Item 1. Business
Item
1. Business
IT Tech Packaging, Inc. (the
“Company” or “IT Tech Packaging”) is not an operating company but a Nevada holding company with operations primarily
conducted by its subsidiary and variable interest entity, or VIE. We operated our business in China through our PRC subsidiary, Baoding
Shengde Paper Co., Ltd. ( the “PRC Subsidiary” or “Baoding Shengde”) and Hebei Baoding Dongfang Paper Milling
Company Limited (“Dongfang Paper”), which we refer to as our VIE in this annual report, and rely on contractual arrangements
among our PRC subsidiary, the VIE and VIE’s shareholders to operate our business in China. Investors in our common stock should
be aware that they may never directly hold equity interests in the Chinese operating entities, but rather purchasing equity solely in
IT Tech Packaging Inc., our Nevada holding company, which does not directly own substantially all of our business in China conducted by
our PRC Subsidiary and VIE.
Because
of our corporate structure, we as well as the investors are subject to unique risks due to uncertainty of the interpretation and the
application of the PRC laws and regulations, including but not limited to regulatory review of oversea listing of PRC companies through
a special purpose vehicle. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard.
We may also be subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory Commission (“CSRC”)
if we fail to comply with their rules and regulations. Although the Company is currently not required to obtain permission from any of
the PRC central or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our operations
could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry,
if we inadvertently conclude that such approvals are not required when they are, or applicable laws, regulations, or interpretations
change and we are required to obtain approval in the future. For a description of relevant risks related to our corporate structure,
see “ Risk Factors – Risks Relating to Doing Business in China” and “Risk Factors – Risks Relating to
Our Corporate Structure.”
Corporate
History
IT Tech Packaging was incorporated
in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described below, we became
the holding company with operations primarily conducted by our subsidiaries and our VIE, Dongfang Paper, a producer and distributor of
paper products in China, on October 29, 2007. 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,” 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, and holds a wholly-owned subsidiary, Baoding Shengde, a limited liability company organized under the laws of the PRC on June 1,
2009. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc., it is regarded as a wholly foreign-owned entity
under PRC law.
Effective
June 24, 2009, Baoding Shengde, Dongfang Paper and the original shareholders of Dongfang Paper entered into a number of contractual arrangements,
as subsequently amended on February 10, 2010, pursuant to which Baoding Shengde acts as the management company for Dongfang Paper, and
Dongfang Paper conducts the principal operations of the business. The contractual arrangements, as amended, effectively transferred the
preponderance of the economic benefits of Dongfang Paper to Baoding Shengde, and as a result, Baoding Shengde assumed effective control
and management over, is considered the primary beneficiary of Dongfang Paper for accounting purposes and we consolidate Dongfang Paper’s
operating results in IT Tech Packaging’s financial statements under U.S. GAAP. The contractual arrangements, as amended, include
the following:
(i) Exclusive
Technical Service and Business Consulting Agreement
The
exclusive technical service and business consulting agreement, entered into by and between Baoding Shengde and Dongfang Paper, 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. The agreement is terminable upon mutual
written agreement.
1
(ii)
Call Option Agreement
The
call option agreement, entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that
the shareholders of Dongfang Paper irrevocably grant to Baoding Shengde an option to purchase all or part of each shareholder’s
equity interest in Dongfang Paper. The exercise price for the options shall be RMB yuan for each of the shareholders’ equity interests,
or if at any time there are PRC laws regulating the minimum exercise price of such options, then to the extent permitted under PRC Law.
The call option agreement contains covenants from Dongfang Paper and its shareholders that they will refrain from taking certain actions
without Baoding Shengde’s consent that would materially affect Dongfang Paper’s operations and asset value, including (i)
supplementing or amending its articles of association or bylaws, (ii) changing Dongfang Paper’s registered capital or shareholding
structure, (iii) selling, transferring, mortgaging or disposing of any interests in Dongfang Paper’s assets or income, or encumbering
Dongfang Paper’s assets or income in a way that would approve a security interest on such assets, (iv) incurring or guaranteeing
any debts not incurred in its normal business operations, (v) entering into any material contract or urging Dongfang Paper management
to dispose of any Dongfang Paper assets, unless it is within the company’s normal business operations; (vi) providing any loan
or guarantee to any third party; (vii) appointing or removing any management personnel or directors that can be changed upon Dongfang
Paper shareholder approval; (viii) declaring or distributing any dividends to the stockholders. The agreement remains effective until
Baoding Shengde or its designees have acquired 100% of the equity interests of Dongfang Paper underlying the options.
(iii) Share
Pledge Agreement
The
share pledge agreement entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that
the Dongfang Paper shareholders will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their
obligations under the other management agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of
the pledged equity interests in the event that the Dongfang Paper shareholders or Dongfang Paper fails to pay the service fees to Baoding
Shengde pursuant to the exclusive technical service and business consulting agreement or fails to perform their other obligations under
the other management agreement. The agreement contains covenants from Dongfang Paper’s shareholders that they will refrain from
taking certain actions without Baoding Shengde’s prior written consent, such as transferring or assigning their equity interests,
or creating or permitting the creation of any pledges which may have an adverse effect on the rights or benefits of Baoding Shengde under
the agreement. The Dongfang Paper shareholders also promise to comply with the laws and regulations relevant to the pledges under the
agreement and to facilitate in good faith the protection of the ability of Baoding Shengde to exercise its rights under the agreement.
The terms of the share pledge agreement remains in effect until all the obligations under the other management agreements have been fulfilled,
whether or not the terms of the other management agreements have expired.
(iv)
Proxy Agreement
The
proxy agreement, entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that the
Dongfang Paper shareholders shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the
right to represent such shareholder to exercise his or her rights at any shareholder’s meeting of Dongfang Paper or with respect
to any shareholder 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 the Dongfang Paper shareholders continue to hold any equity interest in Dongfang
Paper. AnDongfang Paper shareholder will cease to be a party to the agreement once it transfers its equity interests with the prior approval
of Baoding Shengde.
On
June 24, 2009, Zhao Tianqing, the sole shareholder of Shengde Holdings Inc., assigned to the Company, for good and valuable consideration,
100 shares representing 100% of the issued and outstanding shares of Shengde Holdings Inc. As a result of this assignment and the restructuring
transactions described above, Shengde Holdings Inc., Baoding Shengde, and Dongfang Paper became directly and indirectly controlled by
the Company, and Dongfang Paper continued to function as the Company’s operating entity.
2
In
addition to controlling the operations and beneficial ownership of Dongfang Paper, Baoding Shengde also acquired a digital photo paper
production line (including two photo paper coating lines and ancillary equipment) in an asset acquisition transaction on November 25,
2009 and began directly conducting business in the PRC. We suspended production of photo paper in June 2016 and now are upgrading the
production line to produce more competitive photo paper products.
