IT TECH PACKAGING, INC. 10-K/A

Item 8. Financial Statements and Supplementary Data Our audited financial statement for the fiscal year ended December 31, 2020 and 2019, together with the report of the independent certified public accounting firms thereon and the notes thereto, are presented beginning at page F-1. 42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To: The Board of Directors and Stockholders of IT Tech Packaging, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of IT Tech Packaging, Inc. (the Company) as of December 31, 2020, and 2019, and the related consolidated statements of income (loss) and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, 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, 2020, and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) related to the accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in anyway our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. The critical audit matter related to the Company’s property, plant and equipment. The principal considerations in determining that this was a critical audit matter was that the Company had a substantial amount of property, plant, and equipment, and the carrying value of such assets are subject to estimation, which involves judgment. The plant and equipment may be placed into service at varying times, and their ability to contribute to the generation of cash flows is impacted by multiple factors. The audit engagement team addressed this critical accounting matter by reviewing the Company’s accounting policies, and perform extended procedures including physical inspection, corroborated with enquiry, examination of contracts, and independent analysis via recalculation of depreciation and impairment testing. The engagement team’s testing provided adequate evidence to support our audit opinion and to mitigate the risk of material misstatement to an acceptable level. The accounts that are affected by this critical audit matter is property plant and equipment, and the related depreciation that is allocated into cost of sales, and impairment expense, if any. /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, 2021, except for Note 12, as to which the date is April 19, 2021. F- 1 IT TECH PACKAGING, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2019 December 31, December 31, 2020 2019 ASSETS Current Assets Cash and bank balances $ 4,142,437 $ 5,837,745 Restricted cash - - Accounts receivable (net of allowance for doubtful accounts of $34,391 and $59,922 as of December 31, 2020 and December 2019, respectively) 2,389,057 3,119,311 Inventories 1,233,801 1,607,463 Prepayments and other current assets 7,051,515 11,613,241 Due from related parties 92,795 1,863,479 Total current assets 14,909,605 24,041,239 Prepayment on property, plant and equipment 21,149,749 1,433,445 Finance lease right-of-use assets, net 2,397,653 - Property, plant, and equipment, net 145,142,642 151,616,852 Value-added tax recoverable 2,566,195 2,621,841 Deferred tax asset non-current 13,708,630 10,485,053 Total Assets $ $199,874,474 $ 190,198,430 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term bank loans $ 6,435,348 $ 6,163,814 Current portion of long-term loans from credit union 4,996,245 1,605,459 Lease liability 182,852 - Accounts payable 592,391 250,486 Advance from customers 82,625 98,311 Due to related parties 727,433 539,985 Accrued payroll and employee benefits 224,930 291,924 Other payables and accrued liabilities 4,838,601 6,503,010 Income taxes payable 259,649 1,382,471 Total current liabilities 18,340,074 16,835,460 Loans from credit union 4,597,772 7,367,908 Deferred gain on sale-leaseback 387,087 - Lease liability - non-current 354,107 - Derivative liability 1,115,260 - Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $17,950,224 and $19,558,568 as of December 31, 2020 and 2019, respectively) 24,794,300 24,203,368 Commitments and Contingencies Stockholders' Equity Common stock, 500,000,000 shares authorized, $0.001 par value per share, 28,535,816 and 22,054,816 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 28,536 22,055 Additional paid-in capital 53,989,548 51,155,174 Statutory earnings reserve 6,080,574 6,080,574 Accumulated other comprehensive income (loss) 5,740,722 (6,057,537 ) Retained earnings 109,240,794 114,794,796 Total stockholders' equity 175,080,174 165,995,062 Total Liabilities and Stockholders' Equity $ 199,874,474 $ 190,198,430 See accompanying notes to consolidated financial statements. F- 2 IT TECH PACKAGING, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Year Ended December 31, 2020 2019 Revenues $ 100,943,269 $ 117,614,886 Cost of sales (95,241,284 ) (103,935,368 ) Gross Profit 5,701,985 13,679,518 Selling, general and administrative expenses (11,157,789 ) (9,781,719 ) (Loss) Income from Operations (5,455,804 ) 3,897,799 Other Income (Expense): Interest income 32,033 64,717 Subsidy income 220,478 261,136 Interest expense (1,026,512 ) (926,368 ) Loss on change in derivative liability (426,055 ) - (Loss) Income before Income Taxes (6,655,860 ) 3,297,284 Tax Benefit (Provision for Income Taxes) 1,101,858 (1,076,102 ) Net (Loss) Income (5,554,002 ) 2,221,182 Other Comprehensive Income (Loss) Foreign currency translation adjustment 11,798,259 (2,793,585 ) Total Comprehensive Income (Loss) $ 6,244,257 $ (572,403 ) (Loss) Earnings Per Share: Basic and Diluted (Loss) Earnings per Share $ (0.21 ) $ 0.10 Outstanding – Basic and Diluted 26,498,298 22,034,905 F- 3 IT TECH PACKAGING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Accumulated Additional Statutory Other Common Stock Paid-in Earnings Comprehensive Retained Shares Amount Capital Reserve Income (loss) Earnings Total Balance at December 31, 2018 22,022,316 $ 22,022 $ 51,137,657 $ 6,080,574 $ (3,263,952 ) $ 112,573,614 $ 166,549,915 Issuance of shares to Weitian 32,500 33 17,517 17,550 Foreign currency translation adjustment (2,793,585 ) (2,793,585 ) Net income 2,221,182 2,221,182 Balance at December 31, 2019 22,054,816 $ 22,055 $ 51,155,174 $ 6,080,574 $ (6,057,537 ) $ 114,794,796 $ 165,995,062 Issuance of shares to officer and directors 2,000,000 2,000 1,198,000 1,200,000 Issuance of shares 4,400,000 4,400 1,579,755 1,584,155 Issuance of shares to a consultant 60,000 60 41,940 42,000 Issuance of shares to a consultant 21,000 21 14,679 14,700 Foreign currency translation adjustment 11,798,259 11,798,259 Net income (5,554,002 ) (5,554,002 ) Balance at December 31, 2020 28,535,816 $ 28,536 $ 53,989,548 $ 6,080,574 $ 5,740,722 $ 109,240,794 $ 175,080,174 See accompanying notes to consolidated financial statements. F- 4 IT TECH PACKAGING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Year Ended December 31, 2020 2019 Cash Flows from Operating Activities: Net income $ (5,554,002 ) $ 2,221,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,793,854 15,304,039 Loss on derivative liability 426,055 - Allowances for obsolete inventories, net - 75,719 (Recovery from) Allowance for bad debts (28,087 ) 2,192 Share-based compensation and expenses 1,256,700 - Gain on acquisition of a subsidiary - - Deferred tax (2,364,575 ) (2,369,683 ) Changes in operating assets and liabilities: Accounts receivable 923,429 (294,882 ) Prepayments and other current assets 5,301,953 (5,392,916 ) Inventories 458,878 1,207,958 Accounts payable 307,198 (372,728 ) Advance from customers (21,281 ) 99,472 Notes payable - (3,625,921 ) Related parties 1,984,619 (1,757,231 ) Accrued payroll and employee benefits (82,516 ) 82,813 Other payables and accrued liabilities (1,105,508 ) 1,169,967 Income taxes payable (1,153,191 ) 1,180,493 Net Cash Provided by Operating Activities 16,143,526 7,530,474 Cash Flows from Investing Activities: Purchases of property, plant and equipment (21,106,210 ) (6,416,481 ) Proceeds from sale of property, plant and equipment 580,206 - Acquisition of a subsidiary - (1,450,368 ) Net Cash Used in Investing Activities (20,526,004 ) (7,866,849 ) Cash Flows from Financing Activities: Proceeds from issuance of shares and warrants, net 2,273,360 - Repayments of related party loans - (2,175,553 ) Proceeds from short term bank loans 6,090,715 10,152,579 Proceeds from credit union loans - 4,206,068 Repayment of bank loans (6,237,217 ) (17,955,561 ) Payment of capital lease obligation (72,003 ) - Net Cash Provided by (Used in) Financing Activities 2,054,855 (5,772,467 ) Effect of Exchange Rate Changes on Cash and Cash Equivalents 632,315 (170,838 ) Net (Decrease) Increase in Cash and Cash Equivalents (1,695,308 ) (6,279,680 ) Cash, Cash Equivalents and Restricted Cash - Beginning of Year 5,837,745 12,117,425 Cash, Cash Equivalents and Restricted Cash - End of Year $ 4,142,437 $ 5,837,745 Supplemental Disclosure of Cash Flow Information: Cash paid for interest, net of capitalized interest cost $ 592,140 $ 926,368 Cash paid for income taxes $ 2,401,191 $ 2,250,546 Cash and bank balances 4,142,437 5,837,745 Restricted cash - - Total cash, cash equivalents and restricted cash shown in the statement of cash flows 4,142,437 5,837,745 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 single-use face masks and is 100% owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80% of Dongfang Paper’s total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal amount of $10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each owner’s equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Dongfang Paper or with respect to any equity owner action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as long as Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. An Dongfang Paper Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009 and continued to control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements is considered as a business combination under common control. On February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through Baoding Shengde instead