IT TECH PACKAGING, INC. 10-K

Item 8. Financial Statements and Supplementary Data Our audited financial statement for the fiscal year ended December 31, 2019 and 2018, together with the report of the independent certified public accounting firms thereon and the notes thereto, are presented beginning at page F-1. 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To: The Board of Directors and Stockholders of IT Tech Packaging, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of IT Tech Packaging, Inc. (the Company) as of December 31, 2019, and 2018, and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ WWC, P.C. WWC, P.C. Certified Public Accountants We have served as the Company’s auditor since March 25, 2018. San Mateo, California March 23, 2020 F- 1 IT TECH PACKAGING, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018 December 31, December 31, 2019 2018 ASSETS Current Assets Cash and bank balances $ 5,837,745 $ 8,474,809 Restricted cash - 3,642,616 Accounts receivable (net of allowance for doubtful accounts of $59,922 and $58,707 as of December 31, 2019 and December 2018, respectively) 3,119,311 2,876,632 Inventories 1,607,463 2,923,516 Prepayments and other current assets 11,613,241 6,241,299 Due from related parties 1,863,479 - Total current assets 24,041,239 24,158,872 Prepayment on property, plant and equipment 1,433,445 - Property, plant, and equipment, net 151,616,852 167,829,716 Value-added tax recoverable 2,621,841 2,810,331 Deferred tax asset non-current 10,485,053 8,277,091 　 　 Total Assets $ 190,198,430 $ 203,076,010 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term bank loans $ 6,163,814 $ 11,802,075 Current portion of long-term loans from credit union 1,605,459 2,491,549 Accounts payable 250,486 629,054 Advance from customers 98,311 - Notes payable - 3,642,616 Due to related parties 539,985 413,336 Accrued payroll and employee benefits 291,924 213,536 Other payables and accrued liabilities 6,503,010 10,222,796 Income taxes payable 1,382,471 219,305 Total current liabilities 16,835,460 29,634,267 Loans from credit union 7,367,908 4,706,259 Loans from a related party - 2,185,569 Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $19,460,257 and $34,008,908 as of December 31, 2019 and 2018, respectively) 24,203,368 36,526,095 Commitments and Contingencies Stockholders' Equity Common stock, 500,000,000 shares authorized, $0.001 par value per share, 22,054,816 shares issued 22,685 22,360 Additional paid-in capital 51,154,544 51,137,319 Statutory earnings reserve 6,080,574 6,080,574 Accumulated other comprehensive loss (6,057,537 ) (3,263,952 ) Retained earnings 114,794,796 112,573,614 Total stockholders' equity 165,995,062 166,549,915 Total Liabilities and Stockholders' Equity $ 190,198,430 $ 203,076,010 See accompanying notes to consolidated financial statements. F- 2 IT TECH PACKAGING, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 Year Ended December 31, 2019 2018 Revenues $ 117,614,886 $ 86,746,758 Cost of sales (103,935,368 ) (80,926,357 ) Gross Profit 13,679,518 5,820,401 Selling, general and administrative expenses (9,781,719 ) (13,098,373 ) Loss from disposal of property, plant and equipment - (3,904,342 ) 　 　 Income (Loss) from Operations 3,897,799 (11,182,314 ) Other Income (Expense): Interest income 64,717 36,632 Subsidy income 261,136 241,189 Interest expense (926,368 ) (1,492,119 ) Income (Loss) before Income Taxes 3,297,284 (12,396,612 ) Provision for Income Taxes (1,076,102 ) 1,850,928 Net Income (Loss) 2,221,182 (10,545,684 ) Other Comprehensive Loss Foreign currency translation adjustment (2,793,585 ) (8,732,751 ) Total Comprehensive Loss $ (572,403 ) $ (19,278,435 ) Earnings (Losses) Per Share: Basic and Diluted Earnings (Losses) per Share $ 0.10 $ (0.49 ) Outstanding – Basic and Diluted 22,034,905 21,618,305 See accompanying notes to consolidated financial statements. F- 3 IT TECH PACKAGING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 Accumulated Additional Statutory Other Common Stock Paid-in Earnings Comprehensive Retained Shares Amount Capital Reserve Income (loss) Earnings Total Balance at December 1, 2018 21,450,316 21,450 50,635,243 6,080,574 5,468,799 123,119,298 185,325,364 Issuance of shares to officer and directors 534,500 535 469,826 470,361 Issuance of shares to Weitian 37,500 375 32,250 32,625 Foreign currency translation adjustment (8,732,751 ) (8,732,751 ) Net income for the year of 2018 (10,545,684 ) (10,545,684 ) Balance at December 31, 2018 22,022,316 $ 22,360 $ 51,137,319 $ 6,080,574 $ (3,263,952 ) $ 112,573,614 $ 166,549,915 Issuance of shares to officer and directors - - - - Issuance of shares to Weitian 32,500 325 17,225 17,550 Foreign currency translation adjustment (2,793,585 ) (2,793,584 ) Net income for the year of 2019 2,221,182 2,221,182 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 See accompanying notes to consolidated financial statements. F- 4 IT TECH PACACKING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 Year Ended December 31, 2019 2018 Cash Flows from Operating Activities: Net income $ 2,221,182 $ (10,545,684 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,304,039 14,290,919 Allowances for obsolete inventories, net 75,719 - Loss from disposal and impairment of property, plant and equipment - 3,904,342 (Recovery from) for bad debts 2,192 23,676 Share-based compensation expenses - 470,361 Deferred tax (2,369,683 ) (2,089,439 ) Changes in operating assets and liabilities: Accounts receivable (294,882 ) (1,183,782 ) Prepayments and other current assets (5,392,916 ) (5,726,546 ) Inventories 1,207,958 5,322,320 Accounts payable (372,728 ) 234,448 Advance from customers 99,472 - Notes payable (3,625,921 ) (2,261,147 ) Related parties (1,757,231 ) 150,743 Accrued payroll and employee benefits 82,813 (6,855 ) Other payables and accrued liabilities 1,169,967 6,878,137 Income taxes payable 1,180,493 (291,119 ) Net Cash Provided by Operating Activities 7,530,474 9,170,374 Cash Flows from Investing Activities: Purchases of property, plant