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 March 31, 2023 and 2022 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. On the basis of scientific assessment of the characteristics of the virus and the pandemic situation, as well as reference to the prevention practices of other countries, at the end of 2022, the Chinese government refined its COVID-19 prevention and control measures and stopped conducting nucleic acid testing for all residents. By the end of 2022, vaccination rate has exceeded 90%. And normal life is returning. Under such circumstances, the government has taken positive service measures, including tax incentives, bank loan and financial support, etc, to support domestic enterprises to overcome difficulties. The market consolidation will be expedited eventually. Since we resumed business operations after the outbreak of COVID-19, the Company kept continuous attention on the development of the COVID-19 pandemic and reacted actively to its impact on the financial position and operating results of the Company. As of the date of the report, COVID-19’s adverse impacts on the company’s financial position and operating result as of March 31, 2023 were limited. Results of Operations Comparison of the Three months ended March 31, 2023 and 2022 Revenue for the three months ended March 31, 2023 was $19,790,877, an increase of $4,309,259, or 27.83%, from $15,481,618 for the same period in the previous year. This was mainly due to the increase in sales volume of corrugating medium paper (“CMP”), partially offset by the decrease of average selling prices of CMP. 25 Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products Revenue from sales of offset printing paper, corrugating medium paper and tissue paper products for the three months ended March 31, 2023 was $19,751,148, an increase of $4,326,126, or 28.05%, from $15,425,022 for the first quarter of 2022. Total offset printing paper, CMP and tissue paper products sold during the three months ended March 31, 2023 amounted to 49,873 tonnes, an increase of 20,390 tonnes, or 69.16%, compared to 29,483 tonnes sold in the comparable period in the previous year. Production of CMP was suspended in January of 2023 and January and February of 2022 due to Chinese New Year and restriction on production required by the government. The changes in revenue dollar amount and in quantity sold for the three months ended March 31, 2023 and 2022 are summarized as follows: Three Months Ended Three Months Ended Percentage March 31, 2023 March 31, 2022 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 41,663 $ 16,467,969 25,245 $ 13,099,222 16,418 $ 3,368,747 65.03 % 25.72 % Light-Weight CMP 8,019 $ 3,060,226 3,841 $ 1,927,412 4,178 $ 1,132,814 108.77 % 58.77 % Total CMP 49,682 $ 19,528,195 29,086 $ 15,026,634 20,596 $ 4,501,561 70.81 % 29.96 % Offset Printing Paper - $ - - $ - - $ - % % Tissue Paper Products 191 $ 222,953 397 $ 398,388 (206 ) $ (175,435 ) -51.89 % -44.04 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 49,873 $ 19,751,148 29,483 $ 15,425,022 20,390 $ 4,326,126 69.16 % 28.05 % Monthly sales revenue for the 24 months ended March 31, 2023, are summarized below: The Average Selling Prices (ASPs) for our main products in the three months ended March 31, 2023 and 2022 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light-Weight CMP ASP Tissue Paper Products ASP Three Months ended March 31, 2022 $ - $ 519 $ 502 $ 1,003 Three Months ended March 31, 2023 $ - $ 395 $ 382 $ 1,167 Increase (Decrease) from comparable period in the previous year $ - $ (124 ) $ (120 ) $ 164 Increase (Decrease) by percentage 0.00 % -23.89 % -23.90 % 16.35 % 26 The following chart shows the month-by-month ASPs for the 24-month period ended March 31, 2023: Corrugating Medium Paper Revenue from CMP amounted to $19,528,195 (98.87% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2023, representing an increase of $4,501,561, or 29.96%, from $15,026,634 for the comparable period in 2022. We sold 49,682 tonnes of CMP in the three months ended March 31, 2023 as compared to 29,086 tonnes for the same period in 2022, representing a 70.81% increase in quantity sold. ASP for regular CMP dropped from $519/tonne for the three months ended March 31, 2022 to $395/tonne for the three months ended March 31, 2023, representing a 23.89% decrease. ASP in RMB for regular CMP for the first quarter of 2022 and 2023 was RMB3,294 and RMB2,712, respectively, representing a 17.67% decrease. The quantity of regular CMP sold increased by 16,418 tonnes, from 25,245 tonnes in the first quarter of 2022 to 41,663 tonnes in the first quarter of 2023. ASP for light-weight CMP decreased from $502/tonne for the three months ended March 31, 2022 to $382/tonne for the three months ended March 31, 2023, representing a 23.9% decrease. ASP in RMB for light-weight CMP for the first quarter of 2022 and 2023 was RMB3,186 and RMB2,618, respectively, representing a 17.83% decrease. The quantity of light-weight CMP sold increased by 4,178 tonnes, from 3,841 tonnes in the first quarter of 2022, to 8,019 tonnes in the first quarter of 2023. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the first quarter of 2023 and 2022 were 44.49% and 23.04%, respectively, representing an increase of 21.45%. 27 Quantities sold for regular CMP that was produced by the PM6 production line from April 2021 to March 2023 are as follows: Offset printing paper Revenue from offset printing paper was $nil for the three months ended March 31, 2023 and 2022. Production of offset printing paper was suspended in the three months ended March 31, 2023. The production is expected to be resumed in May 2023. Tissue Paper Products Revenue from tissue paper products was $222,953 (1.13% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2023, representing a decrease of $175,435, or 44.04%, from $398,388 for the three months ended March 31, 2022. We sold 191 tonnes of tissue paper in the first quarter of 2023, as compared to 397 tonnes in the comparable period of 2022, representing a decrease of 206 tonnes, or 51.89%. ASP for tissue paper products increased from $1,003/tonne for the three months ended March 31, 2022 to $1,167/tonne for the three months ended March 31, 2023, representing a 16.35% increase. ASP in RMB for tissue paper products for the first quarter of 2022 and 2023 was RMB6,375 and RMB7,995, respectively, representing a 25.41% increase. 28 Revenue of Face Mask Revenue generated from selling face mask were $35,637 and $56,596 for the three months ended March 31, 2023 and 2022, respectively, representing a decrease of $20,959, or 37.03%. We sold 1,105 thousand pieces of face masks in the first quarter of 2023, as compared to 1,160 thousand pieces in the comparable period of 2022, a decrease of 55 thousand pieces, or 4.74%. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended March 31, 2023 was $20,018,379, an increase of $4,887,125, or 32.30%, from $15,131,254 for the comparable period in 2022. This was mainly due to the increase in sales quantity of CMP, partially offset by the decrease in material costs of CMP. Cost of sales for CMP was $19,089,115 for the quarter ended March 31, 2023, as compared to $14,169,089 for the comparable period in 2022. The increase in the cost of sales of $4,920,026 for CMP was mainly due to the increase in sales volume of CMP, partially offset by the decrease in average cost of sales. Average cost of sales per tonne for CMP decreased by 21.15%, from $487 in the first quarter of 2022 to $384 in the first quarter of 2023. 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 first quarter of 2023 compared to the first quarter of 2022. Cost of sales for offset printing paper was $nil for the quarter ended March 31, 2023 and 2022. Cost of sales for tissue paper products was $929,264 for the quarter ended March 31, 2023, as compared to $962,165 for the comparable period in 2022. The decrease in the cost of sales of $32,901 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 100.70%, from $2,424 in the three months ended March 31, 2022, to $4,865 for the comparable period in 2023. This is 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 March 31, 2023 and 2022 are summarized below: Three Months Ended Three Months Ended March 31, 2023 March 31, 2022 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 $ 16,149,948 $ 388 $ 12,398,701 $ 491 $ 3,751,247 $ (103 ) 30.26 % -20.98 % Light-Weight CMP $ 2,939,167 $ 367 $ 1,770,388 $ 461 $ 1,168,779 $ (94 ) 66.00 % -20.39 % Total CMP $ 19,089,115 $ 384 $ 14,169,089 $ 487 $ 4,920,026 $ (103 ) 34.72 % -21.15 % Offset Printing Paper $ - $ - $ - $ - $ - $ - % % Tissue Paper Products $ 929,264 $ 4,865 $ 962,165 $ 2,424 $ (32,901 ) $ 2,441 -3.42 % 100.70 % Total CMP, Offset Printing Paper and Tissue Paper $ 20,018,379 $ n/a $ 15,131,254 $ n/a $ 4,887,125 $ n/a 32.30 % n/a Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended March 31, 2023 were RMB 1,502/tonne (approximately $219/tonne), as compared to RMB 1,858/tonne (approximately $293/tonne) for the three months ended March 31, 2022. These changes (in US dollars) represent a year-over-year decrease of 25.26% 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. 29 The pricing trends of our major raw materials for the 24-month period from April 2021 to March 2023 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 14% of total sales in the first quarter of 2023, respectively, compared to 3% and 9.6% of total sales in the first quarter of 2022. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended March 31, 2023 are summarized as follows: Gross Profit (Loss) Gross loss for the three months ended March 31, 2023 was $276,999 (1.40% of the total revenue), representing a decrease of $587,444, or 189.23%, from the gross profit of $310,445 (2.01% of the total revenue) for the three months ended March 31, 2022, as a result of factors described above. 30 Offset Printing Paper, CMP and Tissue Paper Products Gross loss for offset printing paper, CMP and tissue paper products for the three months ended March 31, 2023 was $267,231, representing a decrease of $560,999, or 190.97%, from the gross profit of $293,768 for the three months ended March 31, 2022. 