IT TECH PACKAGING, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data, the financial statements, and the notes to those statements that are included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the sections in this report entitled “Risk Factors” and “Forward-Looking Statements” . Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Results of Operations Revenue for the year ended December 31, 2023 was $86,546,950, representing a decrease of $13,805,484, or 13.76%, from $100,352,434 for the previous year. This was mainly due to the decrease in average selling price (“ASP”) of CMP. Revenue of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products Revenue from sales of offset printing paper, CMP and tissue paper products for the year ended December 31, 2023 was $86,412,058, a decrease of $13,669,606, or 13.66%, from $100,081,664 for the year ended December 31, 2022. This was mainly due to the decrease in ASP of CMP, partially offset by increase in sales volume of regular CMP, light-weight CMP and offset printing paper. Total quantities of offset printing paper, CMP and tissue paper products sold during the year ended December 31, 2023 amounted to 230,601 tonnes, an increase of 10,997 tonnes, or 5.01%, compared to 219,604 tonnes sold during the year ended December 31, 2022. Total quantities of CMP and offset printing paper sold increased by 11,065 tonnes in the year of 2023 as compared to 2022. We sold 1,205 tonnes of tissue paper products in the year of 2023 as opposed to 1,273 tonnes in 2022. Production of offset printing paper was resumed in May 2023. The changes in revenue and quantity sold for the year ended December 31, 2023 and 2022 are summarized as follows: Year Ended December 31, 2023 Year Ended December 31, 2022 Change in Percentage Change Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Sales Revenue Regular CMP 182,870 $ 67,371,471 180,977 $ 82,297,055 1,893 $ (14,925,584 ) 1.05 % -18.14 % Light-Weight CMP 40,953 $ 14,520,205 37,354 $ 16,428,354 3,599 $ (1,908,149 ) 　9.63 % -11.61 % Total CMP 223,823 $ 81,891,676 218,331 $ 98,725,409 5,492 $ (16,833,733 ) 2.52 % -17.05 % Offset Printing Paper 5,573 $ 3,215,190 - $ - 5,573 $ 3,215,190 - % - % Tissue Paper Products 1,205 $ 1,305,192 1,273 $ 1,356,255 (68 ) $ (51,063 ) -5.34 % -3.76 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 230,601 $ 86,412,058 219,604 $ 100,081,664 10,997 $ (13,669,606 ) 　5.01 % -13.66 % 48 Monthly revenue (excluding revenue of digital photo paper and tissue paper products) for the 24 months ended December 31, 2023, are summarized below: The average selling price, or ASP, for our major products for the years ended December 31, 2023 and 2022 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light- Weight CMP ASP Tissue Paper Products ASP Year Ended December 31, 2023 $ 577 $ 368 $ 355 $ 1083 Year Ended December 31, 2022 $ - $ 455 $ 440 $ 1065 Increase (Decrease) from comparable period in the previous year $ 577 $ (87 ) $ (85 ) $ 18 Increase (Decrease) by percentage - % -19.12 % -19.32 % 1.69 % The following is a chart showing the month-by-month ASPs for the 24 month period ended December 31, 2023: 49 Corrugating Medium Paper Revenue from CMP amounted to $81,891,676 (94.77% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2023, representing a decrease of $16,833,733, or 17.05%, from $98,725,409 during 2022. We sold 223,823 tonnes of CMP in the year ended December 31, 2023 as compared to 218,331 tonnes in the year ended December 31, 2022, representing a 2.52% increase in quantity sold. ASP for regular CMP dropped from $455/tonne in 2022 to $368/tonne in 2023, representing a 19.12% decrease. ASP in RMB for regular CMP in 2022 and 2023 was RMB3,073 and RMB2,599, respectively, representing a 15.42% decrease. The quantity of regular CMP sold increased by 1,893 tonnes, from 180,977 tonnes in 2022 to 182,870 tonnes in 2023. ASP for light-weight CMP dropped from $440/tonne in 2022 to $355/tonne in 2023, representing a $19.32% decrease. ASP in RMB for light-weight CMP in 2022 and 2023 was RMB2,972 and RMB2,502, respectively, representing a 15.82% decrease. The quantity of light-weight CMP sold increased by 3,599 tonnes, from 37,354 tonnes in 2022, to 40,953 tonnes in 2023. Our PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for the year ended December 31, 2023 and 2022 were 51.98% and 49.28%, respectively, representing an increase of 2.70%. Quantities sold for regular CMP that was produced by the PM6 production line from January 2022 to December 2023 are as follows: Offset Printing Paper Revenue from offset printing paper was $3,215,190 (3.72% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2023, representing an increase of $3,215,190, or 100%, from year of 2022. We sold 5,573 tonnes of offset printing paper in the year ended December 31, 2023. 