of Dongfang Paper, the $10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over Dongfang Paper and its businesses in the PRC. An agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010, reiterating that Baoding Shengde is entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the 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 gain control over substantial parcels of land that under the possession of Hebei Tengsheng. The Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang Paper being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”). The revenue generated from Dongfang Paper for the years ended December 31, 2020 and 2019 was accounted for 98.91% and 100% of the Company’s total revenue, respectively. Dongfang Paper also accounted for 90.70% and 91.01% of the total assets of the Company as of December 31, 2020 and 2019, respectively. F- 7 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020, and 2019, details of the Company’s subsidiaries and variable interest entity are as follows: Date of Place of Percentage Incorporation Incorporation or 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, 2020, and 2019 are as follows: December 31, December 31, 2020 2019 (Unaudited) ASSETS Current Assets Cash and bank balances $ 3,315,778 $ 5,675,374 Restricted cash - - Accounts receivable 2,389,057 3,119,312 Inventories 1,223,020 1,603,038 Prepayments and other current assets 7,051,381 11,610,576 Due from related parties 92,795 1,863,479 Total current assets 14,072,031 23,871,779 Prepayment on property, plant and equipment 19,617,159 1,433,445 Finance lease right-of-use assets, net 2,397,653 - Property, plant, and equipment, net 133,134,932 138,920,440 Deferred tax asset non-current 12,040,962 8,869,385 Total Assets $ 181,262,737 $ 173,095,049 LIABILITIES Current Liabilities Short-term bank loans $ 6,435,348 $ 6,163,814 Current portion of long-term loans from credit union 551,733 315,358 Lease liability 182,852 - Accounts payable 592,391 250,486 Advance from customers 82,625 98,311 Due to related parties - 56,552 Accrued payroll and employee benefits 221,482 287,584 Other payables and accrued liabilities 4,672,265 6,502,974 Income taxes payable 259,649 1,382,471 Total current liabilities 12,998,345 15,057,550 Loans from credit union 4,597,772 4,501,018 Lease liability - non-current 354,107 - Total liabilities $ 17,950,224 $ 19,558,568 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, 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 average exchange rates prevailing throughout the respective years 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). 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, 2020, and 2019, and revenues and expenses for the years ended December 31, 2020, and 2019. 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, 2020, and 2019, the balance of allowance for doubtful accounts was $34,391 and $59,922, 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 2020 2019 Opening balance $ 59,922 $ 58,707 Provision (Reversal) for the year (28,087 ) 2,192 Exchange difference 2,556 (977 ) Closing balance $ 34,391 $ 59,922 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 $nil and $75,719 for the years ended December 31, 2020, and 2019, 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, 2020, and 2019, 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, 2020, and 2019. 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, 2020, and 2019. 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, 2020, and 2019. 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 the Company’s 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, 2020, and 2019. 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 $69,208 and $74,825 for the years ended December 31, 2020, and 2019, 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 receives 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, 2020, and 2019, the Company received government subsidies of $220,478 and $261,136, 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. There were no potentially dilutive securities that were in-the-money that were outstanding during the years ended December 31, 2020. 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 measurement, 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, 2020, and 2019, 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 approximates 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. Derivative liabilities are measured at fair value on a recurring basis. 