IT TECH PACKAGING, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data, the financial statements, and the notes to those statements that are included elsewhere in this annual report. Results of Operations Revenue for the year ended December 31, 2021 was $160,881,720, representing an increase of $59,938,451, or 59.38%, from $100,943,269 for the previous year. This was mainly due to the increase in sales volume of corrugating medium paper (“CMP”) and offset printing paper and increase in average selling prices (“ASP”) of CMP, offset printing paper and tissue paper products, partially offset by the decrease in sales volume of tissue paper products. Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products Revenue from sales of offset printing paper, CMP and tissue paper products for the year ended December 31, 2021 was $160,343,920, an increase of $60,502,595, or 60.60%, from $99,841,325 for the year ended December 31, 2020. This was mainly due to the increase in sales volume of Regular CMP, Light-Weight CMP and offset printing paper and the increase in ASP of CMP, offset printing paper and tissue paper products, partially offset by the decrease in sales volume of tissue paper products. Total quantities of offset printing paper, CMP and tissue paper products sold during the year ended December 31, 2021 amounted to 292,459 tonnes, an increase of 65,128 tonnes, or 28.65%, compared to 227,331 tonnes sold during the year ended December 31, 2020. Total quantities of CMP and offset printing paper sold increased by 66,961 tonnes in the year of 2021 as compared to 2020. The changes in revenue and quantity sold for the year ended December 31, 2021 and 2020 are summarized as follows: Year Ended Year Ended Percentage December 31, 2021 December 31, 2020 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 213,490 $ 111,079,432 154,084 $ 62,324,519 59,406 $ 48,754,913 38.55 % 78.23 % Light-Weight CMP 46,201 $ 23,432,323 42,801 $ 16,836,407 3,400 $ 6,595,916 7.94 % 39.18 % Total CMP 259,691 $ 134,511,755 196,885 $ 79,160,926 62,806 $ 55,350,829 31.90 % 69.92 % Offset Printing Paper 24,513 $ 17,062,564 20,358 $ 12,265,746 4,155 $ 4,796,818 20.41 % 39.11 % Tissue Paper Products 8,255 $ 8,769,601 10,088 8,414,653 (1,833 ) $ 354,948 -18.17 % 4.22 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 292,459 $ 160,343,920 227,331 $ 99,841,325 65,128 $ 60,502,595 28.65 % 60.60 % 39 Monthly revenue (excluding revenue of digital photo paper and tissue paper products) for the 24 months ended December 31, 2021, are summarized below: The average selling price, or ASP, for our major products for the years ended December 31, 2021 and 2020 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light-Weight CMP ASP Tissue Paper Products ASP Year Ended December 31, 2020 $ 603 $ 404 $ 393 $ 834 Year Ended December 31, 2021 $ 696 $ 520 $ 507 $ 1062 Increase from comparable period in the previous year $ 93 $ 116 $ 114 $ 228 Increase by percentage 15.42 % 28.71 % 29.01 % 27.34 % The following is a chart showing the month-by-month ASPs for the 24 month period ended December 31, 2021: 40 Corrugating Medium Paper Revenue from CMP amounted to $134,511,755 (83.89% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2021, representing an increase of $55,350,829, or 69.92%, from $79,160,926 during 2020. We sold 259,691 tonnes of CMP in the year ended December 31, 2021 as compared to 196,885 tonnes in the year ended December 31, 2020, representing a 31.90% increase in quantity sold. ASP for regular CMP increased from $404/tonne in 2020 to $520/tonne in 2021, representing a 28.71% increase. ASP in RMB for regular CMP in 2020 and 2021 was RMB2,789 and RMB3,355, respectively, representing a 20.29% increase. The quantity of regular CMP sold increased by 59,406 tonnes, from 154,084 tonnes in 2020 to 213,490 tonnes in 2021. ASP for light-weight CMP increased from $393/tonne in 2020 to $507/tonne in 2021, representing a $29.01% increase. ASP in RMB for light-weight CMP in 2020 and 2021 was RMB2,712 and RMB3,270, respectively, representing a 20.58% increase. The quantity of light-weight CMP sold increased by 3,400 tonnes, from 42,801 tonnes in 2020, to 46,201 tonnes in 2021. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December 31, 2021 and 2020 were 60.94% and 42.56%, respectively, representing an increase of 18.38%. Quantities sold for regular CMP that was produced by the PM6 production line from January 2020 to December 2021 are as follows: Offset Printing Paper Revenue from offset printing paper was $17,062,564 (10.64% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2021, representing an increase of $4,796,818, or 39.11%, from $12,265,746 in 2020. We sold 24,513 tonnes of offset printing paper in the year ended December 31, 2021, compared to 20,358 tonnes in 2020, an increase of 4,155 tonnes, or 20.41%. ASPs for offset printing paper in the year ended December 31, 2020 and 2021 was $603/tonne and $696/tonne, respectively, representing a 15.42% increase. ASP in RMB for offset printing paper for the year ended December 31, 2020 and 2021 was RMB4,154 and RMB4,488, respectively, representing a 8.04% increase. 