and equipment (6,416,481 ) (2,198,852 ) Acquisition of a subsidiary (1,450,368 ) - 　 　 Net Cash Used in Investing Activities (7,866,849 ) (2,198,852 ) Cash Flows from Financing Activities: Proceeds from related party loans - 4,522,295 Repayments of related party loans (2,175,553 ) (12,813,169 ) Proceeds from short term bank loans 10,152,579 12,210,196 Proceeds from credit union loans 4,206,068 5,064,970 Repayment of bank loans (17,955,561 ) (12,149,899 ) Net Cash Used in Financing Activities (5,772,467 ) (3,165,607 ) Effect of Exchange Rate Changes on Cash and Cash Equivalents (170,838 ) (705,917 ) Net (Decrease) Increase in Cash and Cash Equivalents (6,279,680 ) 3,099,998 Cash, Cash Equivalents and Restricted Cash - Beginning of Year 12,117,425 9,017,427 Cash, Cash Equivalents and Restricted Cash - End of Year $ 5,837,745 $ 12,117,425 Supplemental Disclosure of Cash Flow Information: Cash paid for interest, net of capitalized interest cost $ 926,368 $ 1,393,759 Cash paid for income taxes $ 2,250,546 $ 515,001 Cash and bank balances 5,837,745 8,474,809 Restricted cash - 3,642,616 Total cash, cash equivalents and restricted cash shown in the statement of cash flows 5,837,745 12,117,425 See accompanying notes to consolidated financial statements. F- 5 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Organization and Business Background IT Tech Packaging, Inc. (the Company) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding Dongfang Paper Milling Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and effective December 21, 2007, we changed our name to “Orient Paper, Inc.”. Effective on August 1, 2018, we changed our corporate name to IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. In connection with the name change, our common stock began being traded under a new NYSE symbol, “ITP,” and a new CUSIP number, 46527C100, at such time. On October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang Zhiye Holding Limited (“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British Virgin Islands, and issued the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse stock split effected in November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders of Dongfang Holding in accordance with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement, Dongfang Holding owned all of the issued and outstanding stock and ownership of Dongfang Paper and such shares of Dongfang Paper were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant PRC Administration of Industry and Commerce as the 100% owner of Dongfang Paper’s shares. As a result of the merger transaction, Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned subsidiary, Dongfang Paper, became an indirectly owned subsidiary of the Company. Dongfang Holding, as the 100% owner of Dongfang Paper, was unable to complete the registration of Dongfang Paper’s capital under its name within the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions described below, Dongfang Holding directed the trustees to return the shares of Dongfang Paper to their original shareholders, and the original Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”) to transfer the control of Dongfang Paper over to Baoding Shengde. On June 24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued and outstanding shares of Shengde Holdings Inc, a Nevada corporation. Shengde Holdings Inc was incorporated in the State of Nevada on February 25, 2009. On June 1, 2009, Shengde Holdings Inc incorporated Baoding Shengde, a limited liability company organized under the laws of the PRC. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as a wholly foreign-owned entity under PRC law. F- 6 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS To ensure proper compliance of the Company’s control over the ownership and operations of Dongfang Paper with certain PRC regulations, on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”) with Dongfang Paper and Dongfang Paper Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”), a wholly foreign-owned enterprise in the PRC with an original registered capital of $10,000,000 (subsequently increased to $60,000,000 in June 2010). Baoding Shengde is mainly engaged in production and distribution of digital photo paper and is 100% owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80% of Dongfang Paper’s total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal amount of $10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each owner’s equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Dongfang Paper or with respect to any equity owner action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as long as Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. A Dongfang Paper Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009, and continues 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 above 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 subsidiary of Dongfang Paper that manufactures and sells tissue paper products. 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 years ended December 31, 2019 and 2018 was accounted for 100% and 99.98% of the Company’s total revenue, respectively. Dongfang Paper also accounted for 91.01% and 90.60% of the total assets of the Company as of December 31, 2019 and 2018, respectively. F- 7 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2019 and 2018, details of the Company’s subsidiaries and variable interest entity are as follows: Date of Incorporation Place of Incorporation or Percentage of Name or Establishment Establishment Ownership Principal Activity Subsidiary: Dongfang Holding November 13, 2006 BVI 100 % Inactive investment holding Shengde Holdings February 25, 2009 State of Nevada 100 % Investment holding Baoding Shengde June 1, 2009 PRC 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. F- 8 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 consolidated balance sheets as of December 31, 2019 and 2018 are as follows: December 31, December 31, 2019 2018 ASSETS Current Assets