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 was 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 was nil as of December 31, 2020 and 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, 2020, and 2019: December 31, December 31, 2020 2019 Raw Materials Recycled paper board $ 19,459 $ 40,032 Recycled white scrap paper 11,193 10,541 Gas 55,473 41,675 Base paper and other raw materials 181,426 293,935 267,551 386,183 Semi-finished Goods 176,703 83,266 Finished Goods 789,547 1,212,849 Total inventory, gross 1,233,801 1,682,298 Inventory reserve - (74,835 ) Total inventory, net $ 1,233,801 $ 1,607,463 (5) Prepayments and other current assets Prepayments and other current assets consisted of the following as of December 31, 2020, and 2019: December 31, December 31, 2020 2019 Prepaid land lease $ 183,912 $ 301,023 Prepayment for purchase of materials 10,945 5,394,297 Value-added tax recoverable 5,864,989 5,666,975 Others 991,669 250,946 $ 7,051,515 $ 11,613,241 F- 15 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Property, plant and equipment As of December 31, 2020, and 2019, property, plant and equipment consisted of the following: December 31, December 31, 2020 2019 Property, Plant, and Equipment: Land use rights $ 12,497,601 $ 11,689,114 Building and improvements 81,233,162 70,811,803 Machinery and equipment 163,787,807 152,954,020 Vehicles 628,462 587,806 Construction in progress 586,216 6,399,986 Totals 258,733,248 242,442,729 Less: accumulated depreciation and amortization (113,590,606 ) (90,825,877 ) Property, Plant and Equipment, net $ 145,142,642 $ 151,616,852 As of December 31, 2020, and December 31, 2019, 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 paper machine of a new tissue paper production line PM10 and improvement of the office building and essentially all industrial-use buildings in the Headquarters Compound. F- 16 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020, and 2019, certain property, plant and equipment of Dongfang Paper with net values of $2,349,796 and $3,935,270, 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 $6,010,359 and $5,757,546, respectively, as of December 31, 2020 and 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 $5,560,146 and $5,200,452, respectively, as of December 31, 2020 and 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 $8,614,194 and $8,056,930, respectively, as of December 31, 2020 and 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 $15,793,854 and $15,304,039 for the years ended December 31, 2020, and 2019, respectively. No Impairment loss was recorded for the years ended December 31, 2020, and 2019. (7) 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 of15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020. Hebei Tengsheng made payments due according to the schedule. As of December 31, 2020, the balance of Leased Equipment net of amortization was $2,397,653. The lease liability was $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 expense 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. The future minimum lease payments of the capital lease as of December 31, 2020 were as follows: December 31, Amount 2021 253,797 2022 253,797 2023 148,048 Less: unearned discount (118,683 ) 536,959 Less: Current portion lease liability (182,852 ) $ 354,107 F- 17 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) Loans Payable 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 (c) 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. (d) 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. F- 18 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. December 31, December 31, 2020 2019 Rural Credit Union of Xushui District Loan 1 $ 1,318,028 $ 1,232,763 Rural Credit Union of Xushui District Loan 2 3,831,476 3,583,613 Rural Credit Union of Xushui District Loan 3 2,452,145 2,293,512 Rural Credit Union of Xushui District Loan 4 1,992,368 1,863,479 Total 9,594,017 8,973,367 Less: Current portion of long-term loans from credit union (4,996,245 ) (1,605,459 ) Long-term loans from credit union $ 4,597,772 $ 7,367,908 As of Dec 31, 2020, the Company’s long-term debt repayments for the next five years were as follows: Amount Fiscal year 2021 $ 4,996,245 2022 1,685,850 2023 2,911,922 Total 9,594,017 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. F- 19 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 $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. F- 20 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) Related Party Transactions Mr. Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $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. 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. 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 $145,052 (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 for another four years in total, with the same rental payment as original lease agreement. F- 21 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) Other payables and accrued liabilities Other payables and accrued liabilities consist of the following: December 31, December 31, 2020 2019 Accrued electricity $ 14,544 $ 129,466 Value-added tax payable 428,481 854,728 Accrued interest to a related party 649,468 607,453 Payable for purchase of equipment 3,262,153 3,936,047 Accrued commission to salesmen 10,917 17,162 Accrued bank loan interest 429,279 - Others 43,759 958,154 Totals $ 4,838,601 $ 6,503,010 (11) Derivative Liabilities The Company analyzed the warrant for derivative accounting consideration under ASC 815, “ Derivatives and Hedging, and hedging, ” and determined that the instrument should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of December 31, 2020. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the December 31, 2020: Year ended December 31, 2020 Expected term 2.42 - 2.75 Expected average volatility 85% - 92% Expected dividend yield - Risk-free interest rate 0.17% - 0.24% F- 22 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the changes in the derivative liabilities during the year ended December 31, 2020: Fair Value Measurements Using Significant Observable Inputs (Level 3) Balance at December 31, 2019 $ - Addition of new derivatives recognized as warrant 689,205 Addition of new derivatives recognized as loss on derivatives 306,215 Change in fair value of derivative liability 119,840 Balance at December 31, 2020 $ 1,115,260 The following table summarizes the loss on derivative liability included in the income statement for the year ended December 31, 2020 and 2019, respectively. Year Ended December 31, 2020 2019 Day one loss due to derivative liabilities as warrant $ 306,215 $ - Loss on change in fair value of derivative liability 119,840 - 426,055 - (12) Common Stock Issuance of common stock to investors On August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our common stock.Each share of common stock and accompanying warrant was sold at a price of $1.60. On April 29, 2020, the Company and certain institutional investors entered into a securities purchase agreement, as amended on May 4, 2020 (the “2020 Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock in a registered direct offering and warrants to purchase up to 4,400,000 shares of the Company’s common stock in a concurrent private placement, for gross proceeds of approximately $2.55 million (net proceeds of approximately $2.27 million). The purchase price for each share of Common Stock and the corresponding warrant was $0.7425. F- 23 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Issuance of common stock pursuant to the 2012 Incentive Stock Plan, 2015 Omnibus Equity Incentive and 2019 Omnibus Equity Incentive On January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans to nine officers, directors and employees of and a consultant when the stock was at $1.25 per share, as compensation for their services in the past years, of which 168,416 shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500 shares were granted under the 2015 Omnibus Equity Incentive. Please see Note (14), Stock Incentive Plans for more details. Total fair value of the stock was calculated at $1,417,395 as of the date of grant. On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen officers, directors and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance. On April 2, 2020, the compensation committee granted an aggregate of 2,000,000 shares of restricted common stock to fifteen officers, directors and employees of the Company, which were granted under the 2019 Omnibus Equity Incentive Plan. Total fair value of the shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share. F- 24 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Issuance of common stock to a consultant On January 2, 2020, the Company entered into an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 60,000 shares of common stock for merger and acquisition consulting service rendered from January 2, 2020 to January 2, 2021. 60,000 shares of common stock were issued to this consultant on April 28, 2020. Total fair value of the shares of common stock issued was calculated at $42,000 at $0.70 per share. Issuance of common stock to a consultant On November 2, 2020, the Company entered an agreement with a consultant and agreed as compensation to issue to the consultant in the aggregate of 21,000 shares of common stock for investor relations consulting service rendered from November 2, 2020 to November 2, 2021. 21,000 shares of common stock were issued to this consultant on November 30, 2020. Total fair value of the shares of common stock issued was calculated at $14,700 at $0.7 per share. (13) Warrants Pursuant to the 2020 Purchase Agreement, the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock and warrants to purchase up to 4,400,000 shares of the Common Stock in a concurrent private placement. The exercise price of the warrant is $0.7425 per share. These warrants are exercisable on November 4, 2020 and have a term of exercise equal to five years and six months from the date of issuance till November 4, 2025. The Company classified warrant as liabilities and accounted for the issuance of the Warrants as a derivative. A summary of stock warrant activities is as below: Year Ended December 31, 2020 Weight average exercise Number price Outstanding and exercisable at beginning of the