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 3.25 percentage points, from 1.90% for the three months ended March 31, 2022, to -1.35% for the three months ended March 31, 2023. Gross profit margin for regular CMP for the three months ended March 31, 2023 was 1.93%, or 3.42 percentage points lower, as compared to gross profit margin of 5.35% for the three months ended March 31, 2022. Such decrease was mainly due to the decrease in of ASP of regular CMP, partially offset by the decrease in cost of recycled paper board. Gross profit margin for light-weight CMP for the three months ended March 31, 2023 was 3.96%, or 4.19 percentage points lower, as compared to gross profit margin of 8.15% for the three months ended March 31, 2022. The decrease was mainly due to the decrease in ASP of light-weight CMP, partially offset by the decrease of cost of recycled paper board. Gross profit margin for tissue paper products for the three months ended March 31, 2023 was -316.80%, or 175.29 percentage points lower, as compared to gross profit margin of -141.51% for the three months ended March 31, 2022. The decrease in gross loss was mainly due to the increase in cost of base paper, partially offset by the increase in ASP of tissue paper products. Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended March 31, 2023 are as follows: 31 Face Masks Gross loss for face masks for the three months ended March 31, 2023 and 2022 were gross loss of $2,839 and a gross profit of $16,677, representing a gross margin of -7.97% and 29.47%, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended March 31, 2023 were $2,495,362, a decrease of $805,519, or 24.40% from $3,300,881 for the three months ended March 31, 2022. The decrease was mainly due to the reversal of doubtful debt loss and decrease in depreciation of idle fixed assets during production suspension. Loss from Operations Operating loss for the quarter ended March 31, 2023 was $2,772,361, a decrease of $218,075, or 7.29%, from $2,990,436 for the quarter ended March 31, 2022. The decrease in loss from operations was primarily due to the decrease in selling, general and administrative expenses, partially offset by the decrease in gross profit. Other Income and Expenses Interest expense for the three months ended March 31, 2023 decreased by $21,644, from $270,813 in the three months ended March 31, 2022, to $249,169. This was mainly due to the decrease in interest rates of long-term bank loans. The Company had short-term and long-term interest-bearing loans and leasing obligations that aggregated $18,212,347 as of March 31, 2023, as compared to $16,157,692 as of March 31, 2022. 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 change in fair value of derivative liability for the three months ended March 31, 2023 and 2022 was a loss of $152,097 and a gain of $386,588, respectively. Net Loss As a result and the factors discussed above, net loss was $2,733,165 for the quarter ended March 31, 2023, representing an increase of loss of $244,951, or 9.84%, from $2,488,214 for the quarter ended March 31, 2022. 32 Accounts Receivable Net accounts receivable increased by $2,231,924, as compared with $nil as of December 31, 2022. We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories Inventories consist of raw materials (accounting for 82.79% of total value of inventory as of March 31, 2023), semi-finished goods and finished goods. As of March 31, 2023, the recorded value of inventory increased by 107.81% to $5,969,604 from $2,872,622 as of December 31, 2022. As of March 31, 2023, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $4,257,163, approximately $2,999,002, or 238.36%, higher than the balance as of December 31, 2022. As a result of better control over stock turnover and volatility of recycled paper board price, inventory was kept in a minimum level as of December 2022. A summary of changes in major inventory items is as follows: March 31, December 31, 2023 2022 $ Change % Change Raw Materials Recycled paper board $ 4,257,163 $ 1,258,161 2,999,002 238.36 % Recycled white scrap paper 10,955 10,809 146 1.35 % Tissue base paper 456,330 60,660 395,670 652.27 % Gas 79,379 42,237 37,142 87.94 % Mask fabric and other raw materials 138,498 99,569 38,929 39.10 % Total Raw Materials 4,942,325 1,471,436 3,470,889 235.88 % Semi-finished Goods 150,075 132,810 17,265 13.00 % Finished Goods 877,204 1,268,376 -391,172 -30.84 % Total inventory, gross 5,969,604 2,872,622 3,096,982 107.81 % Inventory reserve - - - Total inventory, net $ 5,969,604 $ 2,872,622 3,096,982 107.81 % 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 $145,745 (RMB1,000,000). The lease agreement was renewed in August 2022 with a term of six years with the same rental payments as provided for in the original lease agreement. 33 Capital Expenditure Commitment as of March 31, 2023 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 March 31, 2023, we had approximately $5.9 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 he 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, Tengsheng Paper sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Tengsheng Paper leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Tengsheng Paper 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. Tengsheng Paper made payments due according to the schedule. The balance of Leased Equipment net of amortization was $1,927,390 and $1,939,970 as of March 31, 2023 and December 31, 2022, respectively. The lease liability was $77,789 and $131,772, and its current portion in the amount of $77,789 and $131,772 as of March 31, 2023 and December 31, 2022, respectively. Amortization of the Leased Equipment was $38,865 and $42,006 for the three months ended March 31, 2023 and 2022. Total interest expenses for the sale-leaseback arrangement was $4,490 and $13,507 for the three months ended March 31, 2023 and 2022. 