An
agreement was entered into among Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper on December 31, 2010, reiterating
that Baoding Shengde is entitled to the distributable profit of Dongfang Paper, pursuant to the above mentioned Exclusive Technical Service
and Business Consulting Agreement. In addition, Dongfang Paper and the shareholders of Dongfang Paper agreed that they would not declare
any of Dongfang Paper’s unappropriated earnings, including any earnings of Dongfang Paper from its establishment to 2010 and thereafter,
as dividend.
The
contractual agreements described above have not been tested in a court of law.
The
following diagram sets forth the current corporate structure of IT Tech Packaging:
100%
ownership
Controlled
by contractual arrangements
3
Recent
Regulatory Developments
On January 4, 2022, the Cyberspace
Administration of China, or CAC, issued the revised Measures on Cyberspace Security Review (the “Revised Measures”), which
has came into effect on February 15, 2022. Under the Revised Measures, any “network platform operator” controlling personal
information of no less than one million users which seeks to list in a foreign stock exchange should also be subject to cyber security
review.
We do not believe we are “network
platform operator” who control over one million personal information as mentioned above; as such, we believe we are currently not
be subject to the cyber security review by the CAC. However, the definition of “network platform operator” is unclear
and it is also unclear on how it will be interpreted and implemented by the relevant PRC governmental authorities. See “ Risk
factors — Risk Factors Relating to Doing Business in China — Our business may be subject to a variety
of PRC laws and other obligations regarding cyber security and data protection .”
On July 6, 2021, the
relevant PRC governmental authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with
the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on
overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory
systems to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official
guidance and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage.
See “Risk Factors — Risk Factors Relating to Doing Business in China — While the approval and/or
other requirements of the CSRC or other PRC governmental authorities are currently not required, they may be required, in connection with
our oversea listing under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon we will be able
to obtain such approval .” As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions
regarding listing abroad or offshore offering from the CSRC or any other PRC governmental authorities.
We
believe that we are currently not required to obtain any permission or approval from the China Securities Regulatory Commission (“CSRC”)
and Cyberspace Administration of China (“CAC”) in the PRC to issue securities to foreign investors. However, there is no
guarantee that this will continue to be the case in the future in relation to any future offerings of our company or the continued listing
of our company’s securities on the NYSE American, or even in the event such permission or approval is required and obtained, it
will not be subsequently revoked or rescinded. If we do not receive or maintain the approvals, or we inadvertently conclude that such
approvals are not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in
the future, we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting
an offering, and these risks could result in a material adverse change in our operations and the value of our securities, significantly
limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly
decline in value or become worthless.
On
December 24, 2021, CSRC issued Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic
Companies (Draft for Comments) (the “Administration Provisions”), and the Administrative Measures for the Filing of Overseas
Securities Offering and Listing by Domestic Companies (the “Measures”), which are open for public comments by January 23,
2022. The Administration Provisions and Measures for overseas listings lay out specific requirements for filing documents and include
unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. Domestic companies seeking
to list abroad must carry out relevant security screening procedures if their businesses involve supervisions such as foreign investment
security and cyber security reviews. Companies endangering national security are among those off-limits for overseas listings. According
to Relevant Officials of the CSRC Answered Reporter Questions (“CSRC Answers”), after the Administration Provisions and Measures
are implemented upon completion of public consultation and due legislative procedures, the CSRC will formulate and issue guidance for
filing procedures to further specify the details of filing administration and ensure that market entities could refer to clear guidelines
for filing, which means it will still take time to put the Administration Provisions and Measures into effect. As the Administration
Provisions and Measures have not yet come into effect, we are currently unaffected by them. However, according to CSRC Answers, only
new initial public offerings and refinancing by existing overseas listed Chinese companies will be required to go through the filing
process; other existing overseas listed companies will be allowed a sufficient transition period to complete their filing procedure.
However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently
drafted.
On December 24, 2021, the
Standing Committee of the National People’s Congress issued Law of the People’s Republic of China on the Prevention and Control
of Noise Pollution(the “Prevention and Control of Noise Pollution”), which will be effected on June 5, 2022. According to
the Prevention and Control of Noise Pollution, entities subject to pollutant discharge licensing management shall not emit industrial
noise without a pollutant discharge permit and shall prevent and control noise pollution according to the requirements of the pollutant
discharge permit.
4
Consolidation
We conduct substantially all
of our business in China through Dongfang Paper, the VIE, due to PRC legal restrictions of foreign ownership in certain sectors. Substantially
all of IT Tech Packaging’s revenues, costs and net income in China are directly or indirectly generated through the VIE. IT Tech
Packaging, through its PRC Subsidiary, Baoding Shengde, has signed various agreements with the VIE and shareholders of the VIE to allow
the transfer of economic benefits from the VIE to the PRC Subsidiary and to direct the activities of the VIE.
Total assets and liabilities
presented on IT Tech Packaging’s consolidated balance sheets and revenue, expense, net income presented on consolidated statement
of operations and comprehensive income as well as the cash flow from operating, investing and financing activities presented on the consolidated
statement of cash flows are substantially the financial position, operation and cash flow of the VIE. The Company has not provided any
financial support to the VIE for the fiscal years ended at December 31, 2020 and 2019. As of December 31, 2021, our variable interest
entity accounted for an aggregate of 84.13% and 69.51%of our total assets and total liabilities. As of December 31, 2020, our variable
interest entity accounted for an aggregate of 90.7% and 72.4%of our total assets and total liabilities. As of December 31, 2021 and 2020,
$1,921,407 and $3,315,778 of cash and cash equivalents were denominated in RMB, respectively.
IT
Tech Packaging and its directly owned subsidiary, Shengde Holding do not have any substantial assets or liabilities or result of operations.
The following table sets forth the assets, liabilities, results of operations and changes in cash, cash equivalents of the VIE, which
were included in the Company’s consolidated balance sheets and statements of comprehensive income and statements of cash flows
with intercompany transactions eliminated:
As of
December
31,
December
31,
2021
2020
Current assets
$ 33,444,699
$ 14,072,031
Total non-current assets
$ 169,766,341
$ 167,190,706
Total Assets
$ 203,211,040
$ 181,262,737
Total liabilities
$ 17,924,476
$ 17,950,224
For
the Fiscal Year Ended
December 31,
2021
2020
Net cash provided
by operating activities
$ 25,058,780
$ 17,294,208
Net cash used in investing
activities
$ (25,071,372 )
$ (18,937,689 )
Net cash used in financing
activities
$ (917,041 )
$ (218,505 )
5
Cash
Transfers and Dividend Distribution
IT Tech Packaging
conducts its business operations in China through its Baoding Shengde, or the PRC Subsidiary and Dongfang Paper, the VIE. If needed,
IT Tech Packaging can transfer cash to the PRC Subsidiary through loans and/or capital contributions, and the PRC Subsidiary can
transfer cash to IT Tech Packaging through issuing dividends or other distributions. The PRC Subsidiary can transfer cash to the VIE
through intercompany loans and capital contributions, and the VIE can transfer cash to the PRC Subsidiary as services fees under the
VIE contractual arrangements. For the year ended December 31, 2021, the cash flows occurred between IT Tech Packaging, its
subsidiaries and the VIE included i) funding through Shengde Holdings Inc. to Baoding Shengde, with an amount of $32,052,000 as
capital contributions ii) Baoding Shengde payments to Heibei Tengsheng of $2,027,701 for purchase of products iii) Baoding Shengde loans to Dongfang Paper with
total amount of $19,345,101 and iv) Dongfang Paper payments to Baoding Shengde of $5,016,446 for purchase of raw materials.