period Issued during the period 4,400,000 $ 0.7425 Exercised during the period - - Cancelled or expired during the period - - Outstanding and exercisable at end of the period 4,400,000 $ 0.7425 F- 25 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information relating to outstanding and exercisable warrants as of December 31, 2020. Warrants Outstanding Warrants Exercisable Weighted Average Weighted Weighted Remaining Average Average Number of Contractual life Exercise Number of Exercise Shares (in years) Price Shares Price 4,400,000 4.84 $ 0.7425 4,400,000 $ 0.7425 Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at December 31, 2020 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). There is no intrinsic value of the warrants as of December 31, 2020. (14) Earnings Per Share For the years ended December 31, 2020, and 2019, basic and diluted net income per share are calculated as follows: Year Ended December 31, 2020 2019 Basic (loss) income per share Net (loss) income for the year - numerator $ (5,554,002 ) $ 2,221,182 Weighted average common stock outstanding - denominator 26,498,298 22,034,905 Net (loss) income per share $ (0.21 ) $ 0.101 Diluted (loss) income per share Net (loss) income for the year - numerator $ (5,554,002 ) $ 2,221,182 Weighted average common stock outstanding - denominator 26,498,298 22,034,905 Effect of dilution - - Weighted average common stock outstanding - denominator 26,498,298 22,034,905 Diluted (loss) income per share $ (0.21 ) $ 0.101 F- 26 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) Income Taxes United States The Company and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJA Act”), which significantly changed U.S. tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA. 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. F- 27 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, 2020, and 2019 were as follows: Year Ended December 31, 2020 2019 Provision for Income Taxes Current Tax Provision U.S. $ 14,747 $ 14,747 Current Tax Provision PRC 1,247,970 3,431,038 Deferred Tax Provision PRC (2,364,575 ) (2,369,683 ) Total Provision for (Deferred tax benefit)/ Income Taxes $ (1,101,858 ) $ 1,076,102 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 net operating losses of approximately $2,508,797 and $0 for U.S. income tax purposes for the years ended December 31, 2020 and 2019, respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized, during the period of 2030 through 2035. As of December 31, 2020, 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, 2020, 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, December 31, 2020 2019 Deferred tax assets (liabilities) Depreciation and amortization of property, plant and equipment $ 12,397,323 $ 9,277,009 Impairment of property, plant and equipment 680,800 521,803 Miscellaneous 258,963 277,511 Net operating loss carryover of PRC company 371,544 408,730 Total deferred tax assets 13,708,630 10,485,053 Less: Valuation allowance - Total deferred tax assets, net $ 13,708,630 10,485,053 F- 28 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, 2020 2019 PRC Statutory rate 25.0 % 25.0 % Effect of different tax jurisdiction - - Effect of expenses not deductible for PRC tax purposes (5.6 )% 23.4 % (Over) Under-provision in previous year - - Change in valuation allowance -- - Effective income tax rate 19.4 % 48.4 % During the years ended December 31, 2020, and 2019, the effective income tax rate was estimated by the Company to be 19.4% and 48.4%, 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 believe 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, 2020and 2019, 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, 2020and 2019, 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- 29 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (16) Stock Incentive Plans Issuance of common stock pursuant to the 2011 Incentive Stock Plan and 2012 Incentive Stock Plan On August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company may grant an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted 109,584 shares of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date of issuance. On September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of IT Tech Packaging, Inc. (the “2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company may grant an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable for the 2012 ISP’s administration. On December 31, 2013, the Compensation Committee granted restricted common shares of 297,000, out of which 265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers, directors and employees of the Company when the stock was at $2.66 per share, as compensation for their services in the past years. Total fair value of the stock was calculated at $790,020 as of the date of grant. 