50 Tissue Paper Products Revenue from tissue paper products was $1,305,192 (1.51% of the total offset printing paper, CMP and tissue paper products revenues) for the year ended December 31, 2023, representing a decrease of $51,063, or 3.76%, from $1,356,255 in 2022. We sold 1,205 tonnes of tissue paper products in the year ended December 31, 2023, as compared to 1,273 tonnes in 2022, a decrease of 68 tonnes, or 5.34%. ASP for tissue paper products was $1,065/tonne and $1,083/tonne in the year ended December 31, 2022 and 2023, respectively, representing a 1.69% increase. ASP in RMB for tissue paper products for the year ended 2022 and 2023 was RMB7,198 and RMB7,640, respectively, representing a 6.14% increase. Revenue of Face Mask Revenue generated from selling face masks were $106,064 and $257,820 for the year ended December 31, 2023 and 2022. We sold 3,383 thousand pieces of face masks in 2023, as compared to 5,625 thousand pieces in 2022, a decrease of 2,242 thousand pieces, or 39.86%. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products in the year ended December 31, 2023 was $85,418,822, a decrease of $9,965,512, or 10.45%, from $95,384,334 for the year ended December 31, 2022. This was mainly due to the decrease of material costs of CMP. Cost of sales for CMP was $77,962,837 for the year ended December 31, 2023, as compared to $91,093,891 in 2022. The decrease in the cost of sales of $13,131,054 for CMP was mainly due to the decrease in average cost of sales, partially offset by the increase in the quantities of regular CMP sold in the year of 2023. Average cost of sales per tonne for CMP decreased by 16.55%, from $417 for the year ended December 31, 2022, to $348 in 2023. This was mainly attributable to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board. Cost of sales for offset printing paper was $3,134,832 for the year ended December 31, 2023. Cost of sales for tissue paper products was $4,318,339 for the year ended December 31, 2023, as compared to $4,290,443 in 2022. Average cost of sales per tonne of tissue paper products increased by 6.35%, from $3,370 for the year ended December 31, 2022, to $3,584 for 2023. Changes in cost of sales and cost per tonne by product for the year ended December 31, 2023 and 2022 are summarized below: Year Ended December 31, 2023 Year Ended December 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 $ 63,818,509 $ 349 $ 76,213,404 $ 421 $ (12,394,895 ) $ (72 ) -16.26 % -17.10 % Light-Weight CMP $ 14,144,328 $ 345 $ 14,880,487 $ 398 $ (736,159 ) $ (53 ) -4.95 % -13.32 % Total CMP $ 77,962,837 $ 348 $ 91,093,891 $ 417 $ (13,131,054 ) $ (69 ) -14.41 % -16.55 % Offset Printing Paper $ 3,137,646 $ 563 $ - $ - $ 3,137,646 $ 563 - % 0.00 % Tissue Paper Products $ 4,318,339 $ 3,584 $ 4,290,443 $ 3,370 $ 27,896 $ 214 0.65 % 6.35 % Total CMP, Offset Printing Paper and Tissue Paper Revenue $ 85,418,822 $ n/a $ 95,384,334 $ n/a $ (9,965,512 ) $ n/a -10.45 % n/a % Our average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper for the year ended December 31, 2023 were RMB 1,350/tonne (approximately $191/tonne) as compared to RMB 1,690/tonne (approximately $250/tonne) for the year ended December 31, 2022. These changes (in US dollars) represent a year-over-year decrease of 23.60% for the unit purchase cost of 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. 51 The pricing trends of our major raw materials for the 24-month period from January 2022 to December 2023 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 5% and 15.3% of total sales in 2023, respectively, compared to 4% and 12.4% of total sales 2022. The monthly energy cost (electricity and gas) as a percentage of total monthly sales of our main paper products for the 24 months ended December 31, 2023are summarized as follows: Gross Profit Gross profit for December 31, 2023 was $999,885 (representing 1.16% of the total revenue), representing a decrease of $3,754,311, or 78.97%, from the gross profit of $4,754,196 (representing 4.74% of the total revenue) for the year ended December 31, 2022. The decrease was mainly due to the decrease in ASP of CMP, partially offset by the decrease of material costs of CMP, and (ii) the increase in material costs of tissue paper products. 