compared to 150,658 tonnes in the year ended December 31, 2018, representing a 42.14% increase in quantity sold. ASP for regular CMP dropped from $545/tonne in 2018 to $427/tonne in 2019, representing a 21.65% decrease. ASP in RMB for regular CMP in 2018 and 2019 was RMB3,614 and RMB2,942, respectively, representing a 18.59% decrease. The quantity of regular CMP sold increased by 52,825 tonnes, from 116,012 tonnes in 2018 to 168,837 tonnes in 2019. ASP for light-weight CMP dropped from $531/tonne in 2018 to $414/tonne in 2019, representing a $22.03% decrease. ASP in RMB for light-weight CMP in 2018 and 2019 was RMB3,523 and RMB2,857, respectively, representing a 18.90% decrease. The quantity of light-weight CMP sold increased by 10,664 tonnes, from 34,646 tonnes in 2018, to 45,310 tonnes in 2019. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December 31, 2019 and 2018 were 46.68% and 32.54%, respectively, representing an increase of 14.14%. Quantities sold for regular CMP that was produced by the PM6 production line from January 2018 to December 2019 are as follows: Offset Printing Paper Revenue from offset printing paper was $20,436,130 (17.38% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2019, representing an increase of $15,299,238, or 297.83%, from $5,136,892 in 2018. We sold 29,207 tonnes of offset printing paper in the year ended December 31, 2019, compared to 6,191 tonnes in 2018, an increase of 23,016 tonnes, or 371.77%. ASPs for offset printing paper in the year ended December 31, 2018 and 2019 was $830/tonne and $700/tonne, respectively, representing a 15.66% decrease. ASP in RMB for offset printing paper for the year ended December 31, 2018 and 2019 was RMB5,504 and RMB4,824, respectively, representing a 12.35% decrease. 30 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 Dongfang Paper brand. 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 10,000 tonnes/year. Revenue from tissue paper products was $6,351,168 (5.40% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2019, representing an increase of $6,351,168 from $nil in 2018. We sold 6,790 tonnes of tissue paper products in the year of 2019. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products in the year ended December 31, 2019 was $103,922,414, an increase of $23,013,001, or 28.44%, from $80,909,412 for the year ended December 31, 2018. This was mainly a result of the increase in volume sold, partially offset by the decreases in costs of recycled paper board and recycled white scrap paper. Cost of sales for CMP was $81,511,234 for the year ended December 31, 2019, as compared to $75,811,876 in 2018. The increase in the cost of sales of $5,699,359 for CMP was mainly due to the increase in the quantities of CMP sold, partially offset by the decrease in cost of recycled paper board in the year of 2019. Average cost of sales per tonne for CMP decreased by 24.25%, from $503 for the year ended December 31, 2018, to $381 in 2019. 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 $14,061,771 for the year ended December 31, 2019, as compared to $5,097,537 in 2018. Average cost of sales per tonne of offset printing paper decreased by 41.56%, from $823 in the year ended December 31, 2018, to $481 in 2019. The decrease was mainly attributable to lower average unit purchase costs (net of applicable value added tax) of recycled white scrap paper. Cost of sales for tissue paper products was $8,349,409 for the year ended December 31, 2019. Average cost of sales per tonne of tissue paper products was $1,230 for the year ended December 31, 2019. Changes in cost of sales and cost per tonne by product for the year ended December 31, 2019 and 2018 are summarized below: Year Ended Year Ended Change in December 31, 2019 December 31, 2018 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 $ 64,636,452 $ 383 $ 58,342,301 $ 503 $ 6,294,151 $ (120 ) 10.79 % -23.86 % Light-Weight CMP $ 16,874,783 $ 372 $ 17,469,575 $ 504 $ (594,792 ) $ (132 ) -3.40 % -26.19 % Total CMP $ 81,511,234 $ 381 $ 75,811,876 $ 503 $ 5,699,359 $ (122 ) 7.52 % -24.25 % Offset Printing Paper $ 14,061,771 $ 481 $ 5,097,537 $ 823 $ 8,964,234 $ (342 ) 175.85 % -41.56 % Tissue Paper Products $ 8,349,409 $ 1,230 $ - $ - 8,349,409 $ 1,230 % % Total CMP, Offset Printing Paper and Tissue Paper Revenue $ 103,922,414 $ n/a $ 80,909,412 $ n/a $ 23,013,001 $ n/a 28.44 % n/a% Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31, 2019 were RMB 1,536/tonne (approximately $223/tonne) and RMB 1,855/tonne (approximately $269/tonne), respectively, as compared to RMB 2,079/tonne (approximately $313/tonne) and RMB 3,013/tonne (approximately 454/tonne) for the year ended December 31, 2018, respectively. These changes (in US dollars) represent a year-over-year decrease of 28.75% for the unit purchase cost of recycled paper board and a year-over-year decrease of 40.75% for the unit purchase cost of recycled white scrap paper. 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. 