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 March 31, 2023 was $16,750,893, an increase of $7,226,025, from $9,524,868 as of December 31, 2022. The increase of cash and cash equivalents for the three months ended March 31, 2023 was attributable to a number of factors including: i. Net cash provided by (used in) operating activities Net cash provided by operating activities was $4,809,928for the three months ended March 31, 2023. The balance represented an increase of cash of $398,510, or 9.03%, from $4,411,418 provided for the three months ended March 31, 2022. Net loss for the three months ended March 31, 2023 was $2,733,165, representing an increase of loss of $244,951, or 9.84%, from $2,488,214 for the three months ended March 31, 2022. Changes in various asset and liability account balances throughout the three months ended March 31, 2023 also contributed to the net change in cash from operating activities in three months ended March 31, 2023. Chief among such changes is the increase of accounts receivable in the amount of $1,988,921 during the three months of 2023. There was also an increase of $3,062,782 in the ending inventory balance as of March 31, 2023 (a decrease to net cash for the three months ended March 31, 2023 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $3,686,243 and decrease of bad debt loss of $246,386. The Company also had a net decrease of $9,461,336 in prepayment and other current assets (an increase to net cash) and a net increase of $262,073 in other payables and accrued liabilities and related parties (an increase to net cash), as well as a decrease in income tax payable of $424,198 (a decrease to net cash) during the three months ended March 31, 2023. 34 ii. Net cash used in investing activities We incurred $295,018 in net cash expenditures for investing activities during the three months ended March 31, 2023, as compared to $7,175,972 for the same period of 2022. iii. Net cash provided by financing activities Net cash provided by financing activities was $2,564,646 for the three months ended March 31, 2023, as compared to net cash provided by financing activities in the amount of $6,893,314 for the three months ended March 31, 2022. Short-term bank loans March 31, December 31, 2023 2022 Industrial and Commercial Bank of China (“ICBC”) Loan 1 $ 5,091,899 $ 5,023,978 ICBC Loan 2 291,049 287,167 ICBC Loan 3 145,524 143,583 China Construction Bank Loan 145,524 143,583 Total short-term bank loans $ 5,673,996 $ 5,598,311 On November 10, 2022, the Company entered into a working capital loan agreement with the ICBC, with a balance of $5,091,899 and $5,023,978 as of March 31, 2023 and December 31, 2022, 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 by November 13, 2023. On November 30, 2022, the Company entered into a working capital loan agreement with the ICBC, with a balance of $291,049 and $287,167 as of March 31, 2023 and December 31, 2022, respectively. The loan bears an interest rate of 4.25% per annum. The loan will be due by May 29, 2023. On November 30, 2022, the Company entered into a working capital loan agreement with the ICBC, with a balance of $145,524 and $143,583 as of March 31, 2023 and December 31, 2022, respectively. The loan bears an interest rate of 4.25% per annum. The loan will be due by May 29, 2023. On July 29, 2022, the Company entered into a working capital loan agreement with the China Construction Bank, with a balance of $145,524 and $143,583 as of March 31, 2023 and December 31, 2022, respectively. The loan bears a fixed interest rate of 3.95% per annum. The loan will be due by July 29, 2023. As of March 31, 2023, there were guaranteed short-term borrowings of $5,091,899 and unsecured bank loans of $582,097. As of December 31, 2022, there were guaranteed short-term borrowings of $5,023,978 and unsecured bank loans of $574,333. The average short-term borrowing rates for the three months ended March 31, 2023 and 2022 were approximately 4.72% and 4.79%. Long-term loans As of March 31, 2023 and December 31, 2022, long-term loans were $11,778,745 and $9,040,002, respectively. 35 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 bore a rate of 7.68% per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum. 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, 2023 and December 31, 2022, total outstanding loan balance was $1,251,510 and$1,234,816, respectively, which are presented as current liabilities in the consolidated balance sheet. 