Current PRC regulations permit
the PRC Subsidiary to pay dividends to its shareholders only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. The PRC Subsidiary is required to set aside 10% of its after-tax profits to fund a statutory reserve
until such reserve reaches 50% of its registered capital if it distributes its after-tax profits for the current financial year. For details,
see “ Risk Factors — Risk Factors Relating to Doing Business in China — We may rely on dividends
and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation
on the ability of our PRC Subsidiary to make payments to us could have a material and adverse effect on our ability to conduct our business. ”
In addition, cash transfers from IT Tech Packaging are subject to applicable PRC laws and regulations on loans and direct investment.
For details, see “ Risk Factors — Risk Factors Relating to Doing Business in China — PRC regulation
of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay
us from making loans or additional capital contributions to our PRC Subsidiary, which could materially and adversely affect our liquidity
and our ability to fund and expand our business .”
In addition, the PRC government
imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of
China. IT Tech Packaging receives a significant portion of its revenues in Renminbi. Under IT Tech Packaging’s current corporate
structure, IT Tech Packaging’s Nevada holding company may rely on dividend payments from the PRC Subsidiary to fund any cash and
financing requirements it may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without
prior approval of State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval
from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain
SAFE approval to use cash generated from the operations of the PRC Subsidiary and VIE to pay off their respective debt in a currency other
than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands,
we may not be able to pay dividends in foreign currencies to its shareholders. See “ Risk Factors — Risk Factors
Relating to Doing Business in China — Governmental control of currency conversion may limit our ability to utilize our
revenues effectively and affect the value of your investment ”. In order to secure the amounts owed under the VIE agreements,
the VIE and its shareholders entered into a share pledge agreement with the PRC Subsidiary, pursuant to which if the VIE fails to pay
the service fees to the PRC Subsidiary pursuant to the exclusive technical service and business consulting agreement or fails to perform
their other obligations under the other management agreement, the PRC Subsidiary is entitled to dispose of the pledged equity interests
in the VIE.
IT Tech Packaging declared
and paid four quarterly cash dividends to its U.S. investors in April 2012 and November 2013. As of the date of this annual report, other
than those cash dividends, none of IT Tech Packaging’s subsidiaries have ever issued any dividends or made other distributions to
IT Tech Packaging or their respective holding companies nor has IT Tech Packaging or any of IT Tech Packaging’s subsidiaries ever
paid dividends or made other distributions to U.S. investors. IT Tech Packaging currently intend to retain all future earnings to finance
its operations and to expand its business. As a result, IT Tech Packaging does not expect to pay any cash dividends in the foreseeable
future.
Holding
Foreign Company Accountable Act
Trading
in our securities may be prohibited under the Holding Foreign Companies Accountable Act, or the HFCAA, if the Public Company Accounting
Oversight Board (United States) (the “PCAOB”) determines that it cannot inspect or investigate completely our auditor.
Pursuant
to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate
completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of
a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the
PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the PCAOB’s report identified the specific
registered public accounting firms which are subject to these determinations.
The
PCAOB is currently unable to conduct inspections in China without the approval of Chinese government authorities. If it is later determined
that the PCAOB is unable to inspect or investigate our auditor completely, investors may be deprived of the benefits of such inspection.
Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections of audit work undertaken
in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures, could result
in a lack of assurance that our financial statements and disclosures are adequate and accurate.
6
Our
auditor, WWC, P.C., Certified Public Accountants, is an independent registered public accounting firm with the PCAOB, and as an auditor
of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess
its compliance with the applicable professional standards. WWC, P.C., Certified Public Accountants, is based in the United States and
has been inspected by the PCAOB on a regular basis, with the last inspection in November 2021. WWC, P.C., Certified Public Accountants,
is not headquartered in mainland China or Hong Kong and was not identified as a firm subject to the determinations announced by the PCAOB
on December 16, 2021. Should the PCAOB be unable to fully conduct inspection of our auditor’s work papers in China, it will make
it difficult to evaluate the effectiveness of our auditor’s audit procedures or equity control procedures. Investors may consequently
lose confidence in our reported financial information and procedures or quality of the financial statements, which would adversely affect
us and our securities.
Moreover,
if trading in our securities is prohibited under the HFCAA in the future because the PCAOB determines that it cannot inspect or fully
investigate our auditor at such future time, an exchange may determine to delist our securities.
See
“ Risk Factors—Risks Associated with Our Company— A recent joint statement by the SEC and the Public Company Accounting
Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by Nasdaq, and the newly enacted “Holding
Foreign Companies Accountable Act” all call for additional and more stringent criteria to be applied to emerging market companies
upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments
could add uncertainties to investing in our securities .”
Recent
Business Developments
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.
Cogenerating
Project
In
November 2020, we completed inviting bids for the 75 tonne per hour biomass boiler procurement for our biomass cogeneration project.
Multiple well-known enterprises in the biomass industry participated in tendering opening bids. In February 2021, we completed evaluation
on the bidding proposals and announced that Tai Shan Group Co., Ltd., a top manufacturer in the biomass industry in China, has won the
bid. Installation of the boilers is expected to commence in the near future. We expect to participate in the bidding process for urban
central heating projects.
Tissue
Paper Production Line
In July 2021, The Company
announced that the Company’s tissue paper research and development center has received a Level B scale-above Certification as an
industrial R&D enterprise institution in Hebei province after on-site inspection by regulators. The Company has also been
granted twelve new utility patent certificates on paper manufacturing related equipment issued by the State Intellectual Property Office,
including equipment testing, screening and filtering, and mixing.
Summary
of Risk Factors
Investing
in our securities involves significant risks and uncertainties. You should carefully consider all of the information in this prospectus
before making an investment in our securities. Below please find a summary of the principal risks we face, organized under relevant headings.
These risks are discussed more fully in the section titled “Risk Factors.”
7
Risks
Relating to our Business
● Our
business, financial condition and results of operations may be materially adversely affected
by global health epidemics, including the COVID-19 outbreak.
● Our
operating history may not serve as an adequate basis to judge our future prospects and results
of operations.
● Dongfang
Paper and Baoding Shengde’s failure to compete effectively may adversely affect our
ability to generate revenue.