Cash and bank balances $ 5,675,374 $ 8,328,980 Restricted cash - 3,642,616 Accounts receivable 3,119,312 2,876,632 Inventories 1,603,038 2,906,004 Prepayments and other current assets 11,610,576 6,219,395 Due from related parties 1,863,479 - Total current assets 23,871,779 23,973,627 Prepayment on property, plant and equipment 1,433,445 - Property, plant, and equipment, net 138,920,440 153,302,061 Deferred tax asset non-current 8,869,385 6,711,412 Total Assets $ 173,095,049 $ 183,987,100 LIABILITIES Current Liabilities Short-term bank loans $ 6,163,814 $ 11,802,075 Current portion of long-term loans from credit union 315,358 189,416 Accounts payable 250,486 629,054 Notes payable - 3,642,616 Due to related parties 56,552 203,188 Accrued payroll and employee benefits 287,584 208,660 Other payables and accrued liabilities 6,502,974 10,222,766 Income taxes payable 1,382,471 219,305 Total current liabilities 14,959,239 27,117,080 Loans from credit union 4,501,018 4,706,259 Loans from a related party 2,185,569 Total liabilities $ 19,460,257 $ 34,008,908 F- 9 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. (2) Basis of Presentation and Significant Accounting Policies Basis of Consolidation The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and include the assets, liabilities, revenues, expenses and cash flows of all subsidiaries and variable interest entity. All significant inter-company balances, transactions and cash flows are eliminated on consolidation. Foreign Currency Translation The Company accounts for foreign currency translation pursuant to ASC Topic 830, Foreign Currency Matters . The functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Monetary assets and liabilities denominated in currencies other than RMB are translated into RMB at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than RMB are converted into RMB at the applicable rates of exchange prevailing the transactions occurred. Transaction gains and losses are recognized in the consolidated statements of income. The functional currency of IT Tech Packaging and Shengde Holdings is United States dollars. Monetary assets and liabilities denominated in currencies other than United States dollars are translated into United States dollars at the rates of exchange ruling at the balance sheet date. Translation in currencies other than United States dollars are converted into United States dollars at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains or losses are recognized in the consolidated statement of income. 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 average exchange rates prevailing throughout the respective years 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). Use of Estimates The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 2019 and 2018, and revenues and expenses for the years ended December 31, 2019 and 2018. The most significant estimates relate to allowance for uncollectible accounts receivable, inventory valuation, useful lives and impairment for property, plant and equipment, valuation allowance for deferred tax assets and contingencies. Actual results could differ from those estimates made by management. F- 10 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable Trade accounts receivable are recorded on shipment of products to customers. The trade receivables are all without customer collateral and interest is not accrued on past due accounts. Periodically, management reviews the adequacy of its provision for doubtful accounts based on historical bad debt expense results and current economic conditions using factors based on the aging of its accounts receivable. Additionally, the Company may identify additional allowance requirements based on indications that a specific customer may be experiencing financial difficulties. Actual bad debt results could differ materially from these estimates. As of December 31, 2019 and 2018, the balance of allowance for doubtful accounts was $59,922 and $58,707, respectively; and the movement of the provision of the doubtful accounts is as below. While management uses the best information available upon which to base estimates, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used for the purposes of analysis. December 31, December 31, Allowance of doubtful accounts 2019 2018 Opening balance $ 58,707 $ 37,626 Provision (Reversal) for the year 2,192 23,676 Exchange difference (977 ) (2,595 ) Closing balance $ 59,922 $ 58,707 Inventories Inventories consist principally of raw materials and finished goods, and are stated at the lower of cost (average cost method) or market. Cost includes labor, raw materials, and allocated overhead. Provision in inventories were $75,719 and $nil for the years ended December 31, 2019 and 2018, respectively. Property, Plant, and Equipment Property, plant, and equipment are stated at cost less accumulated depreciation and any impairment losses. Major renewals, betterments, and improvements are capitalized to the asset accounts while replacements, maintenance, and repairs, which do not improve or extend the lives of the respective assets, are expensed to operations. At the time property, plant, and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation or amortization accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to operations. Construction-in-progress is stated at cost and capitalized as expenses are incurred or as payments are made pursuant to relevant construction contracts. Contract retention is recorded as accrued liability. Construction in progress is not depreciated until project completion and the constructed property being placed in service, at which time the capitalized balance will be transferred to appropriate account of property, plant and equipment. The Company depreciates property, plant, and equipment using the straight-line method as follows: Land use right Over the lease term Building and improvements 30 years Machinery and equipment 5-15 years Vehicles 15 years 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. F- 11 