52 Corrugating Medium Paper, Offset Printing Paper and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the year ended December 31, 2023 was $993,236, a decrease of $3,704,094, or 78.86%, from the gross profit of $4,697,330 for the year ended December 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 3.54 percentage points, from 4.69% for the year ended December 31, 2022, to 1.15 for the year ended December 31, 2023. Gross profit margin for regular CMP for the year ended December 31, 2023 was 5.27%, or 2.12 percentage points lower, as compared to gross profit margin of 7.39% for the year ended December 31, 2022. Such decrease was primarily due to the decrease in ASP of regular CMP, partially offset by the decrease in material costs. Gross profit margin for light-weight CMP for the year ended December 31, 2023 was 2.59%, or 6.83 percentage points lower, as compared to gross profit margin of 9.42% for the year ended December 31, 2022. Such decrease was primarily due to the decrease in ASP of light-weight CMP, partially offset by the decrease in material costs. Gross profit margin for offset printing paper was 2.41% for the year ended December 31, 2023. Gross profit margin for tissue paper products was -230.86% for the year ended December 31, 2023, a decrease of 14.52 percentage points, as compared to -216.34% for the year ended December 31, 2022. The decrease was mainly due to the increase in cost of tissue base paper. Monthly gross profit margins for our corrugating medium paper and offset printing paper for the 24-month period ended December 31, 2023 are as follows: Face Masks Gross loss for face mask for the year ended December 31, 2023 was $11,127, representing a gross margin of -10.49% compared with a gross profit of $67,328, representing a gross margin of 26.11%, for the year ended December 31, 2022. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2023 were $9,075,475, a decrease of $983,248, or 9.78% from $10,058,723 for the year ended December 31, 2022. The decrease was mainly due to the decrease in depreciation of idle fixed assets during production suspension. Loss from Operations Operating loss for the year ended December 31, 2023 was $9,575,888, a decrease of $4,271,361, or 80.52%, from $5,304,527 for the year ended December 31, 2022. The decrease was primarily due to the decrease in gross profit and recognition of impairment and disposal loss on assets, partially offset by the decrease in selling, general and administrative expenses. 53 Other Income and Expenses Interest expense for the year ended December 31, 2023 decreased by $43,433, from $1,027,951 for the year ended December 31, 2022, to $984,518. The Company had short-term and long-term interest-bearing loans and lease obligation that aggregated $12,386,346 as of December 31, 2023, as compared to $15,442,807 as of December 31, 2022. Provision for Income Taxes Full allowance for deferred tax asset loss was provided in the year of 2023 and 2022. Income tax for the year ended December 31, 2023 is $346,954 as compared to the income tax $11,711,339 for the year ended December 31, 2022. Net Loss As a result of the above, net loss was $9,946,035 for the year ended December 31, 2023, representing an increase of $6,625,273, or 39.98%, from $16,571,308 for the year ended December 31, 2022. Accounts Receivable Net accounts receivable was $575,526 as of December 31, 2023, 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 10.48% of total value of inventory as of December 31, 2023), semi-finished goods and finished goods. As of December 31, 2023, the recorded value of inventory increased by 23.87% to $3,558,193 from $2,872,622 as of December 31, 2022. The increase is mainly due to the increase of finished goods, partially offset by the decrease of recycle paper board. More CMP products were produced in December 2023 to mitigate the impact of energy price rise starting from January 2024. As of December 31, 2023, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $198,744, approximately $1,059,417, or 84.20%, lower 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. A summary of changes in major inventory items is as follows: December 31, December 31, 2023 2022 $ Change % Change Raw Materials Recycled paper board $ 198,744 $ 1,258,161 -1,059,417 -84.20 % Recycled white scrap paper 10,647 10,809 -162 -1.50 % Tissue base paper 21,138 60,660 -39,522 -65.15 % Gas 21,428 42,237 -20,809 -49.27 % Mask fabric and other raw materials 　121,011 　99,569 21,442 21.53 % Total Raw Materials 372,968 1,471,436 -1,098,468 -74.65 % Semi-finished Goods 