● We
may not be able to effectively control and manage our growth.
● We,
through our subsidiaries, may engage in future acquisitions that could dilute the ownership
interests of our stockholders and cause us to incur debt and assume contingent liabilities.
● We
are responsible for the indemnification of our officers and directors.
● We
are dependent on certain key personnel and loss of these key personnel could have a material
adverse effect on our business, financial condition and results of operations.
● We
may not be able to hire and retain qualified personnel to support our growth and if we are
unable to retain or hire these personnel in the future, our ability to improve our products
and implement our business objectives could be adversely affected.
● Our
operating results may fluctuate as a result of factors beyond our control.
● We
face risks related to product liability claims.
● Our
operating results also depend on the availability and pricing of energy and raw materials.
● A
material disruption at one of our manufacturing facilities could prevent us from meeting
customer demand, reduce our sales, and/or negatively affect our net income.
● Our
certificates, permits, and licenses related to our papermaking operations are subject to
governmental control and renewal and failure to obtain renewal will cause all or part of
our operations to be terminated.
● Compliance
with environmental regulations is expensive, and noncompliance may result in adverse publicity
and potentially significant monetary damages and fines or suspension of our business operations.
● If
we are unable to respond to pricing pressures, our business may be harmed.
● If
we fail to introduce enhancements to our existing products or to develop new products, our
business and results of operations could be adversely affected.
● We
have limited insurance coverage and may incur losses resulting from product liability claims
or business interruptions.
● Our
failure to protect our intellectual property rights may undermine our competitive position,
and external infringements of our intellectual property rights may adversely affect our business.
● We
may be subject to intellectual property infringement claims or other allegations, which may
materially and adversely affect our business, financial condition and prospects.
Risks
Related To Doing Business in the PRC
● The
PRC government has significant oversight and discretion over the conduct of a PRC company’s
business operations or to exert control over any offering of securities conducted overseas
and/or foreign investment in China-based issuers, and may intervene with or influence our
operations, may limit or completely hinder our ability to offer or continue to offer securities
to investors, and may cause the value of such securities to significantly decline or be worthless,
as the government deems appropriate to further regulatory, political and societal goals.
● Our
business may be subject to a variety of PRC laws and other obligations regarding cybersecurity
and data protection.
● Changes
in the policies of the PRC government could have a significant impact upon the business we
may be able to conduct in the PRC and the profitability of such business.
● The
PRC laws and regulations governing our current business operations are sometimes vague and
uncertain. Any changes in such PRC laws and regulations may harm our business.
8
● A
slowdown, inflation or other adverse developments in the PRC economy may harm our customers
and the demand for our services and products.
● We
may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund
any cash and financing requirements we may have, and any limitation on the ability of our
PRC Subsidiary to make payments to us could have a material and adverse effect on our ability
to conduct our business.
● Governmental
control of currency conversion may limit our ability to utilize our revenues effectively
and affect the value of investors’ investment.
● PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies
and governmental control of currency conversion may delay us from making loans or additional
capital contributions to our PRC Subsidiary, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
● The
fluctuation of the Renminbi may harm your investment.
● Failure
to comply with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may materially adversely affect us.
● While
the approval and/or other requirements of the CSRC or other PRC governmental authorities
are currently not required, they may be required, in connection with our oversea listing
under PRC rules, regulations or policies, and, if required, we cannot predict whether or
how soon we will be able to obtain such approval.
● The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions
of Chinese companies by foreign investors, which could make it more difficult for us to pursue
growth through acquisitions in China.
● The
PRC’s legal and judicial system may not adequately protect our business and operations
and the rights of foreign investors.
● Because
our principal assets are located outside of the United States and most of our directors and
officers reside outside of the United States, it may be difficult for you to effect service
of legal process, enforce your rights based on U.S. federal securities laws against us and
our officers or to enforce U.S. court judgment against us or them in the PRC.
● It
may be difficult for overseas regulators to conduct investigation or collect evidence within
China.
● We
may be required to broaden the coverage of the mandatory social security insurance programs
under the Labor Law of the PRC.
● The
current tensions in international trade and rising political tensions, particularly between
U.S. and China, may adversely impact our business, financial condition, and results of operations.
Risks
Related to Our Corporate Structure
● Our
current corporate structure and business operations may be affected by the newly enacted
Foreign Investment Law.
● Any
failure by our consolidated VIE or their shareholders to perform their obligations under
our contractual arrangements with them would have a material adverse effect on our business.
● In
order to comply with PRC regulatory requirements, we operate our businesses through companies
with which we have contractual relationships but in which we do not have controlling ownership.
● Because
we rely on the consulting services agreement with Dongfang Paper for essentially all of our
revenue and cash flows, any difficulty for Dongfang Paper to pay consulting fees to Baoding
Shengde under the consulting agreement may have a material adverse effect on our operations.
● If
the PRC government determines that the contractual agreements constituting part of our VIE
structure do not comply with applicable PRC regulations, or if these regulations change or
are interpreted differently in the future, we may be unable to assert our contractual rights
over the assets of the VIE, and our common stock may decline in value.
● The
contractual arrangements under a VIE Structure may not be as effective as direct ownership
in respect of our relationship with the VIE, and thus, we may incur substantial costs to
enforce the terms of the arrangements, which we may not be able to enforce at all.
● The
shareholders of Dongfang Paper may have actual or potential conflicts of interests with us,
which may adversely affect our business.
9
● We
may lose the ability to use and enjoy assets held by the VIE that are material to the operation
of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation
proceeding.
● Our
arrangements with Dongfang Paper and its shareholders may be subject to a transfer pricing
adjustment by the PRC tax authorities which could have an adverse effect on our income and
expenses.
● We
may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets
held by the VIE, which could severely disrupt our business, render us unable to conduct some
of our business operations and constrain our growth.
● The
exercise of our option to purchase part or all of the equity interests in Dongfang Paper
under the Call Option Agreement might be subject to approval by the PRC government. Our failure
to obtain this approval may impair our ability to substantially control Dongfang Paper and
could result in actions by Dongfang Paper that conflict with our interests.
Risks
Related to Our Common Stock
● The
recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and
the Holding Foreign Companies Accountable Act all call for additional and more stringent
criteria to be applied to emerging market companies upon assessing the qualification of their
auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments
could add uncertainties to investing in our securities.
● If
we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a timely
manner, our business could be harmed and our stock price could decline.
● If
we become directly subject to the scrutiny involving U.S. listed Chinese companies, we may
have to expend significant resources to investigate and/or defend the matter, which could
harm our business operations, stock price and reputation.
● Our
officers and directors control us through their positions and stock ownership and their interests
may differ from other stockholders.
● We
may not continue to pay cash dividends and any return on investment may be limited to the
value of our common stock.
● Our
common stock may be affected by limited trading volume and may fluctuate significantly.