2015 Incentive Stock Plan On August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2015 ISP”) as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company may grant an aggregate of 1,500,000 shares of the Company’s common stock to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On January 12, 2016, the Compensation Committee granted restricted common shares of 1,133,916, of which 168,416 shares were granted under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors, employees and a consultant of the Company as compensation for their services in the past years. Total fair value of the stock was calculated at $1,417,395 as of the date of issuance at $1.25 per share. On September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors and employees of the Company, which were granted under the 2015 ISP. Total fair value of the shares of common stock granted was calculated at $470,360 as of the date of issuance at $0.88 per share. 2019 Incentive Stock Plan On October 31, 2019, the shareholders of the Company at the Company’s Annual Shareholders General Meeting adopted and approved the 2019 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the “2019 ISP”). Under the 2019 ISP, the Company has reserved a total of 2,000,000 shares of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries. On April 2, 2020, 2,000,000 shares of common stock were granted under the 2019 ISP. Total fair value of the shares of common stock granted was calculated at $1,200,000 as of the date of issuance at $0.60 per share. F- 30 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (17) Commitments and Contingencies Operating Lease The Company leases 32.95 acres of land from a local government in Xushui District, Baoding City, Hebei, China through a real estate lease with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,406 (RMB120,000). This operating lease is renewable at the end of the 30-year term. As mentioned in Note (8) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial Buildings back to the Company at an annual rental of $145,052 (RMB1,000,000), for a total term of up to five years. Future minimum lease payments are as follows: December 31, Amount 2021 78,855 2022 107,792 2023 18,391 2024 18,391 2025 18,391 Thereafter 110,347 Total operating lease payments $ 352,167 F- 31 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital commitment As of December 31, 2020, the Company has entered into several contracts for the purchase of paper machine of a new tissue paper production line PM10 and the improvement of Industrial Buildings. Total outstanding commitments under these contracts were $4,570,331 and $1,101,989 as of December 31, 2020 and 2019, respectively. The Company expected to pay off all the balances within 1-3 years. On June 25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd. (“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. The consideration for the acquisition is RMB320 million (approximately $49 million), of which $20 million was paid by the Company, and the balance consideration of $29 million 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, 2020, and 2019, the Company guaranteed its long-term loan from financial institutions amounting to $4,751,031 (RMB31,000,000) and $4,443,680 (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. (18) Segment Reporting Since March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business operating segments: Dongfang Paper, which produces offset printing paper and corrugating medium paper, and Baoding Shengde, which produces digital photo paper. 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. F- 32 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summarized financial information for the two reportable segments is as follows: Year Ended December 31, 2020 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, Paper Tengsheng Shengde to Segments Inter-segment consolidated Revenues $ 91,426,671 8,414,654 1,101,944 - - 100,943,269 Gross profit 7,000,150 (1,828,214 ) 530,049 - - 5,701,985 Depreciation and amortization 7,039,687 8,613,750 140,417 - - 15,793,854 Interest income 27,046 1,770 3,217 - - 32,033 Interest expense 683,605 28,083 314,824 - - 1,026,512 Income tax expense(benefit) 967,408 (2,140,532 ) 56,550 14,717 - (1,101,857 ) Net income (loss) 2,849,742 (5,837,914 ) (42,250 ) (2,523,580 ) - (5,554,002 ) Total Assets 79,206,447 102,056,291 18,589,570 22,166 - 199,874,474 Year Ended December 31, 2019 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, Paper Tengsheng Shengde to Segments 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 F- 33 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (19) Concentration and Major Customers and Suppliers For the years ended December 31, 2020, and 2019, the Company had no single customer contributed over 10% of total sales. For the year ended December 31, 2020, the Company had two major suppliers that accounted for 72% and 12% of total purchases by the Company. 