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 $93,136 and $280,466 as of March 31, 2023 and December 31, 2022, respectively. Interest payment is due quarterly and bore a rate of 7.68% per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum. As of March 31, 2023 and December 31, 2022, the total outstanding loan balance was $3,638,111 and $3,589,582, respectively, which are presented as current liabilities in the consolidated balance sheet. 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 Tengsheng Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due quarterly and bore a rate of 7.68% per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum. As of March 31, 2023 and December 31, 2022, the total outstanding loan balance was $2,328,390 and $2,297,332, respectively, which are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2023 and December 31, 2022, 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 Tengsheng Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bore a rate of 7.56% per annum. With effective from November 15, 2022, the interest rate is reduced to 7% per annum. As of March 31, 2023 and December 31, 2022, the total outstanding loan balance was $1,891,817 and $1,866,582, respectively, which are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2023 and December 31, 2022, respectively. On February 26, 2023, 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 August 21, 2023 to February 24, 2025. The loan is secured by Dongfang Paper with its land use right as collateral for the benefit of the credit union. Interest payment is due monthly and bore a rate of 7% per annum. As of March 31, 2023, the total outstanding loan balance was $2,619,439. Out of the total outstanding loan balance, current portion amounted was $363,811, which is presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,255,628 is presented as non-current liabilities in the consolidated balance sheet as of March 31, 2023. On July 1, 2022, the Company entered into a loan agreement with Jiangna Yu, a customer of the Company, pursuant to which the Company borrowed RMB 400,000 from Jiangna Yu for a term of five years. The loan is payable in monthly installment of RMB10,667 from July 2022 to July 2027. As of March 31, 2023 and December 31, 2022, the total outstanding loan balance was $49,478 and$51,690, respectively. Out of the total outstanding loan balance, current portion amounted were $11,642 and $11,486, which are presented as current liabilities and the remaining balance of $37,836 and $40,204 are presented as non-current liabilities in the consolidated balance sheet as of March 31, 2023 and December 31, 2022, respectively. Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2023 and 2022 were $244,679 and $257,306, respectively. 36 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 $373,028 and $368,052 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, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, approximately $43,657 and $43,075 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 was 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, 2023 and December 31, 2022, the outstanding interest was $200,006 and $197,338, 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, 2023 and December 31, 2022, 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, 2023 and 2022. The accrued interest owing to Mr. Zhenyong Liu was approximately $616,691 and $608,465, as of March 31, 2023 and December 31, 2022, 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 $6,507,431 (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. In October 2022 and November 2022, the Company entered two agreements with Mr. Zhenyong Liu, which allowed Mr. Zhenyong Liu to borrow from the Company an amount of $7,276,220 (RMB50,000,000) in total. The loans were unsecured and carried a fixed interest rate of 4.35% per annum. The loan will be repaid in May 2023. Interest income of the loan for the three months ended March 31, 2023 was $131,553. As of March 31, 2023 and December 31, 2022, 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. 37 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 March 31, 2023 and 2022, 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 March 31, 2023 and December 31, 2022 to translate the Chinese RMB to the U.S. Dollars are 6.8717:1 and 6.9646:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 6.8613:1 and 6. 3483:1 for the three months ended March 31, 2023 and 2022, 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 $4,511,256 (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. 38 Recent Accounting Pronouncements In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-02 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of ASU 2019-05 will have on its consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, “Business Combinations”. The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination and resolve the inconsistency of measuring revenue contracts with customers acquired in a business combination by providing specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments in this Update apply to all entities that enter into a business combination within the scope of Subtopic 805-10, Business Combination-Overalls. For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application is permitted. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.