300,207 132,810 167,397 126.04 % Finished Goods 　2,885,019 　1,268,376 1,616,643 127.46 % Total inventory, gross 3,558,194 2,872,622 685,572 23.87 % Inventory reserve (2,959 ) - -2,959 Total inventory, net $ 3,555,235 $ 2,872,622 682,613 23.76 % 54 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 $141,727 (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. Capital Expenditure Commitment as of December 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 December 31, 2023, we had approximately $3.5 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$2.3 million). Under the sale-leaseback arrangement, Tengsheng Paper sold the Leased Equipment to TLCL for 16 million (approximately US$2.3 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 $14) 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. On July 17, 2023, the Company made a final payment on outstanding obligations and bought back the Lease Equipment at nominal price according to the agreement. The lease assets were reclassified as own assets and balance of Leased Equipment net of amortization were $nil and $1,939,970 as of December 31, 2023 and 2022, respectively. 55 Cash, Cash Equivalents and restricted cash Our cash, cash equivalents and restricted cash as of December 31, 2023 was $4,391,921, a decrease of $5,132,947, from $9,524,868 as of December 31, 2022. The decrease of cash and cash equivalents for the year ended December 31, 2023 was attributable to a number of factors including: i. Net cash provided by operating activities Net cash provided by operating activities was $12,871,086 for the year ended December 31, 2023. The balance represented an increase of cash of $2,151,698, or 20.07%, from $10,719,388 provided for the year ended December 31, 2022. Net loss for the year ended December 31, 2023 was $9,946,035, representing a decrease of loss $6,625,273, or 39.98%, from a net loss of $16,571,308 for the year ended December 31, 2022. Changes in various asset and liability account balances throughout the year ended December 31, 2023 also contributed to the net change in cash from operating activities in year ended December 31, 2023. Chief among such changes is the decrease of accounts receivable in the amount of $280,970 during the year of 2023. There was also an increase of $736,267 in the ending inventory balance as of December 31, 2023 (a decrease to net cash for the year ended December 31, 2023 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $14,225,990. The Company also had a net decrease of $9,322,532 in prepayment and other current assets (an increase to net cash) and a net decrease of $999,812 in other payables and accrued liabilities and related parties (a decrease to net cash), as well as a decrease in income tax payable of $412,504 (a decrease to net cash) during the year ended December 31, 2023. ii. Net cash used in investing activities We incurred $22,239,297 in net cash expenditures for investing activities during the year ended December 31, 2023, as compared to $10,898,531 for the year ended December 31, 2022. Payments in 2023 were mainly for the payment for Land Use Right. iii. Net cash provided by financing activities Net cash provided by financing activities was $4,410,099 for the year ended December 31, 2023, as compared to net cash used in financing activities in the amount of $879,596 for the year ended December 31, 2022. December 31, December 31, 2023 2022 Industrial and Commercial Bank of China (“ICBC”) Loan 1 $ - $ 5,023,978 ICBC Loan 2 - 287,167 ICBC Loan 3 - 143,583 ICBC Loan 4 - - China Construction Bank Loan - 143,583 ICBC Loan 5 - ICBC Loan 6 2,824 - ICBC Loan 7 70,594 - ICBC Loan 8 350,149 - Total short-term bank loans $ 423,567 $ 5,598,311 On November 10, 2022, the Company entered into a working capital loan agreement with the ICBC. The 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 bore a fixed interest rate of 4.785% per annum. The Company repaid $71,743 in May 2023 and paid off the remaining balance of the loan in August 2023. The balance of the loan was $nil and $5,023,978 as of December 31, 2023 and 2022, respectively. On November 30, 2022, the Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $287,167 as of December 31, 2023 and 2022, respectively. The loan bore an interest rate of 4.25% per annum. The loan was fully repaid in May 2023. 