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statutory Reserves According to the laws and regulations in the PRC, the Company is required to provide for certain statutory funds, namely, a reserve fund by an appropriation from net profit after taxation but before dividend distribution based on the local statutory financial statements of the PRC subsidiary and variable interest entity prepared in accordance with the PRC accounting principles and relevant financial regulations. Each of the Company’s wholly owned subsidiary and variable interest entity in the PRC are required to allocate at least 10% of its net profit to the reserve fund until the balance of such fund has reached 50% of its registered capital. Appropriations of additional reserve fund are determined at the discretion of its directors. The reserve fund can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. For the years ended December 31, 2019 and 2018, IT Tech Packaging made transfers of $nil to this reserve fund. As a result of net loss in fiscal year 2019 and 2018 of Baoding Shengde, no statutory reserves were provided for the year ended December 31, 2019 and 2018. The Company’s variable interest entity Dongfang Paper, the statutory reserve account of which has been fully funded for 50% of its registered capital in the amount of RMB 75,030,000 (or approximately $11,811,470) since December 31, 2010, did not make any transfer to statutory reserves during the years ended December 31, 2019 and 2018. Employee Benefit Plan Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance and other welfare benefits are provided to employees. The total provision for such employee benefits was $nil for the years ended December 31, 2019 and 2018. Revenue Recognition The Company adopted ASC Topic 606, Revenue from Contracts with Customers , and all subsequent ASUs that modified ASC 606 on April 1, 2017 using the full retrospective method which requires the Company to present the financial statements for all periods as if Topic 606 had been applied to all prior periods. The company derives revenue principally from producing and sales of paper products. Revenue from contracts with customers is recognized using the following five steps: 1. Identify the contract(s) with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) the entity satisfies a performance obligation. A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct. The transaction price is the amount of consideration a company expects to be entitled from a customer in exchange for providing the goods or services. The unit of account for revenue recognition is a performance obligation (a good or service). A contract may contain one or more performance obligations. Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations are combined with other promised goods or services until the Company identifies a bundle of goods or services that is distinct. Promises in contracts which do not result in the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract. The Company has addressed whether various goods and services promised to the customer represent distinct performance obligations. The Company applied the guidance of ASC Topic 606-10-25-16 through 18 in order to verify which promises should be assessed for classification as distinct performance obligations. The Company’s revenue is primary derived from sales of paper products. The Company recognizes revenue when goods are delivered, when 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 customer’s truck picks up goods at our finished goods inventory warehouse. Shipping Cost Substantially all customers use their own trucks or hire commercial trucking companies to pick up goods from the Company. The Company usually incurs no shipping cost for delivery of goods to customers. For those rare situations where products are not shipped utilizing customer specified shipping services, the Company charges customers a shipping fee which is included in net revenues and was not material. Freight-in and handling costs incurred by the Company with respect to purchased goods are recorded as a component of inventory cost and charged to cost of sales when the inventory items are sold. F- 12 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Advertising The Company expenses all advertising and promotion costs as incurred. The Company incurred $nil of advertising and promotion costs for the years ended December 31, 2019 and 2018. Research and development costs Research and development costs are expensed as incurred and included in selling, general and administrative expenses. Research and development expenses incurred $74,825 and $30,194 for the years ended December 31, 2019 and 2018, respectively. Borrowing costs Borrowing costs attributable directly to the acquisition, construction or production of qualifying assets which require a substantial period of time to be ready for their intended use or sale, are capitalized as part of the cost of those assets. Income earned on temporary investments of specific borrowings pending their expenditure on those assets is deducted from borrowing costs capitalized. All other borrowing costs are recognized in interest expenses in the period in which they are incurred. Government subsidies A government subsidy is not recognized until there is reasonable assurance that: (a) the enterprise will comply with the conditions attached to the grant; and (b) the grant will be received. When the Company received the government subsidies but the conditions attached to the grants have not been fulfilled, such government subsidies are deferred and recorded under other payables and accrued expenses, and other long-term liability. The classification of short-term or long-term liabilities is depended on the management’s expectation of when the conditions attached to the grant can be fulfilled. For the years ended December 31, 2019 and 2018, the Company received government subsidies of $261,136 and $241,189, which are recognized as subsidy income in the consolidated statements of income in that fiscal year. Income Taxes The Company accounts for income taxes pursuant to ASC Topic 740, Income Taxes. Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Any tax paid by subsidiaries during the year is recorded. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. ASC Topic 740 also requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry-forwards. ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry-forwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain. The Company adopted ASC Topic 740-10-05, Income Tax , which provides guidance for recognizing and measuring uncertain tax positions, it prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. It also provides accounting guidance on derecognizing, classification and disclosure of these uncertain tax positions. The Company’s policy on classification of all interest and penalties related to unrecognized income tax positions, if any, is to present them as a component of income tax expense. Value Added Tax Both the PRC subsidiary and variable interest entity of the Company are subject to value added tax (“VAT”) imposed by the PRC government on its purchase and sales of goods. The output VAT is charged to customers who purchase goods from the Company and the input VAT is paid when the Company purchases goods from its vendors. VAT rate is 17% (before May 1, 2018), 16% (after May 1, 2018) and 13% (after April 1, 2019) in general, depending on the types of products purchased and sold. The input VAT can be offset against the output VAT. Debit balance of VAT payable represents a credit against future collection of output VAT instead of a receivable due from government. Comprehensive Income (Loss) The Company presents comprehensive income (loss) in accordance with ASC Topic 220, Comprehensive Income . ASC Topic 220 states that all items that are required to be recognized under accounting standards as components of comprehensive income (loss) be reported in the consolidated financial statements. The components of comprehensive income (loss) were the net income for the years and the foreign currency translation adjustments. F- 13 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings Per Share Basic earnings per share is computed by dividing the net income attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. 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. 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. 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 December 31, 2019 and 2018, the carrying value of the Company’s short term financial instruments, such as cash and bank balances, accounts receivable, accounts and notes payable, short-term bank loans and balance due to related parties, approximate at their fair values because of the short maturity of these instruments; while loans from credit union, loans from a related party and obligation under capital lease 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. The Company does not have any assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018. 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. F- 14 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) Restricted Cash Restricted cash of as of December 31, 2019 was nil. Restricted cash of $3,642,616 as of December 31, 2018 was presented for the cash deposited at the Bank of Cangzhou for purpose of securing the bank acceptance notes from these banks (see Note (9)). The restriction has been lifted upon the maturity of the notes payable on January 10, 2019. (4) Inventories Raw materials inventory includes mainly recycled paper and coal. Finished goods include mainly products of corrugating medium paper and offset printing paper. Inventories consisted of the following as of and December 31, 2019 and 2018: December 31, December 31, 2019 2018 Raw Materials Recycled paper board $ 40,032 $ 412,317 Recycled white scrap paper 10,541 611,861 Coal & gas 41,675 167,230 Base paper and other raw materials 293,935 164,295 386,183 1,355,703 Semi-finished Goods 83,266 - Finished Goods 1,212,849 1,567,813 Total inventory, gross 1,682,298 2,923,516 Inventory reserve (74,835 ) - Total inventory, net $ 1,607,463 $ 2,923,516 (5) Prepayments and other current assets Prepayments and other current assets consisted of the following as of December 31, 2019 and 2018: December 31, December 31, 2019 2018 Prepaid land lease $ 301,023 $ 437,114 Prepayment for purchase of materials 5,394,297 - Value-added tax recoverable 5,666,975 5,760,280 Others 250,946 43,905 $ 11,613,241 $ 6,241,299 F- 15 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Property, plant and equipment As of December 31, 2019 and 2018, property, plant and equipment consisted of the following: December 31, December 31, 2019 2018 Property, Plant, and Equipment: Land use rights $ 11,689,114 $ 11,881,571 Building and improvements 70,811,803 94,127,348 Machinery and equipment 152,954,020 159,651,736 Vehicles 587,806 597,484 Construction in progress 6,399,986 5,005,041 Totals 242,442,729 271,263,180 Less: accumulated depreciation and amortization (90,825,877 ) (103,433,464 ) Property, Plant and Equipment, net $ 151,616,852 $ 167,829,716 As of December 31, 2019 and December 31, 2018, land use rights represented two parcel of state-owned lands located in Xushui District of Hebei Province in China, with lease terms of 50 years expiring from 2061 to 2066. Construction in progress mainly represents payments for improvement of the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”). F- 16 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2019 and 2018, certain property, plant and equipment of Dongfang Paper with net values of $3,935,270 and $5,782,640, respectively, have been pledged pursuant to a long-term loan from credit union of Dongfang Paper. Land use right of Dongfang Paper with net values of $5,757,546 as of December 31, 2019 was pledged for the bank loan from Bank of Industrial & Commercial Bank of China. Land use right of Hebei Tengsheng with net value of $5,200,452 as of December 31, 2019 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 $8,056,930 as of December 31, 2019 was pledged for another long-term loan from credit union of Baoding Shengde. See ” Short-term bank loans ” under Note (7), Loans Payable, for details of the transaction and asset collaterals. Depreciation and amortization of property, plant and equipment was $15,304,039 and $14,290,919 for the years ended December 31, 2019 and 2018, respectively. Impairment loss was recorded for certain inactive production line in the amount of $nil and $3,894,461 for the years ended December 31, 2019 and 2018, respectively. (7) Loans Payable 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. F- 17 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. 