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. (20) Concentration of Credit Risk Financial instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of 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$76,630) 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, 2020, and 2019, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to RMB25,322,558 (US$3,880,911) as of December 31, 2020. (21) 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. (22) 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. F- 34 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (23) Subsequent Event The Company adopts ASC Topic 855 “Subsequent Events”. The Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company performed its evaluation of subsequent events through March 23, 2021. March 2021 Public Offering On March 1, 2021, the Company offered and sold to the public investors an aggregate of 29,277,866 shares of common stock and 14,638,933 warrants to purchase up to 14,638,933 shares of common stock in a firm commitment underwritten public offering for gross proceeds of approximately $21.9 million. The purchase price for each share of common stock and accompanying warrant sold in the offering was $0.75. The warrants are exercisable commencing on March 1, 2021 at an exercise price of $0.75 and will expire on March 1, 2026. In the event of a stock split, stock dividend, combination, subsequent right offering or reclassification of the outstanding shares of Common Stock, the exercise price and the number of shares issuable upon exercise of the warrants shall be proportionately adjusted. The Company intends to use the net proceeds from the offering for general corporate and working capital purposes. January 2021 Public Offering On January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818 warrants to purchase up to 26,181,818 shares of common stock in a best-efforts public offering for gross proceeds of approximately $14.4 million. The purchase price for each share of common stock and the corresponding warrant sold in the offering was $0.55. The warrants are exercisable commencing on January 20, 2021 at an exercise price of $0.55 and will expire on January 20, 2026. In the event of a stock split, stock dividend, combination, subsequent right offering or reclassification of the outstanding shares of Common Stock, the exercise price and the number of shares issuable upon exercise of the warrants shall be proportionately adjusted. The Company intends to use the net proceeds from the offering for general corporate and working capital purposes. (24) Summarized Quarterly Financial Data (Unaudited) Quarterly financial information for 2020 and 2019 is as follows: Quarter 2020 First Second Third Fourth Revenues $ 8,743,851 $ 26,362,273 $ 33,357,451 $ 32,479,694 Gross (loss) profit (169,719 ) 2,558,829 2,567,551 745,323 (Loss) income from operations (2,866,682 ) (798,643 ) 176,631 (1,967,110 ) Net loss (2,436,287 ) (980,031 ) (520,974 ) (1,616,710 ) Net income per share Basic $ -0.11 $ -0.04 $ -0.02 $ -0.06 Diluted $ -0.11 $ -0.04 $ -0.02 $ -0.06 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 F- 35 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (25) 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, 2020, and 2019. The following represents condensed unconsolidated financial information of the parent company only: December 31, December 31, 2020 2019 ASSETS Current Assets Cash and cash equivalents $ 16,172 $ 71,991 Total current assets 16,172 71,991 Investment in subsidiaries 181,194,669 170,426,900 Total Assets $ 181,210,840 $ 170,498,891 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Inter-company payable $ 4,287,974 $ 4,020,394 Due to related parties 727,433 483,433 Total current liabilities 5,015,407 4,503,827 Derivative liability 1,115,260 - Total liabilities $ 6,130,667 $ 4,503,827 Total stockholders' equity 175,080,173 165,995,064 Total Liabilities and Stockholders' Equity $ 181,210,840 $ 170,498,891 F- 36 IT TECH PACKAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2020 2019 Revenue - - Selling, general and administrative expenses $ 2,082,743 $ 464,108 Loss from Operations (2,082,743 ) (464,108 ) Equity in earnings of unconsolidated subsidiaries (3,030,487 ) 2,700,039 Loss on derivative liability (426,055 ) - Income before Income Taxes (5,539,285 ) 2,235,931 Provision for Income Taxes (14,717 ) (14,747 ) Net Income $ (5,554,002 ) $ 2,221,184 Other comprehensive income /(loss) 11,798,259 (2,793,585 ) Total Comprehensive Income (loss) $ 6,244,257 $ (572,401 ) Year Ended December 31, 2020 2019 Net Cash (Used in) Provided by Operating Activities $ (846,820 ) $ 6,730 Net Cash Used in Investing Activities (2,000,000 ) - Net Cash Provided by Financing Activities 2,791,000 513,173 Net Increase (Decrease) in Cash and Cash Equivalents (55,820 ) 69,268 Cash and Cash Equivalents - Beginning of Year 71,991 2,723 Cash and Cash Equivalents - End of Year $ 16,172 $ 71,991 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- 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.