56 On November 30, 2022, the Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $143,583 as of December 31, 2023 and 2022, respectively. The loan bore an interest rate of 4.25% per annum. The loan was fully repaid in May 2023. On May 29, 2023, the Company entered into a working capital loan agreement with the ICBC, to borrow $423,567 at a fixed interest rate of 4.25% per annum. The loan was repaid in November 2023. On July 29, 2022, the Company entered into a working capital loan agreement with the China Construction Bank, with a balance of $nil and $143,583 as of December 31, 2023 and 2022, respectively. The loan bore a fixed interest rate of 3.95% per annum. The loan was fully repaid in July 2023. On June 29, 2023, the Company entered into a working capital loan agreement with the ICBC, to borrow $423,567 at a fixed interest rate of 3.55% per annum. The loan was repaid in September, 2023. On September 15, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,824 as of December 31, 2023. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 14, 2024. On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $ 70,594 as of December 31, 2023. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024. On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $ 350,149 as of December 31, 2023. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024. As of December 31, 2022, there were guaranteed short-term borrowings of $5,023,978 and unsecured bank loans of $574,333. As of December 31, 2023, there were guaranteed short-term borrowings of $nil and unsecured bank loans of $423,567. The average short-term borrowing rates for the years ended December 31, 2023, and 2022 were approximately 4.48% and 4.72%, respectively. Long-term loans As of December 31, 2023, and 2022, long-term loan balance is $11,378,429 and $9,040,002, respectively. On April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan was guaranteed by an independent third party. Interest payment was due quarterly and bore a rate of 7.68% per annum. Effective from November 15, 2022, the interest rate was 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. The loan was fully repaid in December 2023. As of December 31, 2023 and 2022, total outstanding loan balance was $nil 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 was due and payable in various installments from December 21, 2018 to June 20, 2023. On August 24, 2023, the loan was extended for another 3 years and will be due and payable on August 24, 2026. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $nil and $280,466 as of December 31, 2023 and 2022, respectively. Interest payment is due monthly and bore a rate of 7.68% per annum. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of December 31, 2023 and 2022, the total outstanding loan balance was $3,528,315 and $3,589,582. Out of the total outstanding loan balance, current portion amounted was $1,269,290, which is presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,259,025 is presented as non-current liabilities in the consolidated balance sheet as of December 31, 2023. 57 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. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of December 31, 2023 and 2022, the total outstanding loan balance was $2,259,026 and $2,297,332, respectively, which are presented as current liabilities and non-current liabilities in the consolidated balance sheet as of December 31, 2023 and 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. Effective from November 15, 2022, the interest rate was reduced to 7% per annum. As of December 31, 2023 and 2022, the total outstanding loan balance was $1,835,458 and $1,866,582, respectively, which are presented as current liabilities and non-current liabilities in the consolidated balance sheet as of December 31, 2023 and 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 December 31, 2023, the total outstanding loan balance was $2,541,404. Out of the total outstanding loan balance, current portion amounted was $1,284,820, which is presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,256,584 is presented as non-current liabilities in the consolidated balance sheet as of December 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. The company repaid the loan in November 2023. As of December 31, 2023 and 2022, the total outstanding loan balance was $nil and $51,690, respectively. Out of the total outstanding loan balance, current portion amounted $nil and $11,486, respectively, which are presented as current liabilities and the remaining balance of $nil and $40,204 are presented as non-current liabilities in the consolidated balance sheet as of December 31, 2023 and 2022, respectively. On December 5, 2023, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 