41 Tissue Paper Products Revenue from tissue paper products was $8,769,601 (5.47% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2021, representing an increase of $354,948, or 4.22%, from $8,414,653 in 2020. We sold 8,255 tonnes of tissue paper products in the year ended December 31, 2021, as compared to 10,088 tonnes in 2020, a decrease of 1,833 tonnes, or 18.17%.ASP for tissue paper products was $834 and /tonne$1,062/tonne in the year ended December 31, 2020 and 2021, respectively, representing a 27.34% increase. ASP in RMB for tissue paper products for the year ended 2020 and 2021 was RMB5,821 and RMB6,849, respectively, representing a 17.66% increase. Revenue of Face Mask On April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials preparation, trial run of the equipment and the sample products inspection. Revenue generated from selling face mask were $537,800 and $1,101,944 for the year ended December 31, 2021 and 2020. We sold 12,664 thousand pieces of face masks in the year of 2021, as compared to 10,301 thousand pieces in year of 2020, an increase of 2,363 thousand pieces, or 22.94%. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products in the year ended December 31, 2021 was $149,429,711, an increase of $54,760,322, or 57.84%, from $94,669,389 for the year ended December 31, 2020. This was mainly a result of the increase in sales volume of CMP and offset printing paper and increase of material costs. Cost of sales for CMP was $125,445,157 for the year ended December 31, 2021, as compared to $74,279,241 in 2020. The increase in the cost of sales of $51,165,916 for CMP was mainly due to the increase in the quantities of regular CMP sold and the increase in cost of recycled paper board in the year of 2021. Average cost of sales per tonne for CMP increased by 28.12%, from $377 for the year ended December 31, 2020, to $483 in 2021.This is mainly attributable to the higher average unit purchase costs (net of applicable value added tax) of recycled paper board. Cost of sales for offset printing paper was $13,963,983 for the year ended December 31, 2021, as compared to $10,147,280 in 2020. Average cost of sales per tonne of offset printing paper increased by 14.46%, from $498 for the year ended December 31, 2020, to $570 in 2021. The increase was mainly attributable to higher average unit purchase costs (net of applicable value added tax) of recycled white scrap paper. Cost of sales for tissue paper products was $10,020,571 for the year ended December 31, 2021, as compared to $10,242,868 in 2020. Average cost of sales per tonne of tissue paper products increased by 19.61%, from $1,015 for the year ended December 31, 2020, to $1,214 for 2021. Changes in cost of sales and cost per tonne by product for the year ended December 31, 2021 and 2020 are summarized below: Year Ended Year Ended December 31, 2021 December 31, 2020 Change in Change in percentage Cost of Sales Cost per Tonne Cost of Sales Cost per tonne Cost of Sales Cost per Tonne Cost of Sales Cost per Tone Regular CMP $ 104,057,538 $ 487 $ 58,947,059 $ 383 $ 45,110,479 $ 104 76.53 % 27.15 % Light-Weight CMP $ 21,387,619 $ 463 $ 15,332,182 $ 358 $ 6,055,437 $ 105 39.49 % 29.33 % Total CMP $ 125,445,157 $ 483 $ 74,279,241 $ 377 $ 51,165,916 $ 106 68.88 % 28.12 % Offset Printing Paper $ 13,963,983 $ 570 $ 10,147,280 $ 498 $ 3,816,703 $ 72 37.61 % 14.46 % Tissue Paper Products $ 10,020,571 $ 1,214 $ 10,242,868 $ 1,015 $ (222,297 ) $ 199 -2.17 % 19.61 % Total CMP, Offset Printing Paper and Tissue Paper Revenue $ 149,429,711 $ n/a $ 94,669,389 $ n/a $ 54,760,322 $ n/a 57.84 % n/a % Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31, 2021 were RMB 1,997/tonne (approximately $310/tonne) and RMB 2,322/tonne (approximately $360/tonne), respectively, as compared to RMB 1,582/tonne (approximately $229/tonne) and RMB 2,086/tonne (approximately 303/tonne) for the year ended December 31, 2020, respectively. These changes (in US dollars) represent a year-over-year increase of 35.37% for the unit purchase cost of recycled paper board and a year-over-year increase of 18.81% for the unit purchase cost of recycled white scrap paper. We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled paper. 42 The pricing trends of our major raw materials for the 24-month period from January 2020 to December 2021 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 10.5% of total sales in 2021, respectively, compared to 5% and 10.5% of total sales 2020. The monthly energy cost (electricity, coal and gas) as a percentage of total monthly sales of our main paper products for the 24 months ended December 31, 2021 are summarized as follows: Gross Profit Gross profit for December 31, 2021 was $11,017,559 (6.85% of the total revenue), representing an increase of $5,315,574, or 93.22%, from the gross profit of $5,701,985 (5.65% of the total revenue) for the year ended December 31, 2020. The increase was mainly due to (i) the increase in quantities sold of CMP and offset printing paper and (ii) the increase of ASP of CMP, offset printing paper and tissue paper products, partially offset by the increase in material costs. 