IT TECH PACKAGING, INC. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information IT Tech Packaging’s common stock is traded on the NYSE AMERICAN exchange under the symbol “ITP”. Holders As of March 23, 2021, we had approximately 3,100 shareholders of record of our common stock. Dividends On November 21, 2013, the Company declared another quarterly dividend of $0.005 per share to shareholders of record as of November 29, 2013. The dividend was paid on December 10, 2013. Total dividends declared and paid for the year ended December 31, 2013 were $323,032. We do not expect to pay dividends in the near future. Future declaration of dividends will depend on, among other things, the Company’s results of operations, capital requirements, financial condition and on such other factors as the Company’s Board of Directors may in its discretion consider relevant and in the best long term interest of the shareholders. Equity Compensation Plan Information On August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan (the “2015 ISP”). Under the 2015 ISP, the Company may grant an aggregate of 1,500,000 shares of the Company’s common stock to the directors, officers, employees and/or consultants of the Company and its subsidiaries. The 2015 ISP provides for the granting of non-qualified stock options, incentive stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, performance unit awards, unrestricted stock awards, distribution equivalent rights or any combination of the foregoing. The 2015 ISP is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the 2015 ISP, the Compensation Committee has the sole authority, in its discretion, to make all determinations under the plan, including but not limited to (i) determining which employees, directors or consultants shall receive an award, (ii) the time or times when an award shall be made, (iii) what type of award shall be granted, (iv) the term of an award, (v) the date or dates on which an award vests, (vi) the form of any payment to be made pursuant to an award, (vii) the terms and conditions of an award, (viii) the restrictions under a restricted stock award, (ix) the number of shares which may be issued under an award, (x) performance goals applicable to any award and certification of the achievement of such goals, and (xi) the waiver of any restrictions or performance goals, subject in all cases to compliance with applicable laws. On January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans to nine officers, directors and employees of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416 shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus Equity Incentive. On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance at $0.88 per share. On August 14, 2019, the Company’s Annual General Meeting approved the 2019 Incentive Stock Plan (the “2019 ISP”). Under the 2019 ISP, the Company may grant an aggregate of 2,000,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2019 ISP’s administration. All shares of common stock under the 2015 and 2019 ISPs, including shares originally authorized by equity holders and shares remaining for future issuance as of December 31, 2020, have been issued. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. 29 Item 6. Selected Financial Data The selected financial data set forth below is derived from the consolidated financial statements of the Company. The selected consolidated statements of income and comprehensive income 2020 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statements of income and comprehensive income data for the year ended December 31, 2016, 2017, 2018 and 2019 and the selected consolidated balance sheet data as of December 31, 2016, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements not included in this annual report. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and notes thereto and the other information contained in this Form 10-K. The financial information has been prepared in accordance with U.S. GAAP. All financial information referred to herein is expressed in U.S. dollars unless otherwise noted. Year Ended December 31, 2020 2019 2018 2017 2016 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME DATA (in thousands, except per share data) Revenues $ 100,943 $ 117,615 $ 86,747 $ 117,024 $ 134,745 Gross profit $ 5,702 $ 13,680 $ 5,820 $ 19,956 $ 25,532 Selling, general and administrative expenses $ 11,158 $ 9,782 $ 13,098 $ 11,307 $ 12,402 Loss from impairment and disposal of property, plant and equipment $ - $ - $ (3,904 ) $ (3,968 ) $ (178 ) (Loss) income from operations $ (5,456 ) $ 3,898 $ (11,182 ) $ 4,680 $ 12,952 Depreciation $ 15,794 $ 15,304 $ 14,291 $ 14,634 $ 15,288 Interest expense $ 1,027 $ 926 $ 1,492 $ 2,434 $ 2,621 Net (Loss) Income $ (5,554 ) $ 2,221 $ (10,546 ) $ 1,660 $ 7,313 Basic and Diluted (Losses) Earnings per Share $ (0.21 ) $ 0.10 $ (0.49 ) $ 0.16 $ 0.34 CONSOLIDATED BALANCE SHEETS DATA Cash and bank balances $ 4,142 $ 5,838 $ 8,475 $ 2,896 $ 2,333 Accounts receivable, net $ 2,389 $ 3,119 $ 2,877 $ 1,844 $ 3,894 Inventories $ 1,234 $ 1,607 $ 2,924 $ 8,474 $ 5,632 Property, plant, and equipment, net $ 145,143 $ 151,617 $ 167,830 $ 189,389 $ 187,690 Total assets $ 199,874 $ 190,198 $ 203,076 $ 218,989 $ 208,378 Total liabilities $ 24,794 $ 24,203 $ 36,526 $ 33,664 $ 35,622 Total stockholders’ equity $ 175,080 $ 165,995 $ 166,550 $ 185,325 $ 172,755 30 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data, the financial statements, and the notes to those statements that are included elsewhere in this annual report. Results of Operations Revenue for the year ended December 31, 2020 was $100,943,269, a decrease of $16,671,617, or 14.17%, from $117,614,886 for the previous year. This was mainly due to the decrease in sales volume of corrugating medium paper(“CMP”) and offset printing paper and decrease in average selling prices (“ASP”) of CMP, offset printing paper and tissue paper products, partially offset by the revenue generated from face masks in year 2020. Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products Revenue from sales of offset printing paper, CMP and tissue paper products for the year ended December 31, 2020 was $99,841,325, a decrease of $17,772,411, or 15.11%, from $117,613,736 for the year ended December 31, 2019. This was mainly due to the decrease in sales volume of CMP and offset printing paper and the decrease in ASP of CMP, offset printing paper and tissue paper products. Total quantities of offset printing paper, CMP and tissue paper products sold during the year ended December 31, 2020 amounted to 227,331 tonnes, a decrease of 22,813 tonnes, or 9.12%, compared to 250,144 tonnes sold during the year ended December 31, 2019. Total quantities of CMP and offset printing paper sold decreased by 26,111 tonnes in the year of 2020 as compared to 2019. We sold 10,088 tonnes of tissue paper products in the year of 2020 as opposed to 6,790 tonnes in 2019. CMP production was suspended in mid-January to early March 2020 due to Chinese New Year and COVID-19 outbreak. We resumed full capacity of CMP production in May 2020. The production of offset printing paper was suspended during January to May 2020 and resumed in June 2020. The changes in revenue and quantity sold for the year ended December 31, 2020 and 2019 are summarized as follows: Year Ended Year Ended Percentage December 31, 2020 December 31, 2019 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 154,084 $ 62,324,519 168,837 $ 72,050,122 (14,753 ) $ (9,725,603 ) -8.74 % -13.50 % Light-Weight CMP 42,801 $ 16,836,407 45,310 $ 18,776,316 (2,509) $ (1,939,909 ) -5.54 % -10.33 % Total CMP 196,885 $ 79,160,926 214,147 $ 90,826,438 (17,262 ) $ (11,665,512 ) -8.06 % -12.84 % Offset Printing Paper 20,358 $ 12,265,746 29,207 $ 20,436,130 (8,849 ) $ (8,170,384 ) -30.30 % -39.98 % Tissue Paper Products 10,088 $ 8,414,653 6,790 6,351,168 3,298 $ 2,063,485 48.57 % 32.49 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 227,331 $ 99,841,325 250,144 $ 117,613,736 (22,813) $ (17,772,411 ) -9.12 % -15.11 % 31 Monthly revenue (excluding revenue of digital photo paper and tissue paper products) for the 24 months ended December 31, 2020, are summarized below: The average selling price, or ASP, for our major products for the years ended December 31, 2020 and 2019 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light-Weight CMP ASP Tissue Paper Products ASP Year Ended December 31, 2019 $ 700 $ 427 $ 414 $ 935 Year Ended December 31, 2020 $ 603 $ 404 $ 393 $ 834 Decrease from comparable period in the previous year $ -97 $ -23 $ -21 $ -101 Decrease by percentage -13.86 % -5.39 % -5.07 % -10.80 % The following is a chart showing the month-by-month ASPs (excluding the ASPs of digital photo paper and tissue paper products) for the 24 month period ended December 31, 2020: 32 Corrugating Medium Paper Revenue from CMP amounted to $79,160,926 (79.29% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2020, representing a decrease of $11,665,512, or 12.84%, from $90,826,438 during 2019. We sold 196,885 tonnes of CMP in the year ended December 31, 2020 as compared to 214,147 tonnes in the year