3 years, which was due in various installments from June 21, 2024 to December 5, 2026. The loan was guaranteed by an independent third party. Interest payment was due monthly and bore a rate of 7% per annum. As of December 31, 2023, total outstanding loan balance was $1,214,226. Out of the total outstanding loan balance, current portion amounted $225,903, which is presented as current liabilities and the remaining balance of $ 988,323 is presented as non-current liabilities in the consolidated balance sheet as of December 31, 2023. Total interest expenses for the short-term bank loans and long-term loans for the years ended December 31, 2023, and 2022 were $977,678 and $988,997 respectively. Related party transactions Mr. Zhenyong Liu has loaned money to Dongfang Paper for working capital purposes over a period of time. On January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together with interest of $391,374 for the period from 2013 to 2015. Approximately $361,915 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 December 31, 2023, and 2022, respectively. 58 On December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,742,278 to Dongfang Paper for working capital purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China. The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016, the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off the remaining balance, together with interest of $20,400. As of December 31, 2023, and 2022, approximately $42,357 and $43,075 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. On March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount up to $17,201,342 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636 was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018, the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. In December 2019, the Company paid off the remaining balance, together with interest of 94,636. As of December 2023, and 2022, the outstanding interest was $194,047 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 December 31, 2023, and 2022, total amount of loans due to Mr. Zhenyong Liu were $nil. The interest expense incurred for such related party loans are $nil for the years ended December 31, 2023, and 2022. The accrued interest owe to Mr. Zhenyong Liu was approximately $598,319 and $608,465, as of December 31, 2023 and 2022, respectively, which was recorded in other payables and accrued liabilities. On December 8, 2021, the Company entered into 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 was unsecured and carried 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 into two agreements with Mr. Zhenyong Liu, which allowed Mr. Zhenyong Liu to borrow from the Company an amount of $7,059,455 (RMB50,000,000) in total. The loans were unsecured and carried a fixed interest rate of 4.35% per annum. $4,235,673 (RMB30,000,000) was repaid by Mr. Zhengyong Liu in August 2023 and the remaining balance was repaid in December 2023. Interest income of the loan for the year ended December 31, 2023 was $290,275. As of December 31, 2023, and 2022, amount due to shareholder are $727,433, which represent funds from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free. Critical Accounting Policies and Estimates The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates. The most critical accounting policies are listed below: Revenue Recognition Policy The Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered delivered when the customer’s truck picks up goods at our finished goods inventory warehouse. Long-Lived Assets The Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper manufacturing industry. For the years ended December 31, 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. 59 Foreign Currency Translation The functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”). Under ASC Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end of each fiscal period. The current exchange rates used by the Company as of December 31, 2023 and 2022 to translate the Chinese RMB to the U.S. Dollars are 7.0827:1 and 6.9646:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 7.0558:1, and 6.7573:1 for the years ended December 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 $4,376,862 (RMB31,000,000), which matures at various times in 2028. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance sheet transactions. Recent Accounting Pronouncements In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The new amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.