● Future
financings may dilute stockholders or impair our financial condition.
Impact
of COVID-19 on Our Operations and Financial Performance
Outbreaks of epidemic, pandemic,
or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations.
The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic.
Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread
of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals
suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. During the
early part of 2020, COVID-19 caused temporary closure of our CMP production, and as a result, our revenue of CMP decreased by 49.89
% in the first quarter of 2020.
Since we resumed business
operations after the outbreak of COVID-19, the Company kept continuous attention on the development of the COVID-19 pandemic and reacted
actively to its impact on the financial position and operating results of the Company. As of the date of the annual report, COVID-19’s
adverse impacts on the company’s financial position and operating result as of December 31, 2021 were limited.
Our
Business
We, through our subsidiaries
and VIE, engage in production and distribution of three categories of paper products: corrugating medium paper, offset printing paper,
tissue paper products and medical face masks in China.
Our
principal executive offices are located at Science Park, Juli Road, Xushui District, Baoding City, Hebei Province, People’s Republic
of China.
Our
telephone number is (86) 312-869-8215. Our website is located at http://www.itpackaging.cn.
10
Manufacturing
Process
Corrugating
Medium Paper and Offset Printing Paper
Our
current products (excluding tissue paper products) generally undergo two stages of manufacturing: (1) creating pulp from recycled paper
products, and (2) treating the pulp and molding it into the desired types of paper products. A brief overview of the pulp and papermaking
process is provided below.
Pulping
The
recycled waste paper is first sorted by machine, and then broken down and beaten or smashed into small pieces using water and mechanical
energy. It is then put through a course screening drum, followed by a fine screening drum to separate different grades of pulp, a process
that we refer as “concentration”. In order to purify the pulp further, an approach flow system is used to filter out any
impurities or inconsistencies, such as sand, in the pulp.
Paper
Making
The
pulp is sieved to remove the excess water and molded into a specific size. The moisture content is further reduced by applying hydraulic
pressure to the pulp. The pulp then enters the drying section where it is rolled over by heated cylinders. The dried paper is then coated
with a mixture of clay, white pigment and binder to produce a surface on which ink can sit without being fully absorbed, enabling crisper,
and more consistent print quality.
The
paper goes through a process called calendaring, which flattens and smoothens the paper into long sheets. The paper is then wound onto
a reel that is mounted in a roll-slitting machine for rewinding, during which cutters are used to cut the paper into the desired widths.
Upon completion, the rolls are fitted with sleeves and labeled, and then sent to quality control before shipment or storage.
11
Base
Tissue Paper
While
we make tissue paper products, we currently purchase paper pulp from suppliers and use it to manufacture base tissue paper directly.
Products
Corrugating
medium paper
Corrugating
medium paper, or CMP is used in the manufacturing of cardboard. Since the launch of our new Paper Machine (“PM6”) production
line in December 2011, corrugating medium paper has become a major product of the Company. For the year ended December 31, 2021, corrugating
medium paper comprised approximately 88.76% of our total paper production quantities and roughly 83.61% of our total revenue. Raw materials
used in the production of corrugating medium paper include recycled paper board (or Old Corrugating Cardboard or “OCC,” as
it is commonly referred to in the United States) and certain supplementary agents. In January 2013, we suspended the operation of our
PM1 production line for renovation, which was then used to produce corrugating medium paper. In May 2014, we launched the commercial
production of a renovated PM1 production line. The renovated PM1 production line produces light-weight corrugating medium paper with
a specification of 40 to 80 grams per square meter (“g/s/m”). PM1’s light-weight corrugating medium paper products
have a wide range of commercial applications. For example, they can be used as a construction material for wall and floor insulation
or to manufacture moisture-proof packaging materials for the transportation of books and magazines by the publishing industry. It can
also be used as corrugating medium to make corrugating cardboard for packaging that requires light-weight boxes. The manufacturing process
of light-weight corrugating medium paper is similar to that of the regular corrugating medium paper and also uses recycled paper boards
as a major source of raw material. We now have two corrugating medium paper production lines, PM6 and PM1. We refer to products produced
from the PM6 production line as Regular CMP and products produced from the PM1 production line as Light-Weight CMP.
Offset
printing paper
Offset
printing paper is used for offset printing in the publishing industry. Offset printing paper comprised approximately 8.21% of our total
paper production quantities and approximately 10.61% of our total sales revenue for the year ended December 31, 2021. Raw materials used
in making offset printing paper include recycled white scrap paper, fluorescent whitening agent and sizing agent. We currently have two
production lines, PM2 and PM3, for the production of offset printing paper.
Tissue
Paper Products
We
began the commercial production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper purchased
from long-term cooperative third party and produce finished tissue paper products, including toilet paper, boxed and soft-packed tissues,
handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the Dongfang Paper
brand. In December 2018 and November 2019, we completed the construction, installation and test of operation of PM8 and PM9, respectively,
and commercially launched tissue paper production of PM8 and PM9 at such time. On May 5, 2020, the Company announced it planned the commercial
launch of a new tissue paper production line PM10 and the Company signed an agreement to purchase paper machine with paper machine supplier.
The Company expected the new tissue paper production line to be launched after the completion of trial run. Tissue paper products comprised
approximately 3.01% of our total paper production quantities and approximately 5.45% of our total sales revenue for the year ended December
31, 2021.
Face
Masks
On
April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials
preparation, trial run of the equipment and the sample products inspection. In January 2021, the Company announced it has submitted an
application for the license for its new single-use surgical masks from local food and drug administration in Hebei province, and began
commercial production in November 2021.
12
Market
for our Products
The
PRC Paper Making Industry
According
to the 2020China Paper Industry Annual Report, issued by the China Paper Association, there were approximately 2,500 paper and paper
board manufacturers (down from 2,700 in 2019) in China, with a total output of 112.60 million tonnes, up by 4.60% from 107.65 million
tonnes in 2019. Total domestic consumption was 118.27 million tonnes in 2020, up by 10.49% from 107.04 million tonnes in 2019.
The
output of paper and paper board maintained an average growth rate of approximately 1.41% during the ten-year period from 2011to 2020,
while consumption increased at an average annual rate of 2.17%. The growth is expected to continue. It is estimated that China currently
has the largest paper and paper board products output and consumption in the world. (Data source: 2020 Annual Report of China Paper
Manufacturing, April 2021, China Paper Association)
Data
source: 2020 Annual Report of China’s Paper Industry, April2021, China Paper Association
Corrugating
medium paper production in China totaled 23.90 million tonnes in 2020, a 7.66% increase from 2019. Consumption of corrugating medium
paper in China amounted to 27.76 million tonnes in 2020, an increase of 16.93% as compared to 2019.
Uncoated offset printing paper
production in China totaled 17.30million tonnes in 2020, a 2.81% decrease from 2019. Consumption of uncoated offset printing paper in
China amounted to 17.83million tonnes in 2020, an increase of 1.94% as compared to 2019.
