IT TECH PACKAGING, INC. 10-Q

Item 1. Financial Statements IT TECH PACKAGING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2022 AND DECEMBER 31, 2021 March 31, December 31, 2022 2021 (Unaudited) (Audited) ASSETS Current Assets Cash and bank balances $ 15,358,443 $ 11,201,612 Restricted cash - - Accounts receivable (net of allowance for doubtful accounts of $ 73,563 and $ 69,053 as of March 31, 2022 and December 31, 2021, respectively) 4,984,738 4,868,934 Inventories 4,354,676 5,844,895 Prepayments and other current assets 23,025,189 25,796,640 Due from related parties 892,743 7,804,068 Total current assets 48,615,789 55,516,149 Prepayment on property, plant and equipment - 43,446,210 Finance lease right-of-use assets, net 2,254,357 2,286,459 Property, plant, and equipment, net 174,077,916 126,587,428 Value-added tax recoverable 2,396,938 2,430,277 Deferred tax asset non-current 11,666,488 11,268,679 Total Assets $ 239,011,488 $ 241,535,202 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Short-term bank loans $ 5,984,374 $ 5,958,561 Current portion of long-term loans from credit union 6,868,089 6,838,465 Lease liability 228,051 210,161 Accounts payable 72,616 10,255 Advance from customers 39,866 39,694 Due to related parties 727,433 727,433 Accrued payroll and employee benefits 278,287 291,206 Other payables and accrued liabilities 5,739,631 5,250,539 Income taxes payable - 1,108,038 Total current liabilities 19,938,347 20,434,352 Loans from credit union 2,992,974 2,980,065 Deferred gain on sale-leaseback 131,185 155,110 Lease liability - non-current 84,204 152,233 Derivative liability 1,676,946 2,063,534 Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $ 17,240,190 and $ 17,924,475 as of March 31, 2022 and December 31, 2021, respectively) 24,823,656 25,785,294 Commitments and Contingencies Stockholders’ Equity Common stock, 500,000,000 shares authorized, $ 0.001 par value per share, 99,049,900 shares issued and outstanding as of March 31, 2022 and December, 31,2021. 99,050 99,050 Additional paid-in capital 88,927,787 88,927,787 Statutory earnings reserve 6,080,574 6,080,574 Accumulated other comprehensive income 11,422,306 10,496,168 Retained earnings 107,658,115 110,146,329 Total stockholders’ equity 214,187,832 215,749,908 Total Liabilities and Stockholders’ Equity $ 239,011,488 $ 241,535,202 See accompanying notes to condensed consolidated financial statements. 1 IT TECH PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Three Months Ended March 31, 2022 2021 Revenues $ 15,481,618 $ 24,209,427 Cost of sales ( 15,171,173 ) ( 22,378,422 ) Gross Profit 310,445 1,831,005 Selling, general and administrative expenses ( 3,300,881 ) ( 2,555,318 ) Gain on acquisition 34,003 - Loss from Operations ( 2,956,433 ) ( 724,313 ) Other Income (Expense): Interest income 3,455 4,333 Subsidy income - 196,787 Interest expense ( 270,813 ) ( 278,901 ) Gain (Loss) on derivative liability 386,588 ( 3,636,967 ) Loss before Income Taxes ( 2,837,203 ) ( 4,439,061 ) Provision for Income Taxes 348,989 100,205 Net Loss ( 2,488,214 ) ( 4,338,856 ) Other Comprehensive Income (Loss) Foreign currency translation adjustment 926,138 ( 1,468,770 ) Total Comprehensive Loss $ ( 1,562,076 ) $ ( 5,807,626 ) Losses Per Share: Basic and Diluted Losses per Share $ ( 0.03 ) $ ( 0.12 ) Outstanding – Basic and Diluted 99,049,900 36,156,280 2 IT TECH PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Three Months Ended March 31, 2022 2021 Cash Flows from Operating Activities: Net income $ ( 2,488,214 ) $ ( 4,338,856 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,773,236 4,092,487 (Gain) Loss on derivative liability ( 386,588 ) 3,636,967 Gain on acquisition ( 34,001 ) - Allowance for bad debts 4,211 52,018 Deferred tax ( 348,989 ) ( 589,094 ) Changes in operating assets and liabilities: Accounts receivable ( 98,921 ) ( 2,920,798 ) Prepayments and other current assets 3,056,189 ( 3,645,323 ) Inventories 1,515,515 ( 6,270,151 ) Accounts payable 62,315 1,785,742 Related parties - ( 311,679 ) Accrued payroll and employee benefits ( 14,181 ) 86,375 Other payables and accrued liabilities 483,666 ( 84,719 ) Income taxes payable ( 1,112,820 ) 226,699 Net Cash Provided by (Used in) Operating Activities 4,411,418 ( 8,280,332 ) Cash Flows from Investing Activities: Purchases of property, plant and equipment ( 368,504 ) ( 44,599 ) Acquisition of land ( 6,807,468 ) - Net Cash Used in Investing Activities ( 7,175,972 ) ( 44,599 ) Cash Flows from Financing Activities: Proceeds from issuance of shares and warrants, net - 41,837,553 Payment of capital lease obligation ( 51,708 ) ( 43,230 ) Loan repaid by a related party 6,945,022 - Net Cash Provided by Financing Activities 6,893,314 41,794,323 Effect of Exchange Rate Changes on Cash and Cash Equivalents 28,071 ( 170,838 ) Net Increase in Cash and Cash Equivalents 4,156,831 33,298,554 Cash, Cash Equivalents and Restricted Cash - Beginning of Period 11,201,612 4,142,437 Cash, Cash Equivalents and Restricted Cash - End of Period $ 15,358,443 $ 37,440,991 Supplemental Disclosure of Cash Flow Information: Cash paid for interest, net of capitalized interest cost $ 85,094 $ 97,642 Cash paid for income taxes $ 1,112,820 $ 262,191 Cash and bank balances 15,358,443 37,440,991 Restricted cash - - Total cash, cash equivalents and restricted cash shown in the statement of cash flows 15,358,443 37,440,991 See accompanying notes to condensed consolidated financial statements. 