ended December 31, 2019, representing a 8.06% decrease in quantity sold. ASP for regular CMP dropped from $427/tonne in 2019 to $404/tonne in 2020, representing a 5.39% decrease. ASP in RMB for regular CMP in 2019 and 2020 was RMB2,942 and RMB2,789, respectively, representing a 5.20% decrease. The quantity of regular CMP sold decreased by 14,753 tonnes, from 168,837 tonnes in 2019 to 154,084 tonnes in 2020. ASP for light-weight CMP dropped from $414/tonne in 2019 to $393/tonne in 2020, representing a $5.07% decrease. ASP in RMB for light-weight CMP in 2019 and 2020 was RMB2,857 and RMB2,712, respectively, representing a 5.08% decrease. The quantity of light-weight CMP sold decreased by 2,509 tonnes, from 45,310 tonnes in 2019, to 42,801 tonnes in 2020. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December 31, 2020 and 2019 were 42.56% and 46.68%, respectively, representing a decrease of 4.12%. Quantities sold for regular CMP that was produced by the PM6 production line from January 2019 to December 2020 are as follows: Offset Printing Paper Revenue from offset printing paper was $12,265,746 (12.29% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2020, representing a decrease of $8,170,384, or 39.98%, from $20,436,130 in 2019. We sold 20,358 tonnes of offset printing paper in the year ended December 31, 2020, compared to 29,207 tonnes in 2019, a decrease of 8,849 tonnes, or 30.30%. ASPs for offset printing paper in the year ended December 31, 2019 and 2020 was $700/tonne and $603/tonne, respectively, representing a 13.86% decrease. ASP in RMB for offset printing paper for the year ended December 31, 2019 and 2020 was RMB4,824 and RMB4,154, respectively, representing a 13.89% decrease. 33 Tissue Paper Products We produce tissue paper products, including toilet paper, boxed and soft-packed tissues, handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the brand “Qingmu”. In December 2018 and November 2019, we completed the construction, installation and test of operation of our PM8 and PM9 production lines. We launched the complete line of processing base tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue paper products with designated capacity of 15,000 tonnes/year. Revenue from tissue paper products was $8,414,653 (8.43% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2020, representing an increase of $2,063,485, or 32.49%, from $6,351,168 in 2019. We sold 10,088 tonnes of tissue paper products (including 305 tonnes of tissue base paper) in the year ended December 31, 2020, as compared to 6,790 tonnes in 2019, an increase of 3,298 tonnes, or 48.57%. Except for the production suspension in the first quarter of 2020, the production and sales of tissue paper products have been growing up steadily since the launch of PM8 and PM9 in December 2018 and November 2019. Revenue of Face Mask On April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials preparation, trial run of the equipment and the sample products inspection. Revenue generated from selling face masks were $1,101,944 for the year ended December 31, 2020. We sold 10,301 thousand pieces of face masks in year of 2020. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products in the year ended December 31, 2020 was $94,669,389, a decrease of $9,253,025, or 8.90%, from $103,922,414 for the year ended December 31, 2019. This was mainly a result of the decrease in sales volume of CMP and offset printing paper, partially offset by the increase in sales volume of tissue paper products. Cost of sales for CMP was $74,279,241 for the year ended December 31, 2020, as compared to $81,511,234 in 2019. The decrease in the cost of sales of $7,231,993 for CMP was mainly due to the decrease in the quantities of CMP sold, partially offset by the increase in cost of recycled paper board in the year of 2020. Average cost of sales per tonne for CMP decreased by 1.05%, from $381 for the year ended December 31, 2019, to $377 in 2020. The slight decrease was mainly attributable to lower unit cost of manufacturing overhead (e.g. wages, repair and maintenance etc.) due to suspension of production in February 2020, partially offset by higher average unit purchase costs (net of applicable value added tax) of recycled paper board. Cost of sales for offset printing paper was $10,147,280 for the year ended December 31, 2020, as compared to $14,061,771 in 2019. Average cost of sales per tonne of offset printing paper increased by 3.53%, from $481 for the year ended December 31, 2019, to $498 in 2020. The increase was mainly attributable to higher average unit