31 The pricing trends of our major raw materials for the 24-month period from January 2018 to December 2019 are shown below: 32 Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 6% and 10.3% of total sales in 2019, respectively, compared to 6% and 9.5% of total sales 2018.The monthly energy cost (electricity, coal and gas) as a percentage of total monthly sales of our main paper products for the 24 months ended December 31, 2019 are summarized as follows: Gross Profit Gross profit for December 31, 2019 was $13,679,518 (11.63% of the total revenue), representing an increase of $7,859,117, or 135.03%, from the gross profit of $5,820,401 (6.71% of the total revenue) for the year ended December 31, 2018. The increase was mainly due to (i) the increase in quantities sold of CMP, offset printing paper and tissue paper and (ii) the decrease of material purchase price of CMP and offset printing paper, partially offset by the decrease of ASP of these products. 33 Corrugating Medium Paper, Offset Printing Paper and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the year ended December 31, 2019 was $13,691,322, an increase of $7,867,598, or 135.10%, from the gross profit of $5,823,724 for the year ended December 31, 2018. The increase was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 4.93 percentage points, from 6.71% for the year ended December 31, 2018, to 11.64% for the year ended December 31, 2019. Gross profit margin for regular CMP for the year ended December 31, 2019 was 10.29%, or 2.61 percentage points higher, as compared to gross profit margin of 7.68% for the year ended December 31, 2018. Such increase was primarily due to decrease of material purchase price, partially offset by the decrease in ASP of regular CMP. Gross profit margin for light-weight CMP for the year ended December 31, 2019 was 10.13%, or 5.09 percentage points higher, as compared to gross profit margin of 5.04% for the year ended December 31, 2018. Gross profit margin for offset printing paper was 31.19% for the year ended December 31, 2019, an increase of 30.42 percentage points, as compared to 0.77% for the year ended December 31, 2018. Such increase was mainly due to the decrease of purchase price of recycled white scrap paper, partially offset by the decrease in ASP of offset printing paper. Gross profit margin for tissue paper products for the year ended December 31, 2019 was -31.46%. Monthly gross profit margins for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2019 are as follows: Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2019 were $9,781,719, a decrease of $3,316,654, or 25.32% from $13,098,373 for the year ended December 31, 2018. The decrease was mainly due to additional repair and maintenance costs incurred during the production suspension period and depreciation of idle fixed assets in 2018. Income (Loss) from Operations Operating income for the year ended December 31, 2019 was $3,897,799, an increase of $15,080,113, or 134.86%, from loss from operations of $11,182,314 for the year ended December 31, 2018. The increase in operating loss was primarily due to the increase in gross profit and the decrease in selling, general and administrative expenses. 34 Other Income and Expenses Interest expense for the year ended December 31, 2019 decreased by $565,751, from $1,492,119 in the year ended December 31, 2018, to $926,368. The Company had short-term and long-term interest-bearing loans and related party loans that aggregated $15,137,181 as of December 31, 2019, as compared to $21,185,452 as of December 31, 2018. Net Income (Loss) As a result of the above, net income was $2,221,182 for the year ended December 31, 2019, representing an increase of $12,766,866, or 121.06%, from net loss of $10,545,684 for year ended December 31, 2018. Accounts Receivable Net accounts receivable increased by $242,679, or 8.44%, to $3,119,311 as of December 31, 2019, as compared with $2,876,632 as of December 31, 2018. We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories Inventories consist of raw materials (accounting for 23.04% of total value of inventory as of December 31, 2019), semi-finished goods and finished goods. As of December 31, 2019, the recorded value of inventory decreased by 43.63% to $1,647,882 from $2,923,516 as of December 31, 2018. As of December 31, 2019, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $40,032, approximately $372,285, or 90.29%, lower than the balance as of December 31, 2018. Due to the volatility of recycled paper board and recycled white scrap paper price, we maintained a minimum level of inventory of raw materials at the end of the year. A summary of changes in major inventory items is as follows: December 31, December 31, 2019 2018 $ Change % Change Raw Materials Recycled paper board $ 40,032 $ 412,317 -372,285 -90.29 % Recycled white scrap paper 10,541 611,861 -601,320 -98.28 % Tissue base paper 182,096 24,027 158,069 657.90 % Coal & gas 41,675 167,230 -125,555 -75.08 % Digital photo base paper and other raw materials 111,838 140,268 -28,430 -20.27 % Total Raw Materials 386,182 1,355,703 -969,521 -71.51 % Semi-finished Goods 83,266 - 83,266 Finished Goods 1,212,849 1,567,813 -354,964 -22.64 % Total inventory, gross 1,682,297 2,923,516 -1,241,218 -42.46 % Inventory reserve (74,835 ) - (74,835 ) Total inventory, net $ 1,607,462 $ 2,923,516 (1,241,218 ) -42.46 % Accounts Payable and Notes Payable Accounts payable and notes payable was $250,486 as of December 31, 2019, a decrease of 4,021,184, or 94.14%, from $4,271,670 as of December 31, 2018. Accounts payable was $250,486 and $629,054 as of December 31, 2019 and December 31, 2018, respectively. We have been relying on the bank acceptance notes issued under our credit facilities with Bank of Cangzhou to make the majority of our raw materials payments to our vendors. Our notes payable to Bank of Cangzhou were $nil and $3,642,616 as of December 31, 2019 and December 31, 2018, respectively. In January 2018, Bank of Cangzhou issued bank acceptance notes on our behalf for $3,642,616, which we paid off in January 2019. 