3 IT TECH PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Accumulated Additional Statutory Other Common Stock Paid-in Earnings Comprehensive Retained Shares Amount Capital Reserve Income (loss) Earnings Total Balance at December 31, 2020 28,535,816 $ 28,536 $ 53,989,548 $ 6,080,574 $ 5,740,722 $ 109,240,794 $ 175,080,174 Issuance of shares to institutional investors 26,181,818 26,182 8,002,488 8,028,670 Issuance of shares to public investors 29,277,866 29,278 15,585,867 15,615,145 Exercise of warrants 15,054,400 15,054 11,349,884 11,364,938 Foreign currency translation adjustment ( 1,468,772 ) ( 1,468,772 ) Net income ( 4,338,856 ) ( 4,338,856 ) Balance at March 31, 2021 99,049,900 $ 99,050 $ 88,927,787 $ 6,080,574 $ 4,271,950 $ 104,901,938 $ 204,281,299 Balance at December 31, 2021 99,049,900 $ 99,050 $ 88,927,787 $ 6,080,574 $ 10,496,168 $ 110,146,329 $ 215,749,908 Foreign currency translation adjustment 926,138 926,138 Net income ( 2,488,214 ) ( 2,488,214 ) Balance at March 31, 2022 99,049,900 $ 99,050 $ 88,927,787 $ 6,080,574 $ 11,422,306 $ 107,658,115 $ 214,187,832 4 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Organization and Business Background IT Tech Packaging, Inc. (the “Company”) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding Dongfang Paper Milling Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007. On August 1, 2018, we changed our corporate name to IT Tech Packaging, Inc.. The name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. In connection with the name change, our common stock began being traded under a new NYSE symbol, “ITP,” and a new CUSIP number, 46527C100, at such time. On October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang Zhiye Holding Limited (“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British Virgin Islands, and issued the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse stock split effected in November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders of Dongfang Holding in accordance with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement, Dongfang Holding owned all of the issued and outstanding stock and ownership of Dongfang Paper and such shares of Dongfang Paper were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang Holding’s behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital with the relevant PRC Administration of Industry and Commerce as the 100 % owner of Dongfang Paper’s shares. As a result of the merger transaction, Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned subsidiary, Dongfang Paper, became an indirectly owned subsidiary of the Company. Dongfang Holding, as the 100 % owner of Dongfang Paper, was unable to complete the registration of Dongfang Paper’s capital under its name within the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions described below, Dongfang Holding directed the trustees to return the shares of Dongfang Paper to their original shareholders, and the original Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”) to transfer the control of Dongfang Paper over to Baoding Shengde. On June 24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued and outstanding shares of Shengde Holdings Inc., a Nevada corporation. Shengde Holdings Inc. was incorporated in the State of Nevada on February 25, 2009. On June 1, 2009, Shengde Holdings Inc. incorporated Baoding Shengde, a limited liability company organized under the laws of the PRC. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc., it is regarded as a wholly foreign-owned entity under PRC law. 5 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) To ensure proper compliance of the Company’s control over the ownership and operations of Dongfang Paper with certain PRC regulations, on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”) with Dongfang Paper and Dongfang Paper Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc. (“Shengde Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”), a wholly foreign-owned enterprise in the PRC with an original registered capital of $ 10,000,000 (subsequently increased to $ 60,000,000 in June 2010). Baoding Shengde is mainly engaged in production and distribution of digital photo paper and single-use face masks and is 100 % owned by Shengde Holdings. Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement, which generally provides that Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange for service fees including a fee equivalent to 80 % of Dongfang Paper’s total annual net profits; (ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal amount of $ 10,000,000 to Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other things, that Dongfang Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each owner’s equity interest in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang Paper Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and (v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights at any equity owners’ meeting of Dongfang Paper or with respect to any equity owner action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association. The terms of the agreement are binding on the parties for as long as Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. An Dongfang Paper Equity Owner will cease to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the Company had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009 and continued to control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements is considered as a business combination under common control. On February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate the above-mentioned $ 10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through