purchase costs (net of applicable value added tax) of recycled white scrap paper. Cost of sales for tissue paper products was $10,242,868 for the year ended December 31, 2020, as compared to $8,349,409 in 2019. Average cost of sales per tonne of tissue paper products decreased by 17.48%, from $1,230 for the year ended December 31, 2019, to $1,015 for 2020. Changes in cost of sales and cost per tonne by product for the year ended December 31, 2020 and 2019 are summarized below: Year Ended Year Ended December 31, 2020 December 31, 2019 Change in Change in percentage 　 Cost of Sales Cost per Tonne Cost of Sales Cost per tonne Cost of Sales Cost per Tonne Cost of Sales Cost per Tone Regular CMP $ 58,947,059 $ 383 $ 64,636,452 $ 383 $ (5,689,393 ) $ - -8.80 % 0.00 % Light-Weight CMP $ 15,332,182 $ 358 $ 16,874,783 $ 372 $ (1,542,600 ) $ (14 ) -9.14 % -3.76 % Total CMP $ 74,279,241 $ 377 $ 81,511,234 $ 381 $ (7,231,993 ) $ (4 ) -8.87 % -1.05 % Offset Printing Paper $ 10,147,280 $ 498 $ 14,061,771 $ 481 $ (3,914,491 ) $ 17 -27.84 % 3.53 % Tissue Paper Products $ 10,242,868 $ 1,015 $ 8,349,409 $ 1,230 $ 1,893,459 $ (215 ) 22.68 % -17.48 % Total CMP, Offset Printing Paper and Tissue Paper Revenue $ 94,669,389 $ n/a $ 103,922,414 $ n/a $ (9,253,025 ) $ n/a -8.90 % n/a % Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31, 2020 were RMB 1,582/tonne (approximately $229/tonne) and RMB 2,086/tonne (approximately $303/tonne), respectively, as compared to RMB 1,536/tonne (approximately $223/tonne) and RMB 1,855/tonne (approximately 269/tonne) for the year ended December 31, 2019, respectively. These changes (in US dollars) represent a year-over-year increase of 2.69% for the unit purchase cost of recycled paper board and a year-over-year increase of 12.64% for the unit purchase cost of recycled white scrap paper. We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled paper. 34 The pricing trends of our major raw materials for the 24-month period from January 2019 to December 2020 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 5% and 10.5% of total sales in 2020, respectively, compared to 6% and 10.3% of total sales 2019. The monthly energy cost (electricity, coal and gas) as a percentage of total monthly sales of our main paper products for the 24 months ended December 31, 2020 are summarized as follows: Gross Profit Gross profit for December 31, 2020 was $5,701,985 (5.65% of the total revenue), representing a decrease of $7,977,533, or 58.32%, from the gross profit of $13,679,518 (11.63% of the total revenue) for the year ended December 31, 2019. The decrease was mainly due to (i) the decrease in quantities sold of CMP and offset printing paper and (ii) the decrease of ASP of CMP, offset printing paper and tissue paper products, partially offset by the increase in sales quantities of tissue paper products. 35 Corrugating Medium Paper, Offset Printing Paper and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the year ended December 31, 2020 was $5,171,937, a decrease of $8,519,386, or 62.22%, from the gross profit of $13,691,322 for the year ended December 31, 2019. The decrease was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 6.46 percentage points, from 11.64% for the year ended December 31, 2019, to 5.18% for the year ended December 31, 2020. Gross profit margin for regular CMP for the year ended December 31, 2020 was 5. 42%, or 4.87 percentage points lower, as compared to gross profit margin of 10.29% for the year ended December 31, 2019. Such decrease was primarily due to decrease in ASP of regular CMP, partially offset by the decrease in unit cost of sales. Gross profit margin for light-weight CMP for the year ended December 31, 2020 was 8.93%, or 1.20 percentage points lower, as compared to gross profit margin of 10.13% for the year ended December 31, 2019. Gross profit margin for offset printing paper was 17.27% for the year ended December 31, 2020, a decrease of 13.92 percentage points, as compared to 31.19% for the year ended December 31, 2019. Such increase was mainly due to the increase of purchase price of recycled white scrap paper and the decrease in ASP of offset printing paper. Gross profit margin for tissue paper products was -21.73% for the year ended December 31, 2020, an increase of 9.73 percentage points, as compared to -31.46% for the year ended December 31, 2019. The increase was mainly due to the decrease in cost of tissue base paper. Monthly gross profit margins for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2020 are as follows: Face Masks Gross profit for face masks for the year ended December 31, 2020 was $530,049, representing a gross margin of 48.10%. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2020 were $11,157,789, an increase of $1,376,070, or 14.07% from $9,781,719 for the year ended December 31, 2019. The increase was mainly attributed to issuance of 2,000,000 shares of common stock valued at $1,200,000 to officers and directors. Income (Loss) from Operations Operating loss for the year ended December 31, 2020 was $5,455,804, a decrease of $9,353,603, or 239.97%, from income from operations of $3,897,799 for the year ended December 31, 2019. The decrease was primarily due to the decrease in gross profit and increase in selling, general and administrative expenses. 36 Other Income and Expenses Interest expense for the year ended December 31, 2020 increased by $100,144, from $926,368 for the year ended December 31, 2019, to $1,026,512. The Company had short-term and long-term interest-bearing loans and lease obligation that aggregated $16,566,324 as of December 31, 2020, as compared to $15,137,181 as of December 31, 2019. Net Income (Loss) As a result of the above, net loss was $5,554,002 for the year ended December 31, 2020, representing a decrease of $7,775,184, or 350.05%, from net income of $2,221,182 for year ended December 31, 2019. Accounts Receivable Net accounts receivable decreased by $730,254, or 23.41%, to $2,389,057 as of December 31, 2020, as compared with $3,119,311 as of December 31, 2019. We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories Inventories consist of raw materials (accounting for 21.69% of total value of inventory as of December 31, 2020), semi-finished goods and finished goods. As of December 31, 2020, the recorded value of inventory decreased by 23.25% to $1,233,801 from $1,607,463 as of December 31, 2019. Due to the uncertainty of market and economy situation during the pandemic, a minimum level of inventory was maintained at the end of 2020. A summary of changes in major inventory items is as follows: December 31, December 31, 2020 2019 $ Change % Change Raw Materials Recycled paper board $ 19,459 $ 40,032 -20,573 -51.39 % Recycled white scrap paper 11,193 10,541 652 6.19 % Tissue base paper 14,027 122,648 -108,621 -88.56 % Gas 55,473 41,675 13,798 33.11 % Mask fabric and other raw materials 167,399 171,287 -3,888 -2.27 % Total Raw Materials 267,551 386,183 -118,632 -30.72 % Semi-finished Goods 176,703 83,266 93,437 112.22 % Finished Goods 789,547 1,212,849 -423,302 -34.90 % Total inventory, gross 1,233,801 1,682,298 -448,497 -26.66 % Inventory reserve - (74,835 ) 74,835 -100.00 % Total inventory, net $ 1,233,801 $ 1,607,463 (373,662 ) -23.25 % Accounts Payable Accounts payable was $592,391 as of December 31, 2020, an increase of 341,905, or 136.50%, from $250,486 as of December 31, 2019. Liquidity and Capital resources As of December 31, 2020 the we had current assets of $14,909,605 and current liabilities of $18,340,074 (including amounts due to related parties of $727,433 and interest payable for related party loans of $649,468), resulting in a working capital deficit of approximately $3,430,469; as of December 31, 2019, the Company had current assets of $24,041,239 and current liabilities of $16,835,460 (including amounts due to related parties of $1,147,438), resulting in a working capital of approximately $7,205,779. The deficit as of December 31, 2020 was mainly attributed to the payments for acquisition of Hebei Tengsheng. On June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng, to buy up 100% shares of Hebei Tengsheng with a purchase price of RMB 320 million (approximately $49 million). As of December 31, 2020, RMB 128 million (approximately $20 million) has been paid and recorded as ‘Prepayment on property, plant and equipment’ in the consolidated balance sheet. 37 Renewal of operating lease On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $145,052 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $nil and $56,552 which was recorded as part of the current liabilities as of December 31, 2020 and December 31, 2019, respectively. Capital Expenditure Commitment as of December 31, 2019 On May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company signed an agreement to purchase paper machine with paper machine supplier. The Company expected the new tissue paper production line to be launched after the completion of trial run. As of December 31, 2020, we had approximately $4.6 million in capital expenditure commitments that were mainly related to the purchase of paper machine of PM10. These