The
paper making industry in China is concentrated in the east coast provinces. The largest paper production capacities by province for 2019and
2020(the most recent year for which relevant information is available) are summarized in the table below. The three provinces with largest
capacities showed moderate increases in paper production capacities; provinces with smaller capacities, such as, Chongqing, Hebei and
Anhui, showed noticeable increases as well.
Province
2020Capacity
(10k tonnes)
2019
Capacity
(10k tonnes)
%
Change
Guangdong
2,012
1,864
7.94
Shandong
1,920
1,830
4.92
Jiangsu
1,402
1,312
6.86
Zhejiang
1,149
1,429
(19.59 )
Fujian
777
784
(0.89 )
Henan
532
498
6.83
Hubei
427
355
20.28
Chongqing
352
301
16.94
Anhui
321
325
(1.23 )
Hebei
317
240
32.08
Data
Sources: 2020Annual Report of China’s Paper Industry, April 2021, China Paper Association
13
Customers
We generally sell our corrugating
medium paper to companies making corrugating cardboards and offset printing paper to printing companies. Our largest customer is a packaging
company in Shandong Province. Our total corrugating medium and offset printing paper revenue in 2021 was primarily derived from customers
in Tianjin City, Hebei Province and Shandong Province.
For
the year ended December 31, 2021, five major customers who individually accounted for more than 5% of our total sales revenue are as
follows:
2021
Sales Amount
(USD$,
net of
%
of
applicable
Total
VAT)
Revenue
Company A (Shandong)
9,506,562
5.91 %
Company B (Hebei)
9,243,355
5.75 %
Company C (Hebei)
8,946,350
5.57 %
Company D (Tianjin)
8,748,984
5.44 %
Company
E(Tianjin)
8,394,246
5.22 %
Total
Major Customers
44,857,517
27.89 %
Eight
of our top-ten customers of 2021are also in the top-ten customer list in 2020, representing 79.36% of the 2020top-ten customer sales.
Target
Market
We
target corporate customers in the middle range of the marketplace, where, with solid quality and competitive pricing, we see potential
for high volume growth for corrugating medium paper and offset printing paper. Our primary market has been the region of North China,
especially in the province of Hebei.
Our
Production Lines
During
the year ended December 31, 2021, we had six PM production lines in operation and are in the process of launching one more that are designated
as PM7. These production lines include the followings:
Designed
Paper Product
Capacity
PM#
Produced
(tonnes/year)
Owned
by
Operated
by
Status
as of December 31, 2021
PM1
Corrugating Medium Paper
60,000
Dongfang Paper
Dongfang Paper
In production
PM2
Offset Printing Paper
50,000
Dongfang Paper
Dongfang Paper
In production
PM3
Offset Printing Paper
40,000
Dongfang Paper
Dongfang Paper
In production
PM4
Digital Photo Paper
**
Baoding Shengde
Baoding Shengde
Suspended in June 2016 due to low market demand
PM5
Digital Photo Paper
**
Baoding Shengde
Baoding Shengde
Suspended in June 2016 due to low market demand
PM6
Corrugating Medium Paper
360,000
Baoding Shengde
Dongfang Paper***
In production
PM7*
Specialty paper
10,000
Dongfang Paper
Dongfang Paper
Under renovation and preparing for launch by the end
of 2021
PM8
Tissue paper
15,000
Dongfang Paper
Dongfang Paper
In production
PM9
Tissue paper
15,000
Dongfang Paper
Dongfang Paper
In production.
PM10
Tissue paper
20,000
Dongfang Paper
Dongfang Paper
In construction
*: Paper
machines under renovation, under construction, or in the planning stage.
***: PM6
is funded and owned by Baoding Shengde; ancillary facilities that support the PM6 operation
are built and owned by Dongfang Paper.
14
On
December 31, 2009, we acquired a digital photo paper production line, including two coating lines that are designated as PM4 and PM5
and ancillary equipment, for a total purchase price of approximately $13.6 million. We suspended production of photo paper in June 2016.
In
order to meet the growing domestic demand for paper, which we believe currently exceeds domestic supply in the case of corrugating medium
paper, especially in the region of North China, we installed a corrugating medium paper production line (PM6) with a designed capacity
of 360,000 tonnes per year. We completed the installation of the PM6 production line in November 2011 and began commercial production
in December 2011.
We
have implemented a plan to renovate one of the old production lines that has been idle since the end of 2007. We previously made paper
with anti-counterfeit features from that production line. When the renovation is completed, we intend to use the renovated production
line to produce high-profit margin specialty papers. Our current plan is to complete the renovation project, put in place a new production
and marketing team and launch the renovated production line as PM7 by the end of 2021.
On
November 27, 2012, we signed a 15-year lease relating to approximately 49.4 acres of land in the Economic Development Zone in Wei County,
Hebei Province, China for the purpose of developing a new tissue paper production plant. We planned to build two tissue paper production
lines, each with 15,000 tonnes/year capacity, and other packaging facilities and infrastructures on the leased land. In December 2012,
we signed a contract with an equipment contractor in Shanghai to build PM8, the first of our two tissue paper production lines in Wei
County. In December 2018 and November 2019, we completed the construction, installation and test of operation of PM8 and PM9, respectively
and commercially launched tissue paper productions of PM8 and PM9 at such time. On May 5, 2020, the Company announced it planned the
commercial launch of a new tissue paper production line PM10 and the Company signed an agreement to purchase paper machine with paper
machine supplier. The Company expected the new tissue paper production line to be launched after the completion of trial run.
We
voluntarily renovated our 150,000 tonnes/year corrugating medium paper PM1 in anticipation of increased regulatory concerns on energy
efficiencies as well as to improve the quality of our corrugating medium products. Rather than converting PM1 to a regular corrugating
medium paper machine, we decided in 2013 that, based on the market conditions and our waste water treatment capability, the better option
was to convert PM1 to produce Light-Weight CMP with a specification of 40 to 80 grams per square meter (“g/s/m”) with a designed
capacity of 60,000 tonnes/year. We started the renovation in January 2013 and launched commercial production of the renovated PM1 production
line in May 2014.
Raw
Materials and Principal Suppliers
The
supplies used in our production processes are comprised mainly of recycled paper board and unprinted recycled white scrap paper, both
of which are ready-to-use items and available from multiple domestic and foreign sources. We currently purchase all of our recycled paper
supplies from some domestic recycling stations and do not rely on imported recycled paper. We also purchase coal and chemical agents
from nearby suppliers. Ongoing inflationary pressures and higher demand for recycled paper could lead to an increase in our costs of
raw materials and production, which we may or may not be able to pass to our customers.
We
sign annual raw materials supplier contracts with our suppliers. Although we have contracts with our suppliers, these contracts do not
lock-in the purchase price of our raw materials or provide hedge against the fluctuation in the market price of these raw materials.
For the year ended December 31, 2021, we had two large suppliers which accounted for approximately 78% and 11% of our total purchases,
respectively.
For
the year ended December 31, 2021, two major suppliers who individually accounted for more than 5% of our total purchase are as follows:
2021
Purchase
Amount
(USD$,
net of
%
of
applicable
Total
VAT)
Purchase
Company A (Baoding)
117,370,593
78 %
Company
B (Baoding)
17,100,630
11 %
Total
Major Suppliers
134,471,223
89 %
15
Competition
Dongfang
Paper’s main competitors are: Chenming Paper Group Limited, Huatai Group Limited, Nine Dragons Paper (Holdings) Limited and Sun
Paper Group Limited. A number of our competitors are public entities with larger capacities, broader customer bases and greater financial
resources than those available to us. The businesses of our primary competitors are briefly described below:
Chenming
Paper Group, Ltd. (“Chenming”), based in Shandong Province (located in northeast China), produces primarily news print paper
and art paper (high quality, heavy and two-side coated printing paper). Chenming is believed to be the first company to have listed on
all three stock exchanges in China: Renminbi A-shares and foreign currency B-shares in Shenzhen, the smaller of the mainland’s
two stock exchanges, and H-shares in Hong Kong. Chenming has annual production capacity of 8.5 million tonnes for its coated wood-free
paper product and is believed to rank among the top 500 enterprises in China.
Huatai
Group, Ltd. (“Huatai”), based in Shandong Province (located in the northern part of the eastern coastal region of China),
primarily produces newsprint, fine paper, special printing paper, coated board and tissue paper. Huatai is the first Shandong papermaker
to publicly list its stock and has become a famous brand in China. Its annual paper production is estimated to have reached 4 million
tonnes.
Nine Dragons Paper (Holdings)
Limited (“ND Paper”), based in Guangdong Province (located in southern China), is the largest paper manufacturer in China
and primarily produces craft paper and high-strength corrugating medium paper with annual capacity of 13 million tonnes. ND Paper has
reported that it has five production lines in the city of Tianjin with a total designed capacity of 2.15 million tonnes, producing products
such as craft paper, high strength corrugating medium paper and grey-back duplex board.
Sun
Paper Group, Ltd., based in Shandong Province, primarily produces card paper, whiteboard paper and art paper. It also produces alkaline
peroxide mechanical pulp, sourced in part from wood chips harvested by the company’s poplar plantations. This company has reported
that it has an aggregate annual production capacity of paper and pulp of approximately 5.7 million tonnes and has been listed on the
Shenzhen Stock Exchange since 2006.
With
the exceptions of Chenming and ND Paper, which may compete directly with us in the offset printing paper market and the corrugating medium
paper market, respectively, in the Beijing/Tianjin/greater Hebei regions, we believe that we face only indirect competition from the
above-listed companies, either because we have a different product assortment from these companies, or because, to the extent they do
offer products similar to ours, the transportation costs and storage costs make it difficult for these companies to compete effectively
with us on pricing.
Our
Competitive Edge
Regional
advantage (Northern China) . We believe that Dongfang Paper is one of the leading papermaking enterprises in Hebei Province. Our proximity
to large urban centers in northern China, Beijing and Tianjin, gives us access to a large market to sell our products.
There
are other paper manufacturers that are also located in Hebei Province (and close to metropolitan Beijing and Tianjin areas), but most
of these other manufacturers are small in scale and unable to compete with us effectively. We also compete with other large printing
paper manufacturers for Beijing printing company customers. We believe that we have cost and geographical advantages over these larger
competitors.
Cost
advantage . Unlike some of our out-of-province competitors who must set up interim warehouses and ship products from their production
base to such interim warehouses close to their customer base in Beijing, there is no need for us to set up interim warehouses, because
we are approximately 60 miles (100 kilometers) from Beijing, the cultural center of China and our largest target market. While we do
not separately pay for transportation cost on raw material purchases, the transportation cost included in the raw material purchase prices
from our recycled paper suppliers is lower than the transportation cost paid by our competitors in the province of Shandong. We also
enjoy lower transportation costs for coal, a major source of energy used in our production process. Similarly, our customers pay lower
transportation cost to pick up their orders from our finished goods warehouse in Baoding than what they would pay if they had to pick
up goods from locations further away from Beijing. Tianjin, another large urban center, is also approximately 60 miles from our facilities.
Baoding city itself is also home to numerous printing and packaging companies. Our geographical advantage and easy access to low-cost
raw materials allow us to implement a more flexible inventory purchase policy, lower our purchase prices and inventory management expenses
and reduce our production cost. As such, we have lower freight costs and other associated costs of sales, which enable us to charge lower
prices, if necessary, for our products. Additionally, because we buy all recycled paper raw materials from Beijing and Tianjin, rather
than from the United States or Japan, our purchase lead time is shorter as compared to manufacturers who rely on imported recycled paper.
16
Research
and Development
Our
R&D activities are carried out by a task force led by a group of senior managers (in charge of product development and quality control)
and by a group of selected engineers and technicians. The Company charged the time spent on the R&D projects (manufacturing waste
discharge recycling, digital photo paper and tissue paper manufacturing) to R&D expenses. Our R&D efforts in 2020 has focused
on evaluating and developing new products that are in the pipeline for 2020 and included developing and improving the manufacturing process
of Light-Weight CMP and the production and packaging technology of tissue paper.
One
of our production lines, PM7, is under renovation. Since the fourth quarter of 2010, we have spent approximately $1.57 million in machine
parts and new components to renovate this production line, with which we expect to produce certain specialty papers, including wood-grain
deco and furniture paper, wallpaper and paper with security features (for anti-counterfeiting purposes). While we are optimistic about
the prospect of the specialty papers, we cannot guarantee the launch of the specialty paper production (which is tentatively scheduled
by the end of 2020) or the success of such renovation.
Intellectual
Property
The
Company has registered nine trademarks with the Trademark Bureau under the State of Administration for Industry & Commerce.
Trademark
Certificate
No.