Baoding Shengde instead of Dongfang Paper, the $ 10,000,000 loan contemplated was never made prior to the point of termination. The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over Dongfang Paper and its businesses in the PRC. An agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010, reiterating that Baoding Shengde is entitled to 100 % of the distributable profit of Dongfang Paper, pursuant to the above- mentioned Contractual Agreements. In addition, Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s unappropriated earnings as dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and thereafter. On June 25, 2019, Dongfang Paper entered into an acquisition agreement with the shareholder of Hebei Tengsheng Paper Co., Ltd. (“Hebei Tengsheng”), a limited liability company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. Full payment of the consideration in the amount of RMB 320 million (approximately $ 45 million) was made on February 23, 2022. The Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang Paper being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”). The revenue generated from Dongfang Paper for the three months ended March 31, 2022 and 2021 was accounted for 99.63 % and 99.46 % of the Company’s total revenue, respectively. Dongfang Paper also accounted for 86.52 % and 84.13 % of the total assets of the Company as of March 31, 2022 and December 31, 2021, respectively. 6 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of March 31, 2022 and December 31, 2021, details of the Company’s subsidiaries and variable interest entities are as follows: Date of Place of Incorporation Incorporation or Percentage of Name or Establishment Establishment Ownership Principal Activity Subsidiary: Dongfang Holding November 13, 2006 BVI 100 % Inactive investment holding Shengde Holdings February 25, 2009 State of Nevada 100 % Investment holding Baoding Shengde June 1, 2009 PRC 100 % Paper production and distribution Variable interest entity (“VIE”): Dongfang Paper March 10, 1996 PRC Control* Paper production and distribution * Dongfang Paper is treated as a 100 % controlled variable interest entity of the Company. However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the aforementioned agreements. In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or being required to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote. 7 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company has aggregated the financial information of Dongfang Paper in the table below. The aggregate carrying value of Dongfang Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 are as follows: The Company and its consolidated subsidiaries are not required to provide financial support to the VIE, and no creditor (or beneficial interest holders) of the VIE have recourse to the assets of Company unless the Company separately agrees to be subject to such claims. There are no terms in any agreements or arrangements, implicit or explicit, which require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE does require financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIE. March 31, December 31, 2022 2021 ASSETS Current Assets Cash and bank balances $ 2,724,233 $ 1,921,407 Restricted cash - - Accounts receivable 4,984,738 4,867,759 Inventories 4,343,573 5,823,762 Prepayments and other current assets 17,582,379 19,942,878 Due from related parties 892,743 888,893 Total current assets 30,527,666 33,444,699 Prepayment on property, plant and equipment 41,877,755 Finance lease right-of-use assets, net 2,254,357 2,286,459 Property, plant, and equipment, net 163,940,060 116,054,387 Deferred tax asset non-current 10,080,698 9,547,741 Total Assets $ 206,802,781 $ 203,211,041 LIABILITIES Current Liabilities Short-term bank loans $ 5,984,374 $ 5,958,561 Current portion of long-term loans from credit union 2,299,865 2,289,945 Lease liability 228,051 210,161 Accounts payable 72,616 10,255 Advance from customers 39,866 39,694 Due to related parties - - Accrued payroll and employee benefits 263,376 279,513 Other payables and accrued liabilities 5,143,679 4,740,900 Income taxes payable - 1,108,038 Total current liabilities 14,031,827 14,637,067 Loans from credit union 2,992,974 2,980,065 Deferred gain on sale-leaseback 131,185 155,110 Lease liability - non-current 84,204 152,233 Total liabilities $ 17,240,190 $ 17,924,475 8 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (2) Basis of Presentation and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2021 of the Company, and its subsidiaries and variable interest entity (which we sometimes refer to collectively as “the Company”, “we”, “us” or “our”). Principles of Consolidation Our unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of March 31, 2022 and the results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for any future period. Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments 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 period. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates. Valuation of long-lived asset The Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost to dispose. Fair Value Measurements The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 9 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that the Company could realize in a current market exchange. As of March 31, 2022 and December 31, 2021, the carrying value of the Company’s short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values because of the short maturity of these instruments; while loans from credit union and loans from a related party approximate at their fair value as the interest rates thereon are close to the market rates of interest published by the People’s Bank of China. Management determined that liabilities created by beneficial conversion features associated with the issuance of certain warrants (see “ Derivative liabilities” under Note (10)), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities was determined based on management’s estimate of the expected future cash flows required to settle the liabilities. This valuation technique involves management’s estimates and judgment based on unobservable inputs and is classified in level 3. Non-Recurring Fair Value Measurements The Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the possibility of impairment. For the continuing operations, long-lived assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. For discontinued operations, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. The fair value of these assets were determined using models with significant unobservable inputs which were classified as Level 3 inputs, primarily the discounted future cash flow. Share-Based Compensation The Company uses the fair value recognition provision of ASC Topic 718, Compensation-Stock Compensation , which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments over the vesting period. The Company also applies the provisions of ASC Topic 505-50, Equity Based Payments to Non-Employees to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of the instruments issued in exchange for such services, whichever is more reliably measurable. (3) Restricted Cash Restricted cash was nil as of March 31, 2022 and December 31, 2021. 10 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (4) Inventories Raw materials inventory includes mainly recycled paper board and recycled white scrap paper. Finished goods include mainly products of corrugating medium paper, offset printing paper and tissue paper products. Inventories consisted of the following as of March 31, 2022 and December 31, 2021: March 31, December 31, 2022 2021 Raw Materials Recycled paper board $ 2,373,036 $ 2,097,062 Recycled white scrap paper 11,859 11,808 Gas 35,213 32,753 Base paper and other raw materials 278,958 206,531 2,699,066 2,348,154 Semi-finished Goods 398,665 96,087 Finished Goods 1,256,945 3,400,654 Total inventory, gross 4,354,676 5,844,895 Inventory reserve - - Total inventory, net $ 4,354,676 $ 5,844,895 (5) Prepayments and other current assets Prepayments and other current assets consisted of the following as of March 31, 2022 and December 31, 2021: March 31, December 31, 2022 2021 Prepaid land lease $ 189,030 $ 188,215 Prepayment for purchase of materials 6,965,186 9,190,527 Prepayment for purchase of equipment 1,114,206 980,786 Value-added tax recoverable 14,735,418 14,740,296 Others 21,349 696,816 $ 23,025,189 $ 25,796,640 (6) Property, plant and equipment, net As of March 31, 2022 and December 31, 2021, property, plant and equipment consisted of the following: March 31, December 31, 2022 2021 Property, Plant, and Equipment: Land use rights $ 63,287,459 $ 12,790,062 Building and improvements 74,932,903 74,609,698 Machinery and equipment 171,073,452 170,149,367 Vehicles 797,986 725,838 Construction in progress - - Totals 310,091,800 258,274,965 Less: accumulated depreciation and amortization ( 136,013,884 ) ( 131,687,537 ) Property, Plant and Equipment, net $ 174,077,916 $ 126,587,428 As of March 31, 2022 and December 31, 2021, land use rights represented twenty three parcels of state-owned lands located in Xushui District and Wei County of Hebei Province in China, with lease terms of 50 years expiring in 2061 and 2068, respectively. 11 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of March 31, 2022 and December 31, 2021, certain property, plant and equipment of Dongfang Paper with net values of $ 928,347 and $ 1,130,333 , respectively, have been pledged pursuant to a long-term loan from credit union of Dongfang Paper. Land use right of Dongfang Paper with net values of $ 5,990,831 and $ 6,002,195 , respectively, as of March 31, 2022 and December 31, 2021 was pledged for the bank loan from Industrial & Commercial Bank of China. Land use right of Hebei Tengsheng with net value of $5,704,148 and $5,690,261 , respectively, as of March 31, 2022 and December 31, 2021 was pledged for a long-term loan from credit union of Baoding Shengde. In addition, land use right of Hebei Tengsheng with net value of $ 4,417,524 and $ 4,407,889 , respectively, as of March 31, 2022 and December 31, 2021 was pledged for another long-term loan from credit union of Baoding Shengde. See “ Short-term bank loans ” under Note (7), Loans Payable, for details of the transaction and asset collaterals. Depreciation and amortization of property, plant and equipment was $ 3,773,236 and $ 4,089,067 for the three months ended March 31, 2022 and 2021, respectively. (7) Financing with Sale-Leaseback The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$ 2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$ 2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years . At the end of the lease term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $ 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. The balance of Leased Equipment net of amortization was $ 2,254,357 and $ 2,286,459 as of March 31, 2022 and December 31, 2021, respectively. The lease liability was $ 312,255 and $ 362,394 , and its current portion in the amount of $ 228,051 and $ 210,161 as of March 31, 2022 