commitments are expected to be financed by bank loans and cash flows generated from our business operations. Financing with Sale-Leaseback The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $15) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of $2,349,452 was recorded as right-of-use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020. Hebei Tengsheng made payments due according to the schedule. As of December 31, 2020, the balance of Leased Equipment net of amortization was $2,397,653. The lease liability were $536,959 and its current portion in the amount of $182,852 as of December 31, 2020. Amortization of the Leased Equipment was $51,574 for the year ended December 31, 2020. Total interest expenses for the sale lease back arrangement was $28,083 for the year ended December 31, 2020. As a result of the sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to amortization of the Leased Equipment. 38 Cash, Cash Equivalents and restricted cash Our cash, cash equivalents and restricted cash as of December 31, 2020 was $4,142,437, a decrease of $1,695,308, from $5,837,745 as of December 31, 2019. The decrease of cash and cash equivalents for the year ended December 31, 2020 was attributable to a number of factors: i. Net cash provided by operating activities Net cash provided by operating activities was $16,143,527 for the year ended December 31, 2020. The balance represented an increase of cash of $8,613,053, or 114.38%, from $7,530,474 provided for the year ended December 31, 2019. Net loss for the year ended December 31, 2020 was $5,554,002, representing a decrease of $7,775,184, or 350.05%, from a net income of $2,221,182 for the year ended December 31, 2019. Changes in various asset and liability account balances throughout the year ended December 31, 2020 also contributed to the net change in cash from operating activities in year ended December 31, 2020. Chief among such changes is the decrease of accounts receivable in the amount of $923,429 during the year of 2020 (an increase to net cash for the year ended December 31, 2020 cash flow purposes). There was also a decrease of $458,878 in the ending inventory balance as of December 31, 2020 (an increase to net cash). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $15,793,854. The Company also had a net decrease of $5,301,953 in prepayment and other current assets (an increase to net cash) and a net decrease of $796,595 in other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable of $1,153,191 (a decrease to net cash) during the year ended December 31, 2020. ii. Net cash used in investing activities We incurred $20,526,004 in net cash expenditures for investing activities during the year ended December 31, 2020, as compared to $7,866,849 for the year ended December 31, 2019. Expenditures in the year ended December 31, 2020 were mainly for the prepayment of acquisition of Hebei Tengsheng assets and expenditures on improvement of industrial building. iii. Net cash provided in financing activities Net cash provided by financing activities was proceeds from issuance of shares and warrants and repayment of lease liability of $2,054,855 for the year ended December 31, 2020, as compared to net cash used in financing activities in the amount of $5,772,467 for the year ended December 31, 2019. Short-term bank loans December 31, December 31, 2020 2019 Industrial and Commercial Bank of China (“ICBC”) Loan 1 $ - $ 6,163,814 Industrial and Commercial Bank of China (“ICBC”) Loan 2 6,435,348 - Total short-term bank loans $ 6,435,348 $ 6,163,814 (a) 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 the Land use right of Dongfang Paper as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan was repaid on December 14, 2020. (b) On December 11, 2020, the Company entered into a working capital loan agreement with the ICBC, with a balance of $6,435,348 as of December 31, 2020. The working capital loan was secured by the Land use right of Dongfang Paper as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by December 7, 2021. As of December 31, 2020, there were guaranteed short-term borrowings of $6,435,348 and unsecured bank loans of $nil. As of December 31, 2019, there were guaranteed short-term borrowings of $6,163,814 and unsecured bank loans of $nil. The average short-term borrowing rates for the years ended December 31, 2020, and 2019 were approximately 4.79% and 4.93%, respectively. 