35 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 $145,037 (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 original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $56,552 and $203,188 which was recorded as part of the current liabilities as of December 31, 2019 and December 31, 2018, respectively. Capital Expenditure Commitment as of December 31, 2019 We finance our daily operations mainly by cash flows generated from our business operations. As December 31, 2019, we had approximately $1 million in capital expenditure commitments that were mainly related to improvement of Industrial Buildings. These commitments are expected to be financed by bank loans and cash flows generated from our business operations. Cash ,Cash Equivalents and restricted cash Our cash, cash equivalents and restricted cash as of December 31, 2019 was $5,837,745, a decrease of $6,279,680, from $12,117,425 as of December 31, 2018. The decrease of cash and cash equivalents for the year ended December 31, 2019 was attributable to a number of factors: i. Net cash provided by operating activities Net cash provided by operating activities was $7,530,474 for the year ended December 31, 2019. The balance represented a decrease of cash of $1,639,900, or 17.88%, from $9,170,374 provided for the year ended December 31, 2018. Net income for the year ended December 31, 2019 was $2,221,182 representing an increase of $12,766,866, or 121.06%, from a net loss of $10,545,684 for the year ended December 31, 2018. Changes in various asset and liability account balances throughout the year ended December 31, 2019 also contributed to the net change in cash from operating activities in year ended December 31, 2019. Chief among such changes is the increase of accounts receivable in the amount of $294,882 during the year of 2019 (a decrease to net cash) and the decrease of notes payable in the amount of $3,625,921 (an increase to net cash). There was also a decrease of $1,242,780 in the ending inventory balance as of December 31, 2019 (an increase to net cash for the year ended December 31, 2019 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $15,304,039 and provision of inventory reserve of $75,719. The Company also had a net increase of $5,392,916 in prepayment and other current assets (a decrease to net cash) and a net increase of $504,451 in other payables and accrued liabilities and related parties (an increase to net cash), as well as an increase in income tax payable of $1,180,493 (an increase to net cash) during the year ended December 31, 2019. ii. Net cash used in investing activities We incurred $7,866,849 in net cash expenditures for investing activities during the year ended December 31, 2019, as compared to $2,198,852 for the year ended December 31, 2018. Expenditures in the year ended December 31, 2019 were for the prepayment of acquisition of Hebei Tengsheng assets and expenditures on improvement of industrial building. 36 iii. Net cash used in financing activities Net cash used in financing activities was $5,772,467 for the year ended December 31, 2019, as compared to net cash used in financing activities in the amount of $3,165,607 for the year ended December 31, 2018. The decrease was mainly attributable to repayment of bank loans and related party loans in 2019. Short-term bank loans December 31, December 31, 2019 2018 Industrial and Commercial Bank of China (“ICBC”) Loan 1 (a) $ - $ 4,079,730 Bank of Cangzhou (b) - 5,099,662 ICBC Loan 2 (c) - 2,622,683 ICBC Loan 3 (d) 6,163,814 - Total short-term bank loans $ 6,163,814 $ 11,802,075 (a) On February 6, 2018, the Company entered into a working capital loan agreement with the ICBC, with a balance of $4,079,730 as of December 31, 2018. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit of the bank. The loan bore a fixed interest rate of 5.4% per annum. The loan was due and repaid on January 28, 2019. (b) On January 2, 2018, the Company entered into a working capital loan agreement with the Bank of Cangzhou, with a balance of $5,099,662 as of December 31, 2018. The loan bore a fixed interest rate of 6.09% per annum. The working capital loan was secured by the Company’s land use right and guaranteed by the Company’s CEO and Baoding Shengde with its production equipment as collateral for the benefit of the bank. The loan was due and repaid on January 3, 2019. (c) On November 22, 2018, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,622,683 as of December 31, 2018. The working capital loan was secured by the Company’s land use right as collateral for the benefit of the bank. The loan bore a fixed interest rate of 4.741% per annum. The loan was repaid on October 19, 2019. (d) On December 20, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,163,814 as of December 31, 2019. The working capital loan was secured by land use right of Hebei Tengsheng 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 by December 23, 2020. As of December 31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil. As of December 31, 2018, there were guaranteed short-term borrowings of $11,802,075 and unsecured bank loans of $nil. The average short-term borrowing rates for the years ended December 31, 2019 and 2018 were approximately 4.93% and 5.66%, respectively. 