and December 31, 2021, respectively. Amortization of the Leased Equipment was $ 42,006 and $ 40 ,997for the three months ended March 31, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $ 13,507 and $ 20,418 for the three months ended March 31, 2022 and 2021. As a result of the sale and leaseback, a deferred gain in the amount of $ 430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to amortization of the Leased Equipment. The future minimum lease payments of the capital lease as of March 31, 2022 were as follows: March 31, Amount 2023 260,861 2024 86,954 Less: unearned discount ( 35,560 ) 312,255 Less: Current portion lease liability ( 228,051 ) $ 84,204 (8) Loans Payable Short-term bank loans On November 25, 2021, the Company entered into a working capital loan agreement with the ICBC, with a balance of $ 5,984,374 and $ 5,958,561 as of March 31, 2022 and December 31, 2021, respectively. 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. Liu. 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 March 31, 2022, there were guaranteed short-term borrowings of $ 5,984,374 and unsecured bank loans of $ nil . As of December 31, 2021, there were guaranteed short-term borrowings of $ 5,958,561 and unsecured bank loans of $ nil . The average short-term borrowing rates for the three months ended March 31, 2022 and 2021 were approximately 4.79 %. 12 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Long-term loans from credit union As of Mar 31, 2022 and December 31, 2021, loans payable to Rural Credit Union of Xushui District, amounted to $ 9,861,063 and $ 9,818,530 , respectively. March 31, December 31, 2022 2021 Rural Credit Union of Xushui District Loan 1 $ 1,354,715 $ 1,348,871 Rural Credit Union of Xushui District Loan 2 3,938,124 3,921,139 Rural Credit Union of Xushui District Loan 3 2,520,399 2,509,528 Rural Credit Union of Xushui District Loan 4 2,047,825 2,038,992 Total 9,861,063 9,818,530 Less: Current portion of long-term loans from credit union ( 6,868,089 ) ( 6,838,465 ) Long-term loans from credit union $ 2,992,974 $ 2,980,065 As of Mar 31, 2022, the Company’s long-term debt repayments for the next coming years were as follows: Amount Fiscal year Remainder of 2022 $ 6,868,089 2023 2,992,974 Total 9,861,063 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 March 31, 2022 and December 31, 2021, total outstanding loan balance was $ 1,354,715 and$ 1,348,871 , respectively, Out of the total outstanding loan balance, current portion amounted were $ 330,802 and $ 329,376 as of March 31, 2022 and December 31, 2021, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $ 1,023,913 and $ 1,019,495 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2022 and December 31, 2021, 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 $ 928,347 and $ 1,130,333 as of March 31, 2022 and December 31, 2021, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64 % per month. As of March 31, 2022 and December 31, 2021, the total outstanding loan balance was $ 3,938,124 and $ 3,921,139 , respectively. Out of the total outstanding loan balance, current portion amounted were $ 1,969,062 and $ 1,960,569 as of March 31, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $ 1,969,062 and $ 1,960,570 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, the total outstanding loan balance was $ 2,520,399 and $ 2,509,528 , respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2022 and December 31, 2021. 13 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 March 31, 2022 and December 31, 2021, the total outstanding loan balance was $ 2,047,825 and $ 2,038,992 , respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2022 and December 31, 2021. Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2022 and 2021 were $ 257,306 and $ 258,483 , respectively. (9) Related Party Transactions Mr. Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $ 2,249,279 , together with interest of $ 391,374 for the period from 2013 to 2015. Approximately $ 403,791 and $ 402,047 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 March 31, 2022 and December 31, 2021, respectively. On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $ 8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35 % per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $ 6,012,416 to Mr. Zhenyong Liu, together with interest of $ 288,596 . In February 2018, the company paid off the remaining balance, together with interest of $ 20,400 . As of March 31, 2022 and December 31, 2021, approximately $ 47,257 and $ 47,054 of interest, respectively 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 (RMB 120,000,000 ) 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 March 31, 2022 and December 31, 2021, the outstanding interest was $ 216,498 and $ 215,565 , respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. As of March 31, 2022 and December 31, 2021, total amount of loans due to Mr. Zhenyong Liu were $ nil . The interest expense incurred for such related party loans were $ nil for the three months ended March 31, 2022 and 2021. The accrued interest owing to Mr. Zhenyong Liu was approximately $ 667,546 and $ 664,666 , as of March 31, 2022 and December 31, 2021, 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 (RMB 44,089,085 ). The loan will be due on June 29, 2022 . The loan is unsecured and carries a fixed interest rate of 3 % per annum. The loan was repaid by Mr. Zhenyong Liu in February 2022. As of March 31, 2022 and December 31, 2021, amount due to shareholder was $ 727,433 , which represents funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free. Lease of Headquarters Compound Real Properties from a Related Party On August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound (the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $ 2.77 million, $ 1.15 million, and $ 4.31 million respectively. Sales of the LUR and the Industrial Buildings were completed in year 2013. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company for its original use for a term of up to three years , with an annual rental payment of approximately $ 157,522 (RMB 1,000,000 ). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same rental payment as original lease agreement. 14 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (10) Other payables and accrued liabilities Other payables and accrued liabilities consist of the following: March 31, December 31, 2022 2021 Accrued electricity $ 175,436 $ 135,360 Accrued rental 101,528 61,879 Value-added tax payable 190,500 - Accrued interest to a related party 667,546 664,666 Payable for purchase of equipment 3,376,680 3,379,368 Accrued commission to salesmen 16,374 15,274 Accrued bank loan interest 1,183,013 992,989 Others 28,554 1,003 Totals $ 5,739,631 $ 5,250,539 (11) Derivative Liabilities The Company analyzed the warrant for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability since the warrant becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item. The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of March 31, 2022. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the March 31, 2022: Three months ended March 31, 2022 Expected term 1.80 - 2.75 Expected average volatility 85 % - 102 % Expected dividend yield - Risk-free interest rate 0.19 % - 2.45 % The following table summarizes the changes in the derivative liabilities during the three months ended March 31, 2022: Fair Value Measurements Using Significant Observable Inputs (Level 3) Balance at December 31, 2021 $ 2,063,534 Addition of new derivatives recognized as warrant - Addition of new derivatives recognized as loss on derivatives - Exercise of warrants - Change in fair value of derivative liability ( 386,588 ) Balance at March 31, 2022 $ 1,676,946 15 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (12) Common Stock Issuance of common stock to investors On January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 26,181,818 shares of common stock and 26,181,818warrants 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 was $ 0.55 . The exercise price of the warrant was $ 0.55 per share. 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 was $ 0.75 . The exercise price of the warrant was $ 0.75 per share, (13) Warrants Pursuant to the 2020 Purchase Agreement, the Company agreed to sell to such investors an aggregate of 4,400,000 shares of common stock and warrants to purchase up to 4,400,000 shares of common stock in a concurrent private placement (the “May 2020 Warrants”). The exercise price of the May 2020 Warrant is $ 0.7425 per share. These warrants are exercisable on July 23, 2020 and have a term of exercise equal to five years and six months from the date of issuance till July 23, 2025. 880,000 May 2020 Warrants were exercised in February 2021 at the exercise price of $0.7425 per share and 3,520,000 May 2020 Warrants were outstanding as of March 31, 2022. The Company classified warrant as liabilities and accounted for the issuance of the May 2020Warrants as a derivative. 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 (the “January 2021 Warrants”). The January 2021 Warrants are exercisable commencing on January 20, 2021 at an exercise price of $0.55 and will expire on January 20, 2026. 14,106,900 January 2021 Warrants were exercised in January and February of 2021 at the exercise price of $0.55 per share. 12,074,918 January 2021 Warrants were outstanding as of March 31, 2022 . 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 (the “March 2021 Warrants”). The March 2021Warrants are exercisable commencing on March 1, 2021at an exercise price of $0.75 and will expire on March 1, 2026. 67,500 March 2021 Warrants were exercised in January and March 2021 at the exercise price of $0.75 per share and 14,571,433 March 2021 Warrants were outstanding as of March 31, 2022. The Company classified warrants as liabilities and accounted for the issuance of the warrants as a derivative. A summary of stock warrant activities is as below: Three months Ended March 31, 2022 Number Weight average exercise price Outstanding and exercisable at beginning of the period 30,166,351 $ 0.6691 Issued during the period - Exercised during the period - Cancelled or expired during the period - Outstanding and exercisable at end of the period 30,166,351 $ 0.6691 16 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes information relating to outstanding and exercisable warrants as of March 31, 2022. Warrants Outstanding Warrants Exercisable Weighted Average Remaining Number of Contractual life Weighted Average Number of Weighted Average Shares (in years) Exercise Price Shares Exercise Price 30,166,351 3.84 $ 0.6691 30,166,351 $ 0.6691 Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at March 31, 2022 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). The intrinsic value of the warrants as of March 31, 2022and December 31, 2021 are nil. (14) Earnings Per Share For the three months ended March 31, 2022 and 2021, basic and diluted net income per share are calculated as follows: Three Months Ended March 31, 2022 2021 Basic loss per share Net loss for the period - numerator $ ( 2,488,214 ) $ ( 4,338,856 ) Weighted average common stock outstanding - denominator 99,049,900 36,156,280 Net loss per share $ ( 0.03 ) $ ( 0.12 ) Diluted income per share Net income for the period- numerator $ ( 2,488,214 ) $ ( 4,338,856 ) Weighted average common stock outstanding - denominator 99,049,900 36,156,280 Effect of dilution - - Weighted average common stock outstanding - denominator 99,049,900 36,156,280 Diluted loss per share $ ( 0.03 ) $ ( 0.12 ) For the three months ended March 31, 2022 and 2021 there were no securities with dilutive effect issued and outstanding. 17 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (15) Income Taxes United States The Company and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34 %and 0 %, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJA”), which significantly changed U.S. tax law. The 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate from the highest rate of 35 % to 21 % effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA. Transition tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional income tax expense of approximately $ 80,000 in the fourth quarter of 2017. However, the Company is continuing to gather additional information and will consider additional technical guidance to more precisely compute and account for the amount of the transition tax. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable over eight years beginning in 2018. PRC Dongfang Paper and Baoding Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25 %. The provisions for income taxes for three months ended March 31, 2022 and 2021 were as follows: Three Months Ended March 31, 2022 2021 Provision for Income Taxes Current Tax Provision PRC $ - $ 488,889 Deferred Tax Provision PRC ( 348,989 ) ( 589,094 ) Total Provision for (Deferred tax benefit)/ Income Taxes $ ( 348,989 ) $ ( 100,205 ) 18 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In addition to the reversible future PRC income tax benefits stemming from the timing differences of items such as recognition of asset disposal gain or loss and asset depreciation, the Company was incorporated in the United States and incurred net operating losses of approximately $ 2,508,797 and $ 0 for U.S. income tax purposes for the years ended December 31, 2021 and 2019, respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry forwards would expire, if not utilized, during the period of 2030 through 2035. As of March 31, 2022,management believed that the realization of all the U.S. income tax benefits from these losses, which generally would generate a deferred tax asset if it can be expected to be utilized in the future, appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, As of March 31, 2022, the Company provided a 100 % valuation allowance on the U.S. deferred tax asset benefit to reduce the total deferred tax asset to the amount realizable for the PRC income tax purposes. Management reviews this valuation allowance periodically and will make adjustments as warranted. A summary of the otherwise deductible (or taxable) deferred tax items is as follows: March 31, December 31, 2022 2021 Deferred tax assets (liabilities) Depreciation and amortization of property, plant and equipment $ 15,237,384 $ 14,754,456 Impairment of property, plant and equipment 808,596 783,433 Miscellaneous 373,757 342,170 Net operating loss carryover of PRC company 246,751 388,620 Total deferred tax assets 16,666,488 16,268,679 Less: Valuation allowance ( 5,000,000 ) ( 5,000,000 ) Total deferred tax assets, net $ 11,666,488 11,268,679 Three Months Ended March 31, 2022 2021 PRC Statutory rate 25.0 % 25.0 % Effect of different tax jurisdiction ( 22.7 %) Effect of tax and book difference ( 12.7 %) (Over) Under-provision in previous year Change in valuation allowance Effective income tax rate 12.3 % 2.3 % During the three months ended March 31, 2022 and 2021, the effective income tax rate was estimated by the Company to be 12.3 % and 2.3 %, respectively. As of December 31, 2017, except for the one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated foreign E&Ps, the Company does not believe that its future dividend policy and the available U.S. tax deductions and net operating losses will cause the Company to recognize any other substantial current U.S. federal or state corporate income tax liability in the near future. Nor does it believe that the amount of the repatriation of the VIE’s earnings and profits for purposes of paying dividends will change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required. The Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of March 31, 2022 and December 31, 2021, management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial statements for the three months ended March 31, 2022 and 2021, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority. 19 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (16) Stock Incentive Plans 2021 Incentive Stock Plan On November 12, 2021, the Company’s Annual General Meeting adopted and approved the 2021 Omnibus Equity Incentive Plan of IT Tech Packaging, Inc. (the”2021 Plan”).Under the 2021 ISP, the Company has reserved a total of 1,500,000 shares of common stock for issuance as or under awards to be made to the directors, officers, employees and/or consultants of the Company and its subsidiaries. (17) Commitments and Contingencies Operating Lease The Company leases 32.95 acres of land from a local government in Xushui District, Baoding City, Hebei, China through a real estate lease with a 30 -year term, which expires on December 31, 2031 . The lease requires an annual rental payment of approximately $ 18,903 (RMB 120,000 ). This operating lease is renewable at the end of the 30 -year term. As mentioned in Note (8) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei Fangsheng agrees to lease the Industrial Buildings back to the Company at an annual rental of $ 157,522 (RMB 1,000,000 ), for a total term of up to five years . Future minimum lease payments of all operating leases are as follows: March 31, Amount 2023 71,411 2024 18,903 2025 18,903 2026 18,903 2027 18,903 Thereafter 89,789 Total operating lease payments $ 236,813 Capital commitment As of March 31, 2022, the Company has entered into several contracts for the purchase of paper machine of a new tissue paper production line PM10 and the improvement of Industrial Buildings. Total outstanding commitments under these contracts were $ 4,749,646 and $ 4,700,927 as of March 31, 2022 and December 31, 2021, respectively. The Company expected to pay off all the balances within 1 - 3 years. Guarantees and Indemnities The Company agreed with Baoding Huanrun Trading Co., a major supplier of raw materials, to guarantee certain obligations of this third party, and as of March 31, 2022 and December 31, 2021, the Company guaranteed its long-term loan from financial institutions amounting to $ 4,883,274 (RMB 31,000,000 ) and $ 4,862,211 (RMB 31,000,000 ), respectively, that matured at various times in 2018-2023. If Huanrun Trading Co., were to become insolvent, the Company could be materially adversely affected. (18) Segment Reporting Since March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business operating segments: Dongfang Paper, which produces offset printing paper and corrugating medium paper, and Baoding Shengde, which produces digital photo paper. They are managed separately because each business requires different technology and marketing strategies. The Company evaluates performance of its operating segments based on net income. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui County, Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC. 20 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Summarized financial information for the three reportable segments is as follows: Three Months Ended March 31, 2022 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, Paper Tengsheng Shengde to Segments Inter-segment consolidated Revenues $ 15,026,633 $ 398,388 $ 56,597 $ - $ - $ 15,481,618 Gross profit 857,544 ( 563,777 ) 16,678 - - 310,445 Depreciation and amortization 1,270,492 2,061,937 440,807 - - 3,773,236 Interest income 1,956 170 1,329 - - 3,455 Interest expense 173,189 13,507 84,117 - - 270,813 Income tax expense(benefit) ( 80,399 ) ( 411,191 ) 142,601 - - ( 348,989 ) Net income (loss) ( 704,673 ) ( 1,605,442 ) ( 231,890 ) 19,788 34,003 ( 2,488,214 ) Three Months Ended March 31, 2021 Dongfang Hebei Baoding Not Attributable Elimination of Enterprise-wide, Paper Tengsheng Shengde to Segments Inter-segment consolidated Revenues $ 22,827,553 $ 1,251,416 $ 130,458 $ - $ - $ 24,209,427 Gross profit 2,262,681 ( 456,207 ) 24,531 - - 1,831,005 Depreciation and amortization 1,833,101 2,257,067 2,319 - - 4,092,487 Interest income 2,366 206 1,761 - - 4,333 Interest expense 176,386 20,418 82,097 - - 278,901 Income tax expense(benefit) 416,855 ( 515,629 ) ( 1,431 ) - - ( 100,205 ) Net income (loss) 1,087,209 ( 1,478,604 ) ( 68,045 ) ( 3,879,416 ) - ( 4,338,856 ) As of March 31, 2022 Dongfang Hebei Baoding Not Attributable Elimination of Inter- Enterprise- wide, Paper Tengsheng Shengde to Segments segment consolidated Total assets $ 63,717,093 143,085,690 23,402,793 8,805,912 - 239,011,488 As of December 31, 2021 Dongfang Hebei Baoding Not Attributable Elimination of Inter- Enterprise- wide, Paper Tengsheng Shengde to Segments segment consolidated Total assets $ 109,369,166 93,841,874 29,181,392 9,142,770 - 241,535,202 21 IT TECH PACKAGING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (19) Concentration and Major Customers and Suppliers For the three months ended March 31, 2022, the Company had no single customer contributed over 10 % of total sales. For the three months ended March 31, 2021, the Company had no single customer contributed over 10 % of total sales. For the three months ended March 31, 2022, the Company had two major suppliers accounted for 77 % and 13 % of total purchases. For the three months ended March 31, 2021, the Company had two major suppliers accounted for 81 % and 10 % of total purchases. (20) Concentration of Credit Risk Financial instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of the United States as of as of March 31, 2022 and December 31, 2021. On May 1, 2015, the new “Deposit Insurance Regulations” was effective in the PRC that the maximum protection would be up to RMB 500,000 ($ 78,762) per depositor per insured financial intuition, including both principal and interest. For the cash placed in financial institutions in the United States, the Company’s U.S. bank accounts are all fully covered by the FDIC insurance as of March 31, 2022 and December 31, 2021, while for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB 500,000 amounted to RMB 39,944,290 ($ 6,292,223 ) as of March 31, 2022. (21) Risks and Uncertainties The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates, and operating in the PRC under its various laws and restrictions. (22) Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic326): 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. (23) Subsequent Event None. 22