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. December 31, December 31, 2019 2018 Rural Credit Union of Xushui District Loan 1 $ 1,232,763 $ 1,253,060 Rural Credit Union of Xushui District Loan 2 3,583,613 3,642,615 Rural Credit Union of Xushui District Loan 3 - 2,302,133 Rural Credit Union of Xushui District Loan 4 2,293,512 - Rural Credit Union of Xushui District Loan 5 1,863,479 - Total 8,973,367 7,197,808 Less: Current portion of long-term loans from credit union (1,605,459 ) (2,491,549 ) Long-term loans from credit union $ 7,367,908 $ 4,706,259 As of December 31, 2019, the Company’s long-term debt repayments for the next four years were as follows: Fiscal year Amount 2020 $ 1,605,459 2021 3,067,573 2022 1,576,790 2023 2,723,545 Total 8,973,367 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. F- 18 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 monthly 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. F- 19 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) 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 $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. 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. Sale of Headquarters Compound Real Properties to 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 $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 for another four years in total, with the same rental payment as original lease agreement. F- 20 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) Notes payable Notes payable was nil as of December 31, 2019. As of December 31, 2018, the Company had bank acceptance notes of $3,642,616 from the Bank of Cangzhou to one of its major suppliers for settling purchase of raw materials. The acceptance notes are used to essentially extend the payment of accounts payable and are issued under the banking facilities obtained from bank as well as the restricted bank deposit of $3,642,616 in the bank as mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at nil% per annum and 0.05% of notes amount as handling charge. The acceptance notes were due and paid off in January 2019. (10) Other payables and accrued liabilities Other payables and accrued liabilities consist of the following: December 31, December 31, 2019 2018 Accrued electricity $ 129,466 $ 186,780 Value-added tax payable 854,728 520,190 Accrued interest to a related party 607,453 617,454 Payable for purchase of equipment 3,936,047 8,788,924 Accrued commission to salesmen 17,162 62,247 Others 958,154 47,201 Totals $ 6,503,010 $ 10,222,796 (11) 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 (the “Offering”). Each share of common stock and accompanying warrant was sold at a price of $1.60. Issuance of common stock pursuant to the 2012 Incentive Stock Plan and 2015 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 (15), 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. Issuance of common stock to Weitian On October 15, 2018, the Company entered 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 Weitain 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 Weitain on August 13, 2019. Total fair value of the shares of common stock granted was calculated at $17,550 at $0.54 per share. F- 21 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) Earnings Per Share For the years ended December 31, 2019 and 2018, basic and diluted net income per share are calculated as follows: Year Ended December 31, 2019 2018 Basic income (loss) per share Net income (loss) for the year - numerator $ 2,221,182 $ (10,545,684 ) Weighted average common stock outstanding - denominator 22,034,905 21,618,305 Net income (loss) per share $ 0.10 $ (0.49 ) Diluted income (loss) per share Net income (loss) for the year - numerator $ 2,221,182 $ (10,545,684 ) Weighted average common stock outstanding - denominator 22,034,905 21,618,305 Effect of dilution - - Weighted average common stock outstanding - denominator 22,034,905 21,618,305 Diluted income (loss) per share $ 0.10 $ (0.49 ) (13) 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”), 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. F- 22 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 the years ended December 31, 2019 and 2018 were as follows: Year Ended December 31, 2019 2018 Provision for Income Taxes Current Tax Provision U.S. $ 14,747 $ 8,189 Current Tax Provision PRC 3,431,038 230,322 Deferred Tax Provision PRC (2,369,683 ) (2,089,439 ) Total Provision for (Deferred tax benefit)/ Income Taxes $ 1,076,102 $ (1,850,928 ) 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 and $6,710,939 for U.S. income tax purposes for the years ended December 31, 2018 and 2017, 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 December 31, 2019, 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 December 31, 2019, 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: December 31, 2019 2018 Deferred tax assets Depreciation and amortization of property, plant and equipment $ 9,277,009 $ 7,097,828 Impairment of property, plant and equipment 521,803 546,531 Miscellaneous 277,511 289,799 Net operating loss carryover of PRC company 408,730 342,933 Net operating loss carryover for U.S. income tax purposes - - Total deferred tax assets 10,485,053 8,277,091 Less: Valuation allowance - - Total deferred tax assets, net $ 10,485,053 $ 8,277,091 F- 23 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reconciles the statutory rates to the Company’s effective tax rate as of: Year ended December 31, 2019 2018 PRC Statutory rate 25.0 % 25.0 % Effect of the U.S. Transition Tax under the 2017 TCJA - - Effect of different tax jurisdiction - - Effect of expenses not deductible for PRC tax purposes 23.4 % 31.3 % (Over) Under-provision in previous year - - Change in valuation allowance - - Other - (38.7 )% Effective income tax rate 48.4 % 17.6 % During the years ended December 31, 2019 and 2018, the effective income tax rate was estimated by the Company to be 48.4% and 17.6%, 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 believes 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. 