43 Corrugating Medium Paper, Offset Printing Paper and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the year ended December 31, 2021 was $10,914,209, an increase of $5,742,273, or 111.03%, from the gross profit of $5,171,936 for the year ended December 31, 2020. The increase was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 1.63percentage points, from 5.18% for the year ended December 31, 2020, to 6.81% for the year ended December 31, 2021. Gross profit margin for regular CMP for the year ended December 31, 2021 was 6.32%, or 0.90 percentage points higher, as compared to gross profit margin of 5.42% for the year ended December 31, 2020. Such increase was primarily due to increase in ASP of regular CMP, partially offset by the increase in unit cost of sales. Gross profit margin for light-weight CMP for the year ended December 31, 2021 was 8.73%, or 0.20 percentage points lower, as compared to gross profit margin of 8.93% for the year ended December 31, 2020. Such decrease was primarily due to the increase in unit cost of sales, partially offset by the increase in ASP of light-weight CMP. Gross profit margin for offset printing paper was 18.16% for the year ended December 31, 2021, an increase of 0.89 percentage points, as compared to 17.27% for the year ended December 31, 2020. Such increase was mainly due to the increase in ASP of offset printing paper, partially offset by the increase of purchase price of recycled white scrap paper. Gross profit margin for tissue paper products was -14.26% for the year ended December 31, 2021, an increase of 7.47 percentage points, as compared to -21.73% for the year ended December 31, 2020. The increase was mainly due to the increase in ASP of tissue base paper, partially offset by the increase in cost of tissue base paper. Monthly gross profit margins for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2021 are as follows: Face Masks Gross profit for face mask for the year ended December 31, 2021 was $103,350, representing a gross margin of 19.22% compared with a gross profit of $530,049, representing a gross margin of 48.10%, for the year ended December 31, 2020. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2021 were $9,558,190, a decrease of $1,599,599, or 14.34% from $11,157,789 for the year ended December 31, 2020. The decrease was mainly due to higher share based compensation in year 2020. Income (Loss) from Operations Operating income for the year ended December 31, 2021 was $1,459,369, an increase of $6,915,173, or 126.75%, from loss from operations of $5,455,804 for the year ended December 31, 2020. The increase was primarily due to the increase in gross profit and decrease in selling, general and administrative expenses. 44 Other Income and Expenses Interest expense for the year ended December 31, 2021 increased by $98,190, from $1,026,512 for the year ended December 31, 2020, to $1,124,702. The Company had short-term and long-term interest-bearing loans and lease obligation that aggregated $16,139,485 as of December 31, 2021, as compared to $16,566,324 as of December 31, 2020. Net Income (Loss) As a result of the above, net income was $905,535 for the year ended December 31, 2021, representing an increase of $6,551,079, or 116.30%, from net loss of $5,554,002 for year ended December 31, 2020. Accounts Receivable Net accounts receivable increased by $2,479,877, or 103.80%, to $4,868,934 as of December 31, 2021, as compared with $2,389,057 as of December 31, 2020. We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories Inventories consist of raw materials (accounting for 40.17% of total value of inventory as of December 31, 2021), semi-finished goods and finished goods. As of December 31, 2021, the recorded value of inventory increased by 373.73% to $5,844,895 from $1,233,801 as of December 31, 2020. As of December 31, 2021, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $2,097,062, approximately $2,077,603, or 10676.82%, higher than the balance as of December 31, 2020. Due to the volatility of recycled paper board price and the uncertainty of market and economy situation during the pandemic, a minimum level of inventory was maintained at the end of 2020. A summary of changes in major inventory items is as follows: December 31, December 31, 2021 2020 $ Change % Change Raw Materials Recycled paper board $ 2,097,062 $ 19,459 2,077,603 10676.82 % Recycled white scrap paper 11,808 11,193 615 5.49 % Tissue base paper 38,745 14,027 24,718 176.22 % Gas 32,753 55,473 -22,720 -40.96 % Mask fabric and other raw materials 167,786 167,399 387 0.23 % Total Raw Materials 2,348,154 267,551 2,080,603 777..65 % Semi-finished Goods 96,087 176,703 -80,616 -45.62 % Finished Goods 3,400,654 789,547 2,611,107 330.71 % Total inventory, gross 5,844,895 1,233,801 4,611,094 373.73 % Inventory reserve - - - Total inventory, net $ 5,844,895 $ 1,233,801 4,611,094 373.73 % Accounts Payable Accounts payable and notes payable was $10,255 as of December 31, 2021, a decrease of 582,136, or 98.27%, from $592,391 as of December 31, 2020. 45 Renewal of operating lease On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million respectively. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $155,101 (RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term to August 9, 2022 with the same rental payment as original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $61,879 and $nil which was recorded as part of the current liabilities as of December 31, 2021 and 2020, respectively. Capital Expenditure Commitment as of December 31, 2021 On May 5, 2020, the Company announced it planned the commercial launch of a new tissue paper production line PM10 and the Company signed an agreement to purchase paper machine with paper machine supplier. The Company expected the new tissue paper production line to be launched after the completion of trial run. As of December 31, 2021, we had approximately $4.7 million in capital expenditure commitments that were mainly related to the purchase of paper machine of PM10. These commitments are expected to be financed by bank loans and cash flows generated from our business operations. Financing with Sale-Leaseback The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $16) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of $2,349,452 was recorded as right-of-use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020. Hebei Tengsheng made payments due according to the schedule. As of December 31, 2021 and 2020, the balance of Leased Equipment net of amortization was $2,286,459 and $2,397,653, respectively. The lease liability were $362,394 and $536,959, and its current portion in the amount of $210,161 and $182,852 as of December 31, 2021 and 2020, respectively. Amortization of the Leased Equipment was $165,441 and $51,574 for the year ended December 31, 2021 and 2020, respectively. Total interest expenses for the sale lease back arrangement was $71,798 and $28,083 for the year ended December 31, 2021 and 2020, respectively. 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. 46 Cash, Cash Equivalents and restricted cash Our cash, cash equivalents and restricted cash as of December 31, 2021 was $11,201,612, an increase of $7,059,175, from $4,142,437 as of December 31, 2020. The increase of cash and cash equivalents for the year ended December 31, 2021 was attributable to a number of factors: i. Net cash provided by operating activities Net cash used in operating activities was $2,436,071 for the year ended December 31, 2021. The balance represented a decrease of cash of $18,579,597, or 115.09%, from $16,143,526 provided for the year ended December 31, 2020. Net income for the year ended December 31, 2021 was $905,535, representing an increase of $6,459,537, or 116.30%, from a net loss of $5,554,002 for the year ended December 31, 2020. Changes in various asset and liability account balances throughout the year ended December 31, 2021 also contributed to the net change in cash from operating activities in year ended December 31, 2021. Chief among such changes is the increase of accounts receivable in the amount of $2,430,495 during the year of 2021. There was also an increase of $4,531,263 in the ending inventory balance as of December 31, 2021 (a decrease to net cash for the year ended December 31, 2021 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $15,358,452. The Company also had a net increase of $8,350,716 in prepayment and other current assets (a decrease to net cash) and a net increase of $469,797 in other payables and accrued liabilities and related parties (a decrease to net cash), as well as an increase in income tax payable of $832,946 (an increase to net cash) during the year ended December 31, 2021. ii. Net cash used in investing activities We incurred $25,071,372 in net cash expenditures for investing activities during the year ended December 31, 2021, as compared to $20,526,004 for the year ended December 31, 2020. Expenditures in the year ended December 31, 2021 were mainly for the payments for the acquisition of lands of Hebei Tengsheng. iii. Net cash provided in financing activities Net cash provided by financing activities was proceeds from issuance of shares and warrants net of repayment of loans and lease obligation of $34,193,824 for the year ended December 31, 2021, as compared to net cash provided by financing activities in the amount of $2,054,855 for the year ended December 31, 2020. Short-term bank loans December 31, December 31, 2021 2020 Industrial and Commercial Bank of China (“ICBC”) Loan 1 $ - $ 6,435,348 Industrial and Commercial Bank of China (“ICBC”) Loan 2 5,958,561 - Total short-term bank loans $ 5,958,561 $ 6,435,348 (a) 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 was fully repaid in November 2021. (b) On November 25, 2021, the Company entered into a working capital loan agreement with the ICBC, with a balance of $5,958,561 as of December 31, 2021. The working capital loan was secured by the Land use right of Dongfang Paper as collateral for the benefit of the bank and guaranteed by Mr. Zhenyong Liu, the Company’s CEO. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid at various installments by November 17, 2022. As of December 31, 2020, there were guaranteed short-term borrowings of $5,958,561 and unsecured bank loans of $nil. As of December 31, 2020, there were guaranteed short-term borrowings of $6,435,348 and unsecured bank loans of $nil. The average short-term borrowing rates for the years ended December 31, 2021, and 2020 were approximately 4.73% and 4.79%, respectively. 