39 Long-term loans from credit union As of December 31, 2020, and 2019, loans payable to Rural Credit Union of Xushui County, amounted to $9,594,017 and $8,973,367, respectively. On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of December 31, 2020, and 2019, total outstanding loan balance was $1,318,028 and $1,232,763, respectively, Out of the total outstanding loan balance, current portion amounted were $214,563 and $143,345 as of December 31, 2020, and 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,103,465 and $1,089,418 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2020, and 2019, respectively. On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $2,349,796 and $3,935,270 as of December 31, 2020, and 2019, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of December 31, 2020, and 2019, the total outstanding loan balance was $3,831,476 and $3,583,613, respectively. Out of the total outstanding loan balance, current portion amounted were $337,169 and $172,013 as of December 31, 2020, and 2019 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $3,494,307 and $3,411,600 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2020, and 2019, 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 credit union. Interest payment is due quarterly and bears a fixed rate of 0.6% per month. As of December 31, 2020 and 2019, the total outstanding loan balance was $2,452,145 and $2,293,512, respectively. Out of the total outstanding loan balance, current portion amounted were $2,452,145 and $1,146,756 as of December 31, 2020 and 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,146,756 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2020 and 2019, respectively. On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan is secured by Hebei Tengsheng with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bears a fixed rate of 7.56% per annum. As of December 31, 2020, and 2019, the total outstanding loan balance was $1,992,368 and $1,863,479, respectively. Out of the total outstanding loan balance, current portion amounted were $1,992,368 and $143,345 as of December 31, 2020, and 2019, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,720,134 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2020, and 2019, respectively. Total interest expenses for the short-term bank loans and long-term loans for the years ended December 31, 2020, and 2019 were $695,287 and $831,732, respectively. Shareholder Loans Mr Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $392,855 and $367,441 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, 2020, and 2019, respectively. 40 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, 2020, and 2019, approximately $45,978 and $43,003 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, 2020, and 2019, the outstanding interest was $210,635 and $197,009, 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, 2020, and 2019, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil and $94,636 for the years ended December 31, 2020, and 2019, respectively. The accrued interest owe to the CEO was approximately $649,468 and $607,453, as of December 31, 2020, and 2019, respectively, which was recorded in other payables and accrued liabilities. As of December 31, 2020, and 2019, amount due to shareholder are $727,433 and $483,433, respectively, which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free. Critical Accounting Policies and Estimates The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates. The most critical accounting policies are listed below: Revenue Recognition Policy The Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered when the customer’s truck picks up goods at our finished goods inventory warehouse. Long-Lived Assets The Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry. For the years ended December 31, 2020 and 2019, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record such impairment in the future. 41 Foreign Currency Translation The functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of December 31, 2020 and 2019 to translate the Chinese RMB to the U.S. Dollars are 6.5249:1 and 6.9762:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.8941:1, and 6.8948:1 for the years ended December 31, 2020 and 2019, respectively. Translation adjustments are included in other comprehensive income (loss). Off-Balance Sheet Arrangements We were the guarantor for Baoding Huanrun Trading Co., for its long-term bank loans in an amount of $4,751,031 (RMB31,000,000), which matures at various times in 2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the CECL standards. The ASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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.