Category
Registrant
Valid
Term
Shuangxing
3298963
Fax
paper, thermal paper, blueprint paper, sensitized paper, spectrum sensitized paper, blueprint cloth, photographic paper, cyanotype
solution, diazo paper
Dongfang
Paper
April
7, 2014 through April 6, 2024
Fangmenglai
12955328
Toilet
paper, handkerchief tissues, tissues, paper napkins, paper mats, beer mats, paper place mats, printing paper (including offset paper,
newsprint, books paper, bond paper, plate paper and halftone paper), coated paper
Dongfang
Paper
December
28, 2014 through December 27, 2024
Fangqingxin
12955235
Toilet
paper, handkerchief tissues, tissues for makeup remover, paper napkin, tissues, paper duster cloth, paper face towels, paper table
cloth, paper tablecloths, drawer liner (with or without flavor)
Dongfang
Paper
December
28, 2014 through December 27, 2024
Kaimeilai
20212149
Xuan
Paper (for traditional Chinese painting and calligraphy), Paper, tissue paper, watercolor paper, writing paper, printing publications,
ink, painting brush, packaging plastic film, color box,
Baoding
Shengde
July
28, 2017 through July 27, 2027
Shadow
8349821
Drying
blueprint solution, diazo paper, photographic paper, sensitive paper, blueprint paper, blueprint canvas, spectral photographic plate,
heliographic paper
Baoding
Shengde
June
14, 2011 through June 13, 2021
Lanmeier
15635879
Paper table cover, paper
pinafore, drawer lining (with flavor or not)
Hebei Tengsheng
November 21, 2016 through
November 20, 2026
Qingmu
15635916
Tissue
paper, paper handkerchief, paper napkin, facial paper, grained paper, cardboard, white board, container board, kraft liner, corrugated
medium paper (board)
Hebei
Tengsheng
January
7, 2016 through January 6, 2026
Rongou
20063034
Paper,
tissue paper, paper handkerchief, paper napkin, facial paper, paper billboard, cleansing tissue, packaging paper or plastic bag (envelop,
sachet), carton, paper box
Hebei
Tengsheng
July
14, 2017 through July 13, 2027
Weizun
15636093
Coasters, paper table cover,
paper costers, cleansing paper
Hebei Tengsheng
February 28, 2016 through
February 27, 2026
17
The
Company has also been granted twelve new utility patent certificates on paper manufacturing related equipment issued by the State Intellectual
Property Office, including equipment testing, screening and filtering, and mixing.
Certificate
No.
Description
Registrant
Valid
Term
13762076
The utility
model relates to a pulp mixing device
Hebei
Tengsheng
July23,
2021 through July23, 2031
13751681
The invention
relates to a product processing and cutting device
Hebei
Tengsheng
July23,
2021 through July23, 2031
14357355
The utility
model relates to a packaging equipment for pulp waste
Hebei
Tengsheng
October
8, 2021 through October 8, 2031
14248265
The utility
model relates to a pulp crushing device
Hebei
Tengsheng
Sep.
24, 2021 through Sep. 24, 2031
14254625
The utility
model relates to a pulp screening and separation device
Sep.
24, 2021 through Sep. 24, 2031
Hebei
Tengsheng
14260129
The utility
model relates to a pulp raw material processing device
Hebei
Tengsheng
Sep.
24, 2021 through Sep. 24, 2031
14258926
The utility
model relates to a forming tool for paper pulp products
Hebei
Tengsheng
Sep.
24, 2021 through Sep. 24, 2031
14250092
The utility
model relates to a material mixing device for paper processing
Hebei
Tengsheng
Sep.
24, 2021 through Sep. 24, 2031
13477825
The invention
relates to a pulp concentration detecting device
Hebei
Tengsheng
June
22, 2021 through June 22, 2031
14051723
The utility
model relates to a recycling device for edge material used in paper processing
Hebei
Tengsheng
August
27, 2021 through August 27, 2031
13893004
The utility
model relates to a pulp filter dehydration device
Hebei
Tengsheng
August
6, 2020 through August 6, 2031
13874156
The utility
model relates to a storage rack for raw material used in paper processing
Hebei
Tengsheng
August
6, 2020 through August 6, 2031
Domain
names
IT
Tech Packaging has registered the internet domain name, http://www.itpackaging.cn.
Government
Regulation
The
testing, approval, manufacturing, labeling, advertising and marketing, post-approval safety reporting and export of our products are
extensively regulated by governmental authorities in the PRC. We are also subject to various other regulations and permit requirements
by the Chinese government. These regulations and their impact on our business are set forth in more details below.
Environmental
Regulation
Our
operations and facilities are subject to environmental laws and regulations stipulated by the national and the local environment protection
bureaus in the PRC.
Since
the implementation of the State Council’s “Decisions on Environmental Protection Issues” in 1996, the PRC paper industry
has been subject to more rigorous environmental standards. Effective January 1, 2015, a new law promulgated by the National People’s
Congress of the People’s Republic of China makes certain violations of the environmental laws a criminal offense. We believe that
we are one of the few major paper manufacturers in Hebei Province that have obtained a Pollution Discharge Permit. We initially received
the permit in September 1996 and, we have successfully renewed the permit each year by complying with applicable environmental requirements.
18
Waste
Water Treatment
Dongfang
Paper uses a multi-level water recycling process. Waste water from the pulping process is fed into collection pools, where it is divided
into two parts, water and recovered pulp fiber. The latter is returned to the pulping process.
Chemical
agents are added to the waste water, and the waste water is fed into a biogas reactor and filtering pools, producing purified water and
depositing sludge. Most of the purified water is recycled to produce corrugating medium paper and the sludge is pumped into a sludge
pool, condensed and dehydrated. We then use the sludge as a raw material in the manufacture of corrugating medium paper.
We
maintain computerized controls at our production facilities on a 24-hour basis to monitor compliance with environmental rules and regulations.
We are not aware of any environmental investigations, prosecutions, disputes, claims or other environmental proceedings, nor have we
been subject to any action by any environmental administration authorities of the PRC. To our knowledge, our operations meet or exceed
the existing environmental requirements of the PRC.
Human
Capital Resources
Employee
Profiles
As
of December 31, 2021, we have approximately 366full time employees, all of whom were based in PRC. As of December 31, 2021, approximately
23.0% of our current workforce is female and 77.0% male. These employees are organized into a labor union under the labor laws of the
PRC and have collective bargain power against us. We generally maintain good relations with our employees and the labor union.
Total
Rewards
Our
compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business
objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders. We provide employees with
compensation packages that include base salary and annual incentive bonuses. We also provide private insurance coverage for any workplace
accident or injury for all the operators of paper milling machinery in the workshops.
Health
and Safety
The
success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety
and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health
and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them
improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs
and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that
we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government
regulations.
Talent
A
core tenet of our talent system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty
and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and
external ideas supports a continuous improvement mindset and our goals of a diverse and inclusive workforce. Our human resources team
uses internal and external resources to recruit highly skilled and talented workers in the PRC, and we encourage employee referrals for
open positions.
Available
Information
We
are required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange
Commission (“SEC”). The public may read and copy any materials that we file with the SEC. In addition, the SEC maintains
an Internet site that contains reports, proxy and information statements, and other information regarding issuers like our Company that
file electronically with the SEC at http://www.sec.gov.
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports
(including exhibits) filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are also
available free of charge on our Internet site at http://www.itpackaging.cn as soon as reasonably practicable after such reports are electronically
filed with or furnished to the SEC. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated
into this or any of our other filings with the SEC.
Executive
Officers
For
information regarding our executive officers as of March 15, 2022, see Part III, Item 10, “Directors, Executive Officers and Corporate
Governance.”
19
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.