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 December 31, 2019 and 2018, 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 years ended December 31, 2019 and 2018, 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. F- 24 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) 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 ofIT 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 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 un-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 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. 2019 Incentive 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. (15) 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 $17,404 (RMB 120,000). 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 $ 145,037 (RMB 1,000,000), for a total term of up to five years. Future minimum lease payments are as follows: December 31, Amount 2020 100,819 2021 17,201 2022 17,201 2023 17,201 2024 17,201 Thereafter 120,409 Total operating lease payments $ 290,034 F- 25 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital commitment As of December 31, 2019, the Company has signed several contracts for improvement of Industrial Buildings. Total outstanding commitments under these contracts were $1,101,989 and $2,300,187 as of December 31, 2019 and 2018, respectively. The Company expected to pay off all the balances within 1 year. 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 RMB 320 million (approximately $45 million) and is payable by December 31, 2021. Guarantees and Indemnities The Company agreed with Baoding Huanrun Trading Co., a major supplier of raw materials, to guarantee certain obligations of this third party, and as of December 31, 2019 and 2018, the Company guaranteed its long-term loan from financial institutions amounting to $4,443,680 (RMB31,000,000) and $4,516,843 (RMB31,000,000), respectively, that matured at various times in 2018-2023. If Huanrun Trading Co., were to become insolvent, the Company could be materially adversely affected. (16) 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. 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 County, Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC. Summarized financial information for the two reportable segments is as follows: Year Ended December 31, 2019 Dongfang Hebei Baoding Not Attributable Elimination Enterprise-wide, Paper Tengsheng Shengde to Segments of Inter-segment consolidated Revenues $ 113,072,638 $ 4,541,099 $ 1,149 $ - $ - $ 117,614,886 Gross profit 15,722,266 (2,030,942 ) (11,806 ) - - 13,679,518 Depreciation and amortization 8,812,363 6,491,653 23 - - 15,304,039 Loss from impairment and disposal of property, plant and equipment - - - - - - Interest income 64,313 108 296 - - 64,717 Interest expense 758,177 - 168,191 - - 926,368 Income tax expense(benefit) 2,769,607 (1,632,012 ) (76,239 ) 14,747 - 1,076,103 Net income (loss) 8,302,244 (5,444,598 ) (157,607 ) (478,857 ) 2,221,182 Total Assets 73,347,811 99,747,236 17,031,392 71,991 - 190,198,430 Year Ended December 31, 2018 Dongfang Hebei Baoding Not Attributable Elimination Enterprise-wide, Paper Tengsheng Shengde to Segments of Inter-segment consolidated Revenues $ 86,733,136 $ - $ 13,622 $ - $ - $ 86,746,758 Gross profit (loss) 5,823,725 - (3,324 ) - - 5,820,401 Depreciation and amortization 13,557,960 - 732,959 - - 14,290,919 Loss from disposal of property, plant and equipment 9,881 - 3,894,461 - - 3,904,342 Interest income 36,234 - 398 - - 36,632 Interest expense 1,318,252 - 173,867 - - 1,492,119 Income tax expense(benefit) (1,623,468 ) - (235,649 ) 8,189 - (1,850,928 ) Net income (loss) (5,029,497 ) - (4,612,001 ) (904,186 ) - (10,545,684 ) Total assets 183,987,100 - 19,068,788 20,122 - 203,076,010 F- 26 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (17) Concentration and Major Customers and Suppliers For the years ended December 31, 2019 and 2018, the Company had no single customer contributed over 10% of total sales. For the year ended December 31, 2019, the Company had two major suppliers that accounted for 74% and 12% of total purchases by the Company. For the year ended December 31, 2018, the Company had two major suppliers that accounted for 82% and 7% of total purchases by the Company. (18) 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 December 31, 2018 and December 31, 2017. 