47 Long-term loans from credit union As of December 31, 2021 and 2020, loans payable to Rural Credit Union of Xushui County, amounted to $9,818,530 and $9,594,017, respectively. On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of December 31, 2021, and 2020, total outstanding loan balance was $1,348,871 and $1,318,028, respectively, Out of the total outstanding loan balance, current portion amounted were $329,376 and $214,563 as of December 31, 2021, and 2020, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,019,495 and $1,103,465 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2021, and 2020, respectively. On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $1,130,333 and $2,349,796 as of December 31, 2021, and 2020, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of December 31, 2021, and 2020, the total outstanding loan balance was $3,921,139 and $3,831,476, respectively. Out of the total outstanding loan balance, current portion amounted were $1,960,569 and $337,169 as of December 31, 2021, and 2020 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,960,570 and $3,494,307 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2021, and 2020, 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 was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on April 16, 2024 according to the new schedule. 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, 2021, and 2020, the total outstanding loan balance was $2,509,528 and $2,452,145, respectively, which are presented as current liabilities in the consolidated balance sheet as of December 31, 2021, and 2020. 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 was renewed on March 22, 2021 and December 24, 2021 and extended for additional 3 years in total, which will be due on December 11, 2024 according to the new schedule. 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, 2021, and 2020, the total outstanding loan balance was $2,038,992 and $1,992,368, respectively, which are presented as current liabilities in the consolidated balance sheet as of December 31, 2021, and 2020. Total interest expenses for the short-term bank loans and long-term loans for the years ended December 31, 2021, and 2020 were $1,052,904 and $998,429, respectively. Related party transactions Mr. Zhenyong Liu 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 $402,047 and $392,855 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, 2021, and 2020, respectively. 48 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, 2021, and 2020, approximately $47,054 and $45,978 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 2021, and 2020, the outstanding interest was $215,565 and $210,635, 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, 2021, and 2020, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil for the years ended December 31, 2021, and 2020. The accrued interest owe to the CEO was approximately $664,666 and $649,468, as of December 31, 2021, and 2020, respectively, which was recorded in other payables and accrued liabilities. On December 8, 2021, the Company entered an agreement with Mr. Zhenyong Liu which allows Mr. Zhenyong Liu to borrow from the Company an amount of $6,915,176 (RMB44,089,085). The loanwill be due on June 29, 2022. The loan is unsecured and carries a fixed interest rate of 3% per annum. As of December 31, 2021, the outstanding balance of the loan was $6,915,176 and outstanding interest due from CEO is $nil, which were recorded in due from related parties as part of the current assets in the consolidated balance sheet. As of December 31, 2021, and 2020, amount due to shareholder are $727,433, which represent funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free. Critical Accounting Policies and Estimates The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates. The most critical accounting policies are listed below: Revenue Recognition Policy The Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered when the customer’s truck picks up goods at our finished goods inventory warehouse. Long-Lived Assets The Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry. For the years ended December 31, 2021 and 2020, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate any need to record such impairment in the future. 49 Foreign Currency Translation The functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of December 31, 2021 and 2020 to translate the Chinese RMB to the U.S. Dollars are 6.3757:1 and 6.5249:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.4474:1, and 6.8941:1 for the years ended December 31, 2021 and 2020, respectively. Translation adjustments are included in other comprehensive income (loss). Off-Balance Sheet Arrangements We were the guarantor for Baoding Huanrun Trading Co., for its long-term bank loans in an amount of $4,862,211 (RMB31,000,000), which matures at various times in 2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the CECL standards. The ASU is effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements.