IT TECH PACKAGING, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Notice Regarding Forward-Looking Statements The following discussion of the financial condition and results of operations of the Company for the periods ended June 30, 2022 and 2021 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere in this quarterly report. In this quarterly report, references to “the Company,” “we,” “our” and “us” refer to IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise. We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our products, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”, “may”, “should”, “will”, “would”, and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking statements. In evaluating the forward-looking statements contained in this report, you should consider various factors, including, without limitation, the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitably, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities laws. Impact of COVID-19 on Our Operations and Financial Performance Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. It is, however, still unclear how the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues. While we have resumed business operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally. Results of Operations Comparison of the Three months ended June 30, 2022 and 2021 Revenue for the three months ended June 30, 2022 was $31,788,884, a decrease of $14,746,031, or 31.69%, from $46,534,915 for the same period in the previous year. This was mainly due to the decrease in sales volume of regular corrugating medium paper, Offset Printing Paper and tissue paper products. 23 Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products Revenue from sales of offset printing paper, corrugating medium paper (“CMP”) and tissue paper products for the three months ended June 30, 2022 was $31,701,305, a decrease of $14,724,740, or 31.72%, from $46,426,045 for the second quarter of 2021. Total offset printing paper, CMP and tissue paper products sold during the three months ended June 30, 2022 amounted to 65,968 tonnes, a decrease of 20,641tonnes, or 23.83%, compared to 86,609 tonnes sold in the comparable period in the previous year. Due to the sporadic situation of COVID-19 in China, our factory facilities were operated in a limited, transitional basis during the three months ended June 30, 2022. The changes in revenue dollar amount and in quantity sold for the three months ended June 30, 2022 and 2021 are summarized as follows: Three Months Ended Three Months Ended Percentage June 30, 2022 June 30, 2021 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 53,943 $ 25,853,442 60,507 $ 30,252,256 (6,564 ) $ (4,398,814 ) -10.85 % -14.54 % Light-Weight CMP 　 11,642 $ 5,436,476 　 13,491 $ 6,561,375 　 (1,849) $ (1,124,899 ) 　 -13.71 % 　 -17.14 % Total CMP 65,585 $ 31,289,918 73,998 $ 36,813,631 (8,413 ) $ (5,523,713 ) -11.37 % -15.00 % Offset Printing Paper - $ - 10,415 $ 7,184,221 (10,415 ) $ (7,184,221 ) (100.00 )% (100.00 )% Tissue Paper Products 383 $ 411,387 2,196 $ 2,428,193 (1,813 ) $ (2,016,806 ) -82.56 % -83.06 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 　 65,968 $ 31,701,305 　 86,609 $ 46,426,045 　 (20,641) $ (14,724,740 ) 　 -23.83 % 　 -31.72 % Monthly sales revenue for the 24 months ended June 30, 2022, are summarized below: The Average Selling Prices (ASPs) for our main products in the three months ended June 30, 2022 and 2021 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light-Weight CMP ASP Tissue Paper Products ASP Three Months ended June 30, 2021 $ 690 $ 500 $ 486 $ 1,106 Three Months ended June 30, 2022 $ - $ 479 $ 467 $ 1,074 Decrease from comparable period in the previous year $ n/a $ (21 ) $ (19 ) $ (32 ) Decrease by percentage n/a -4.20 % -3.91 % -2.89 % 24 The following chart shows the month-by-month ASPs for the 24-month period ended June 30, 2022: Corrugating Medium Paper Revenue from CMP amounted to $31,289,918 (98.70% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended June 30, 2022, representing a decrease of $5,523,713, or 15.00%, from $36,813,631 for the comparable period in 2021. We sold 65,585 tonnes of CMP in the three months ended June 30, 2022 as compared to 73,998 tonnes for the same period in 2021, representing an 11.37% decrease in quantity sold. ASP for regular CMP dropped from $500/tonne for the three months ended June 30, 2021 to $479/tonne for the three months ended June 30, 2022, representing a 4.20% decrease. ASP in RMB for regular CMP for the second quarter of 2021 and 2022 was RMB3,224 and RMB3,156, respectively, representing a 2.11% decrease. The quantity of regular CMP sold decreased by 6,564 tonnes, from 60,507 tonnes in the second quarter of 2021 to 53,943 tonnes in the second quarter of 2022. ASP for light-weight CMP decreased from $486/tonne for the three months ended June 30, 2021 to $467/tonne for the three months ended June 30, 2022, representing a 3.91% decrease. ASP in RMB for light-weight CMP for the second quarter of 2021 and 2022 was RMB3,136 and RMB3,064, respectively, representing a 2.30% decrease. The quantity of light-weight CMP sold decreased by 1,849 tonnes, from 13,491 tonnes in the second quarter of 2021, to 11,642 tonnes in the second quarter of 2022. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the second quarter of 2022 and 2021 were 58.98% and 68.20%, respectively, representing a decrease of 9.22%. 25 Quantities sold for regular CMP that was produced by the PM6 production line from July 2020 to June 2022 are as follows: Offset printing paper Revenue from offset printing paper was $nil for the three months ended June 30, 2022 compared to the revenue of $7,184,221 for the three months ended June 30, 2021. Due to the Winter Olympic held in Beijing, China in 2022 and the requirement by the government to stem the sporadic spread of COVID-19, our production of offset printing paper was suspended in the first half of 2022. Tissue Paper Products Revenue from tissue paper products was $411,387 (1.30% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended June 30, 2022, representing a decrease of $2,016,806, or 83.06%, from $2,428,193 for the three months ended June 30, 2021. We sold 383 tonnes of tissue paper in the second quarter of 2022, as compared to 2,196 tonnes in the comparable period of 2021, representing a decrease of 1,813 tonnes, or 82.56%. ASP for tissue paper products decreased from $1,106/tonne for the three months ended June 30, 2021 to $1,074/tonne for the three months ended June 30, 2022, representing a 2.89% decrease due to the appreciation of USD against RMB during the period. ASP in RMB for tissue paper products for the second quarter of 2021 and 2022 was RMB7,130 and RMB7,153, respectively, representing a 0.32% increase. 26 Revenue of Face Mask Revenue generated from selling face mask were $87,579 and $108,869 for the three months ended June 30, 2022 and 2021, respectively, representing a decrease of $21,290, or 19.56%. We sold 3,014 thousand pieces of face masks in the second quarter of 2022, as compared to 2,635 thousand pieces in the comparable period of 2021, an increase of 379 thousand pieces, or 14.38%. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended June 30, 2022 was $31,085,472, a decrease of $12,322,383, or 28.39%, from $43,407,855 for the comparable period in 2021. This was mainly due to the decrease in sales quantity of regular CMP, offset printing paper and tissue paper products. Cost of sales for CMP was $29,859,737 for the quarter ended June 30, 2022, as compared to $34,838,381 for the comparable period in 2021. The decrease in the cost of sales of $4,978,644 for CMP was mainly due to the decrease in sales volume of regular CMP and the decrease in average cost of sales. Average cost of sales per tonne for CMP decreased by 3.40%, from $471 in the second quarter of 2021 to $455 in the second quarter of 2022. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board in the second quarter of 2022 compared to the second quarter of 2021. Cost of sales for offset printing paper was $nil for the quarter ended June 30, 2022, as compared to $5,909,029 for the comparable period in 2021. Cost of sales for tissue paper products was $1,225,735 for the quarter ended June 30, 2022, as compared to $2,660,444 for the comparable period in 2021. The decrease in the cost of sales of $1,434,709 for tissue paper products was mainly due to the decrease in sales volume of tissue paper products, partially offset by the increase in average cost of sales. Average cost of sales per tonne of tissue paper products increased by 164.24%, from $1,211 in the three months ended June 30, 2021, to $3,200 for the comparable period in 2022. This was mainly due to the increase in cost of tissue base paper. Changes in cost of sales and cost per tonne by product for the quarters ended June 30, 2022 and 2021 are summarized below: Three Months Ended Three Months Ended June 30, 2022 June 30, 2021 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 $ 24,746,689 $ 459 $ 28,717,334 $ 475 $ (3,970,645 ) $ (16 ) -13.83 % -3.37 % Light-Weight CMP $ 5,113,048 $ 439 $ 6,121,047 $ 454 $ (1,007,999 ) $ (15 ) -16.47 % -3.30 % Total CMP $ 29,859,737 $ 455 $ 34,838,381 $ 471 $ (4,978,644 ) $ (16 ) -14.29 % -3.40 % Offset Printing Paper $ - $ - $ 5,909,029 $ 567 $ (5,909,029 ) $ (567 ) -100.00 % -100.00 % Tissue Paper Products $ 1,225,735 $ 3,200 2,660,444 $ 1,211 $ (1,434,709 ) $ 1,989 -53.93 % 164.24 % Total CMP, Offset Printing Paper and Tissue Paper $ 31,085,472 $ n/a $ 43,407,855 $ n/a $ (12,322,383 ) $ n/a -28.39 % n/a Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended June 30, 2022 was RMB 1,776/tonne (approximately $273/tonne), as compared to RMB 2,112/tonne (approximately $327/tonne) for the three months ended June 30, 2021. These changes (in US dollars) represent a year-over-year decrease of 16.51% for the recycled paper board. 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. 27 The pricing trends of our major raw materials for the 24-month period from July 2020 to June 2022 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 15.4% of total sales in the second quarter of 2022, respectively, compared to 4% and 10.2% of total sales in the second quarter of 2021. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended June 30, 2022 are summarized as follows: Gross Profit Gross profit for the three months ended June 30, 2022 was $634,037 (1.99% of the total revenue), representing a decrease of $2,394,982, or 79.07%, from the gross profit of $3,029,019 (6.51% of the total revenue) for the three months ended June 30, 2021, as a result of factors described above. Offset Printing Paper, CMP and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the three months ended June 30, 2022 was $615,833, representing a decrease of $2,402,358, or 79.60%, from the gross profit of $3,018,191 for the three months ended June 30, 2021. The decrease was mainly the result of the factors discussed above. 28 The overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 4.56 percentage points, from 6.50% for the three months ended June 30, 2021, to 1.94% for the three months ended June 30, 2022. Gross profit margin for regular CMP for the three months ended June 30, 2022 was 4.28%, or 0.79 percentage points lower, as compared to gross profit margin of 5.07% for the three months ended June 30, 2021. Such decrease was mainly due to the decrease of ASP of regular CMP, partially offset by the decrease in cost of recycled paper board in the second quarter of 2022. Gross profit margin for light-weight CMP for the three months ended June 30, 2022 was 5.95%, or 0.76 percentage points lower, as compared to gross profit margin of 6.71% for the three months ended June 30, 2021. The decrease was mainly due to the decrease in ASP of light-weight CMP, partially offset by the decrease in cost of recycled paper board in the second quarter of 2022. Gross profit margin for tissue paper products for the three months ended June 30, 2022 was -197.95%, or 188.39 percentage points lower, as compared to gross profit margin of -9.56% for the three months ended June 30, 2021. The decrease in gross loss was mainly due to the decrease in ASP of tissue paper products and the increase in cost of base paper in the second quarter of 2022. Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended June 30, 2022 are as follows: Face Masks Gross profit for face masks for the three months ended June 30, 2022 and 2021 were $18,204 and $10,829, representing a gross margin of 20.79% and 9.95%, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended June 30, 2022 were $1,869,802, a decrease of $727,809, or 28.02% from $2,597,611 for the three months ended June 30, 2021. The decrease was mainly due to the savings in manpower costs and appreciation of USD against RMB. (Loss) Income from Operations Operating loss for the quarter ended June 30, 2022 was $1,237,605, a decrease of $1,669,013, or 386.88%, from income from operations of $431,408 for the quarter ended June 30, 2021. The decrease in income from operations was primarily due to the decrease in gross profit, partially offset by the decrease in selling, general and administrative expenses. 29 Other Income and Expenses Interest expense for the three months ended June 30, 2022 decreased by $24,793, from $283,899 in the three months ended June 30, 2021, to $259,106. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $15,530,449 as of June 30, 2022, as compared to $16,566,327 as of June 30, 2021. Gain on derivative liability 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. 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 gain recognized on addition and change in fair value of derivative liability for the three months ended June 30, 2022 and 2021 was $386,588 and $4,509,007, respectively. Net Loss As a result and the factors discussed above, net loss was $287,913 for the quarter ended June 30, 2022, representing an increase of $165,335, or 36.48%, from $453,248 for the quarter ended June 30, 2021. 30 Comparison of the six months ended June 30, 2022 and 2021 Revenue for the six months ended June 30, 2022 was $47,270,502, representing a decrease of $23,473,840, or 33.18%, from $70,744,342 for the same period in the previous year. This was mainly due to the decrease in sales volume of corrugating medium paper (“CMP”) and offset printing paper and 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 six months ended June 30, 2022 was $47,126,327, a decrease of $23,378,688, or 33.16%, from $70,505,015 for the six months ended June 30, 2021. This was mainly due to the decrease in sales volume of regular CMP, light-weight CMP, offset printing paper and tissue paper products, and the decrease in ASPs of CMP and tissue paper products. Total quantities of offset printing paper, CMP and tissue paper products sold during the six months ended June 30, 2022 amounted to 95,451 tonnes, a decrease of 36,717 tonnes, or 27.78%, compared to 132,168 tonnes sold during the six months ended June 30, 2021. Total quantities of CMP and offset printing paper sold decreased by 34,180 tonnes in the six months of 2022 as compared to the same period of 2021. We sold 780 tonnes of tissue paper products in the six months of 2022 as opposed to 3,317 tonnes in the same period of 2021. Production of CMP was suspended during January and February 2022 and offset printing paper suspended in the first quarter of 2022, due to Chinese New Year and restriction on production during Winter Olympics held in Beijing in 2022 as required by the government. The changes in revenue and quantity sold for the six months ended June 30, 2022 and 2021 are summarized as follows: A summary of the above changes and further analyses of the changes in our sales revenue are as follows: Six Months Ended Six Months Ended Percentage June 30, 2022 June 30, 2021 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 79,188 $ 38,952,663 94,133 $ 47,216,294 (14,945 ) $ (8,263,631 ) -15.88 % -17.50 % Light-Weight CMP 　 15,483 $ 7,363,888 　 21,161 $ 10,309,109 　 (5,678) $ (2,945,221 ) -26.83 % -28.57 % Total CMP 94,671 $ 46,316,551 115,294 $ 57,525,403 (20,623 ) $ (11,208,852 ) -17.89 % -19.49 % Offset Printing Paper — $ — 13,557 $ 9,300,003 (13,557 ) $ (9,300,003 ) -100.00 % -100.00 % Tissue Paper Products 780 $ 809,776 3,317 3,679,609 (2,537 ) $ (2,869,833 ) -76.48 % -77.99 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 　 95,451 $ 47,126,327 　 132,168 $ 70,505,015 　 (36,717) $ (23,378,688 ) -27.78 % -33.16 % ASPs for our main products in the six-month period ended June 30, 2022 and 2021 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light-Weight CMP ASP Tissue Paper Products ASP Six Months Ended June 30, 2021 $ 686 $ 502 $ 487 $ 1109 Six Months Ended June 30, 2022 $ - $ 492 $ 476 $ 1038 Decrease from comparable period in the previous year $ n/a $ -10 $ -11 $ -71 Decrease by percentage n/a -1.99 % -2.26 % -6.40 % Revenue of Face Masks Revenue generated from selling face masks were $144,175 and $239,327 for the six months ended June 30, 2022 and 2021. We sold 12,664 thousand pieces of face masks for the six months ended June 30, 2022, as compared to 6,470 thousand pieces in the comparable period of 2021, an increase of 6,194 thousand pieces, or 95.73%. 31 Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products in the six months ended June 30, 2022 was $46,216,727, a decrease of $19,463,623, or 29.63%, from $65,680,350 for the six months ended June 30, 2021. This was mainly a result of the decrease in sales volume of CMP and offset printing paper. Cost of sales for CMP was $44,028,827 for the six months ended June 30, 2022, as compared to $53,697,316 in the same period of 2021. Cost of sales for tissue paper products was $2,187,900 for the six months ended June 30, 2022, as compared to $4,368,067 in the same period of 2021. Average cost of sales per tonne of tissue paper products increased by 112.98%, from $1,317 for the six months ended June 30, 2021, to $2,805 for the same period of 2022. The increase in average cost of sales of tissue paper products was mainly due to the increase in average cost of tissue base paper. Changes in cost of sales and cost per tonne by product for the six months ended June 30, 2022 and 2021 are summarized below: Six Months Ended Six Months Ended June 30, 2022 June 30, 2021 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 $ 37,145,391 $ 469 $ 44,238,716 $ 470 $ (7,093,325 ) $ (1 ) -16.03 % -0.21 % Light-Weight CMP $ 6,883,436 $ 445 $ 9,458,600 $ 447 $ (2,575,164 ) $ (2 ) -27.23 % -0.45 % Total CMP $ 44,028,827 $ 465 $ 53,697,316 $ 466 $ (9,668,489 ) $ (1 ) -18.01 % -0.21 % Offset Printing Paper $ 0 $ - $ 7,614,967 $ 562 $ (7,614,967 ) $ (562 ) -100.00 % -100.00 % Tissue Paper Products $ 2,187,900 $ 2,805 $ 4,368,067 $ 1,317 $ (2,180,167 ) $ 1,488 -49.91 % 112.98 % Total CMP, Offset Printing Paper and Tissue Paper Revenue $ 46,216,727 $ n/a $ 65,680,350 $ n/a $ (19,463,623 ) $ n/a -29.63 % n/a % Gross Profit Gross profit for the six months ended June 30, 2022 was $944,482 (2.00% of the total revenue), representing a decrease of $3,915,542, or 80.57%, from the gross profit of $4,860,024 (6.87% of the total revenue) for the six months ended June 30, 2021. The decrease was mainly due to (i) the decrease in quantities sold of CMP, offset printing paper and tissue paper products, and (ii) the increase in material costs of tissue paper products. Offset Printing Paper, CMP and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the six months ended June 30, 2022 was $909,600, a decrease of $3,915,065, or 81.15%, from the gross profit of $4,824,665 for the six months ended June 30, 2021. The decrease was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 4.91 percentage points, from 6.84% for the six months ended June 30, 2021, to 1.93% for the six months ended June 30, 2022. Gross profit margin for regular CMP for the six months ended June 30, 2022 was 4.64%, or 1.67 percentage points lower, as compared to gross profit margin of 6.31% for the six months ended June 30, 2021. 32 Gross profit margin for light-weight CMP for the six months ended June 30, 2022 was 6.52%, or 1.73 percentage points lower, as compared to gross profit margin of 8.25% for the six months ended June 30, 2021. Gross profit margin for tissue paper products was -170.19% for the six months ended June 30, 2022, a decrease of 151.48 percentage points, as compared to -18.71% for the six months ended June 30, 2021. The decrease was mainly due to the increase in cost of tissue base paper. Face Masks Gross profit for face masks for the six months ended June 30, 2022 was $34,882, representing a gross margin of 24.19% compared with a gross profit of $35,359, representing a gross margin of 14.77% for the six months ended June 30, 2021. Selling, General and Administrative Expenses Selling, general and administrative expenses for the six months ended June 30, 2022 were $5,170,683, an increase of $17,754, or 0.34% from $5,152,929 for the six months ended June 30, 2021. (Loss) Income from Operations Operating loss for the six months ended June 30, 2022 was $4,194,038, an increase of $3,901,133, or 1331.88%, from loss from operations of $292,905 for the six months ended June 30, 2021. The increase in loss from operations was primarily due to the decrease in gross profit. Other Income and Expenses Interest expense for the six months ended June 30, 2022 decreased by $32,881, from $562,800 for the six months ended June 30, 2021, to $529,919. The Company had short-term and long-term interest-bearing loans and lease obligation that aggregated $15,530,449 as of June 30, 2022, as compared to $16,566,327 as of June 30, 2021. Gain on derivative liability The Company analyzed warrants for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability. 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 change in fair value of derivative liability for the six months ended June 30, 2022 and 2021 were $1,346,633 and $872,040, respectively. Net Loss As a result of the above, net loss was $2,776,127 for the six months ended June 30, 2022, representing a decrease of $2,015,977, or 42.07%, from net loss of $4,792,104 for six months ended June 30, 2021. 33 Accounts Receivable Net accounts receivable decreased by $1,048,811, or 21.54%, to $3,820,123 as of June 30, 2022, as compared with $4,868,934 as of December 31, 2021. We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories Inventories consist of raw materials (accounting for 85.96% of total value of inventory as of June 30, 2022), semi-finished goods and finished goods. As of June 30, 2022, the recorded value of inventory increased by 13.43% to $6,629,657 from $5,844,895 as of December 31, 2021. As of June 30, 2022, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $5,289,833, approximately $3,192,771, or 152.25%, higher than the balance as of December 31, 2021. Due to the volatility of recycled paper board price, a minimum level of inventory was maintained at the end of 2021. A summary of changes in major inventory items is as follows: June 30, December 31, 2022 2021 $ Change % Change Raw Materials Recycled paper board $ 5,289,833 $ 2,097,062 3,192,771 152.25 % Recycled white scrap paper 11,217 11,808 -591 -5.01 % Tissue base paper 61,120 38,745 22,375 57.75 % Gas 148,119 32,753 115,366 352.23 % Mask fabric and other raw materials 188,327 167,786 20,541 12.24 % Total Raw Materials 5,698,616 2,348,154 3,350,462 142.68 % Semi-finished Goods 107,309 96,087 11,222 11.68 % Finished Goods 823,732 3,400,654 -2,576,922 -75.78 % Total inventory, gross 6,629,657 5,844,895 784,762 13.43 % Inventory reserve — — — Total inventory, net $ 6,629,657 $ 5,844,895 784,762 13.43 % 34 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 $153,709 (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 provided for in the original lease agreement Capital Expenditure Commitment as of June 30, 2022 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 June 30, 2022, we had approximately $4.5 million in capital expenditure commitments that were mainly related to the purchase of paper machine of PM10. The infrastructure work of PM10 has been completed and the associated ancillary facilities are working in progress. 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. The balance of Leased Equipment net of amortization was $2,092,625and $2,286,459 as of June 30, 2022 and December 31, 2021, respectively. The lease liability was $244,518 and $362,394, and its current portion in the amount of $224,219 and $210,161 as of June 30, 2022 and December 31, 2021, respectively. Amortization of the Leased Equipment was $39,972 and $41,457for the three months ended June 30, 2022 and 2021. Amortization of the Leased Equipment was $81,978 and $82,454for the six months ended June 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $10,862 and $18,932 for the three months ended June 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was $24,369 and $39,350 for the six months ended June 30, 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. Cash and Cash Equivalents Our cash, cash equivalents and restricted cash as of June 30, 2022 was $14,344,077, an increase of $3,142,465, from $11,201,612 as of December 31, 2021. The increase of cash and cash equivalents for the six months ended June 30, 2022 was attributable to a number of factors including: i. Net cash provided by (used in) operating activities Net cash provided by operating activities was $3,949,782 for the six months ended June 30, 2022. The balance represented an increase of cash of $19,520,145, or 125.37%, from -$15,570,363 used in operating activities for the six months ended June 30, 2021. Net loss for the six months ended June 30, 2022 was $2,776,127, representing a decrease of loss of $2,015,977, or 42.07%, from a net loss of $4,792,104 for the six months ended June 30, 2021. Changes in various asset and liability account balances throughout the six months ended June 30, 2022 also contributed to the net change in cash from operating activities in six months ended June 30, 2022. Chief among such changes is the decrease of accounts receivable in the amount of $845,450 during the six months of 2022. There was also an increase of $1,111,160 in the ending inventory balance as of June 30, 2022 (a decrease to net cash for the six months ended June 30, 2022 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $7,592,319. The Company also had a net decrease of $1,963,348 in prepayment and other current assets (an increase to net cash) and a net increase of $503,774 in other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable of $859,643 (a decrease to net cash) during the six months ended June 30, 2022. 35 ii. Net cash used in investing activities We incurred $7,324,305 in net cash expenditures for investing activities during the six months ended June 30, 2022, as compared to $171,541 for the same period of 2021. Payments were mainly for the last installments for the Tengsheng land acquisition. iii. Net cash provided by financing activities Net cash provided by financing activities was $6,673,987 for the six months ended June 30, 2022, as compared to net cash provided by financing activities in the amount of $41,671,591 for the six months ended June 30, 2021. A $6.8 million loan was repaid by a related party during the period. Short-term bank loans June 30, December 31, 2022 2021 Industrial and Commercial Bank of China (“ICBC”) Loan $ 5,660,518 $ 5,958,561 Total short-term bank loans $ 5,660,518 $ 5,958,561 On November 25, 2021, the Company entered into a working capital loan agreement with ICBC, with a balance of $5,660,518 and $5,958,561 as of June 30, 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. Zhenyong 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 June 30, 2022, there were guaranteed short-term borrowings of $5,660,518 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 June 30, 2022 and 2021 were approximately 4.79%. The average short-term borrowing rates for the six months ended June 30, 2022 and 2021 were approximately 4.79%. Long-term loans from credit union As of June 30, 2022 and December 31, 2021, loans payable to Rural Credit Union of Xushui District, amounted to $9,327,413 and $9,818,530, respectively. 36 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 June 30, 2022 and December 31, 2021, total outstanding loan balance was $1,281,402 and$1,348,871, respectively, Out of the total outstanding loan balance, current portion amounted were $685,401 and $329,376 as of June 30, 2022 and December 31, 2021, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $596,001 and $1,019,495 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 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 $682,421 and $1,130,333 as of June 30, 2022 and December 31, 2021, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per month. As of June 30, 2022 and December 31, 2021, the total outstanding loan balance was $3,725,005 and $3,921,139, respectively. Out of the total outstanding loan balance, current portion amounted were $3,725,005 and $1,960,569 as of June 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,960,570 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 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 June 30, 2022 and December 31, 2021, the total outstanding loan balance was $2,384,003 and $2,509,528, respectively. Out of the total outstanding loan balance, current portion amounted were $nil and $2,509,528 as of June 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,384,003 and $nil are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2022 and December 31, 2021, respectively. On December 12, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years, which is due and payable in various installments from June 21, 2020 to December 11, 2021. The loan 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 June 30, 2022 and December 31, 2021, the total outstanding loan balance was $1,937,003 and $2,038,992, respectively. Out of the total outstanding loan balance, current portion amounted were $nil and $2,038,992 as of June 30, 2022 and December 31, 2021 respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,937,003 and $nil are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2022 and December 31, 2021, respectively. Total interest expenses for the short-term bank loans and long-term loans for the three months ended June 30, 2022 and 2021 were $248,244 and $264,967, respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months ended June 30, 2022 and 2021 were $505,550 and $523,450, respectively. 37 Shareholder Loans Mr. Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $381,938 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 June 30, 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 June 30, 2022 and December 31, 2021, approximately $44,700 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 (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 June 30, 2022 and December 31, 2021, the outstanding interest was $204,782 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 June 30, 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 and six months ended June 30, 2022 and 2021. The accrued interest owing to Mr. Zhenyong Liu was approximately $631,420 and $664,666, as of June 30, 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(RMB44,089,085). 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 June 30, 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. 38 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 three months ended June 30, 2022 and 2021, 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. 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 June 30, 2022 and December 31, 2021 to translate the Chinese RMB to the U.S. Dollars are 6.7114:1 and 6.3757:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.5058:1 and 6.4682:1 for the three months ended June 30, 2022 and 2021, 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 $4,619,006 (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. 39 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.