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$71,672) 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 December 31, 2019 and 2018, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB38,779,345 (US$5,558,806) as of December 31, 2019. (19) Risks and Uncertainties IT Tech Packaging 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. (20) 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 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. F- 27 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (21) Subsequent Event None. (22) Summarized Quarterly Financial Data (Unaudited) Quarterly financial information for 2019 and 2018 is as follows: Quarter 2019 First Second Third Fourth Revenues $ 17,450,292 $ 33,619,948 $ 32,937,917 $ 33,606,729 Gross (loss) profit (192,466 ) 2,908,129 5,374,732 5,589,123 (Loss) income from operations (3,173,939 ) 531,667 3,349,306 3,190,765 Net (loss) income (2,722,595 ) 450,070 2,338,027 2,155,680 Net income per share Basic $ -0.13 $ 0.02 $ 0.11 $ 0.10 Diluted $ -0.13 $ 0.02 $ 0.11 $ 0.10 Quarter 2018 First Second Third Fourth Revenues $ 1,888,194 $ 33,149,190 $ 26,723,657 $ 24,985,717 Gross (loss) profit (695,308 ) 3,015,422 1,259,343 2,240,944 Loss from operations (4,519,478 ) (11,730 ) (1,570,353 ) (5,080,753 ) Net (loss) income (4,086,276 ) 109,994 (1,404,962 ) (5,164,440 ) Net income per share Basic $ -0.19 $ 0.005 $ -0.07 $ -0.24 Diluted $ -0.19 $ 0.005 $ -0.07 $ -0.24 F- 28 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (23) Condensed Financial Information of the Parent Company The condensed financial statements of IT Tech Packaging Inc. (“ITP”, the “parent company”) have been prepared in accordance with accounting principles generally accepted in the United States of America. Under the PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the parent company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital, capital surplus and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling $45,589,643 as of December 31, 2019 and 2018. The following represents condensed unconsolidated financial information of the parent company only: CONDENSED BALANCE SHEETS December 31, December 31, 2019 2018 ASSETS Current Assets Cash and cash equivalents $ 71,991 $ 2,723 Prepayments and other current assets - 17,400 Total current assets 71,991 20,123 Investment in subsidiaries 170,426,900 170,520,446 Total Assets $ 170,498,891 $ 170,540,569 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Inter-company payable $ 4,503,827 $ 3,990,654 Accrued payroll and employee benefit - - Accrued liabilities - - Income tax payable - - Total current liabilities 4,503,827 3,990,654 Total liabilities $ 4,503,827 $ 3,990,654 Total stockholders’ equity 165,995,064 166,549,915 Total Liabilities and Stockholders’ Equity $ 170,498,891 $ 170,540,569 F- 29 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2019 2018 Revenue - - Selling, general and administrative expenses $ 464,108 $ 895,995 Loss from Operations (464,108 ) (895,995 ) Equity in earnings of unconsolidated subsidiaries 2,700,039 (9,641,498 ) Other Income (Expense) 　- - Income before Income Taxes 2,235,931 (10,537,493 ) Provision for Income Taxes 　(14,747) (8,189 ) Net Income $ 2,221,184 $ (10,545,682 ) Other comprehensive income /(loss) (2,793,585 ) (8,732,751 ) Total Comprehensive Income (loss) $ (572,401 ) $ (19,278,433 ) CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 2019 2018 Net Cash (Used in) Provided by Operating Activities $ 6,730 $ (425,127 ) Net Cash Used in Investing Activities - - Net Cash Provided by Financing Activities 513,173 422,692 Net Increase (Decrease) in Cash and Cash Equivalents 69,268 (2,435 ) Cash and Cash Equivalents - Beginning of Year 2,723 5,158 Cash and Cash Equivalents - End of Year $ 71,991 $ 2,723 BASIS OF PRESENTATION The condensed financial information has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company has used equity method to account for its investments in the subsidiaries. F- 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On March 23, 2018, we dismissed our principal independent accountant, BDO China Shu Lun Pan Certified Public Accountants LLP (“BDO”) from its engagement with the Company, which dismissal was effective immediately. The decision to dismiss BDO as the Company’s principal independent accountant was approved by the Audit Committee of the Company on March 23, 2018. There were no disagreements between the Company and BDO on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, within the Company’s two most recent fiscal years ended December 31, 2017 and subsequently up to the date of dismissal which disagreements that, if not resolved to BDO’s satisfaction, would have caused BDO to make reference to the subject matter of the disagreement in connection with its report issued in connection with the audit of the Company’s financial statements. None of the reportable events described under Item 304(a)(1)(v)(A)-(D) of Regulation S-K occurred within the Company’s two most recent fiscal years ended December 31, 2018and subsequently up to the date of dismissal. BDO’s report on the Company’s financial statements for each of the fiscal years ended December 31, 2016 and 2015 contained a modification by BDO raising substantial doubt of the Company’s ability to continue as a going concern. This modification in BDO’s report for each of the fiscal year 2016 and 2015 financial statements was based on the Company’s working capital deficit. BDO’s reports did not contain any other adverse opinion or disclaimer of opinion and were not otherwise qualified or modified as to uncertainty, audit scope or accounting principles. The Company provided BDO with a copy of the Form 8-K including the disclosure above before its filing with the SEC, providing BDO with the opportunity to furnish the Company with a letter addressed to the SEC containing any new information, clarification of the Company’s expression of its views, or the respect in which BDO does not agree with the statements contained herein. A letter from BDO dated March 28, 2018 was attached such Form 8-K filed with the SEC on March 29, 2018. On March 26, 2018, we engaged WWC, P.C. Certified Accountants (“WWC”) to serve as our principal independent accountant, effective immediately.The decision to engage WWC as the Company’s principal independent accountant was approved by the Audit Committee of the Company on March 23, 2018. During the Company’s two most recent fiscal years, and any subsequent interim period prior to engaging WWC, the Company did not consult with WWC regarding (i) the application of accounting principles to a specific completed or proposed transaction, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements and no written or oral advice was provided by WWC that was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement or event as set forth in Item 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K.