37 Long-term loans from credit union As of December 31, 2019 and 2018, loans payable to Rural Credit Union of Xushui County, amounted to $8,973,367 and $7,197,808, respectively. On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and 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 December 31, 2019 and 2018, total outstanding loan balance was $1,232,763 and $1,253,060, respectively, Out of the total outstanding loan balance, current portion amounted were $143,345 and $87,423 as of December 31, 2019 and 2018, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,089,418 and $1,165,637 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, 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 $3,935,270 and $5,782,640 as of December 31, 2019 and 2018, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of December 31, 2019 and 2018, the total outstanding loan balance was $3,583,613 and $3,642,615, respectively. Out of the total outstanding loan balance, current portion amounted were $172,013 and $101,993 as of December 31, 2019 and 2018 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,411,600 and $3,540,622 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, respectively. On April 20, 2017, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from August 26, 2017 to April 19, 2019. The loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral for the benefit of the bank. Interest payment was due quarterly and bore a fixed rate of 0.6% per month. As of December 31, 2019 and December 31, 2018, the total outstanding loan balance was $nil and $2,302,133, respectively, which are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, 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. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of December 31, 2019 and 2018, the total outstanding loan balance was $2,293,512 and $nil, respectively. Out of the total outstanding loan balance, current portion amounted were $1,146,756 and $nil as of December 31, 2019 and 2018, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,146,756 and $nil are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, 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 was 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. Interest payment is due quarterly and bears a fixed rate of 7.56% per annum. As of December 31, 2019 and 2018, the total outstanding loan balance was $1,863,479 and $nil, respectively. Out of the total outstanding loan balance, current portion amounted were $143,345 and $nil as of December 31, 2019 and 2018, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,720,134 and $nil are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, respectively. Total interest expenses for the short-term bank loans and long-term loans for the years ended December 31, 2019 and 2018 were $831,732 and $1,214,708, 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 $367,441 and $373,490 of interest were outstanding to Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet as of December 31, 2019 and 2018, respectively. 38 On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of December 31, 2019 and 2018, approximately $43,003 and $43,711 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,201,342 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the company paid off the remaining balance, together with interest of 94,636. As of December 31, 2019 and 2018, the outstanding loan balance were $nil and $2,185,569, respectively, and the accrued interest was $197,009 and $200,253, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. As of December 31, 2019 and 2018, total amount of loans due to Mr. Zhenyong Liu were $nil and $2,185,569, respectively. The interest expense incurred for such related party loans are $94,636 and $277,411 for the years ended December 31, 2019 and 2018, respectively. The accrued interest owe to the CEO was approximately $607,453 and $617,454, as of December 31, 2019 and 2018, respectively, which was recorded in other payables and accrued liabilities. As of December 31, 2019 and 2018, amount due to shareholder are $483,433 and $210,148, respectively, 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 years ended December 31, 2019 and 2018, 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. 39 Foreign Currency Translation The functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of December 31, 2019 and 2018 to translate the Chinese RMB to the U.S. Dollars are 6.9762:1 and 6.8632:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.8948:1, and 6.6338:1 for the years ended December 31, 2019 and 2018, respectively. Translation adjustments are included in other comprehensive income (loss). Off-Balance Sheet Arrangements We were the guarantor for Baoding Huanrun Trading Co., for its long-term bank loans in an amount of $4,443,680 (RMB31,000,000), which matures at various times in 2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions. Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020, 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial statements 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 impact on our condensed consolidated financial statements. 40