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, 2024 and 2023 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. Results of Operations Comparison of the Three months ended March 31, 2024 and 2023 Revenue for the three months ended March 31, 2024 was $6,863,841, representing a decrease of $12,927,036, or 65.32%, from $19,790,877 for the same period in the previous year. This was mainly due to the production suspension of corrugating medium paper (“CMP”) in January and February of 2024, and production suspension of tissue paper products in the first quarter of 2024. 25 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 three months ended March 31, 2024 was $6,826,800, representing a decrease of $12,924,348, or 65.44%, from $19,751,148 for the first quarter of 2023. Total offset printing paper, CMP and tissue paper products sold during the three months ended March 31, 2024 amounted to 18,670 tonnes, representing a decrease of 31,203 tonnes, or 62.56%, compared to 49,873 tonnes sold in the comparable period in the previous year. Production orders of CMP were arranged ahead of schedule (in December 2023), in order to mitigate the impact of energy price rise in 2024. Production of CMP was suspended in January and February 2024 due to the change of production schedule and Chinese New Year holiday. Production of CMP was resumed in mid of March 2024. Production of offset printing paper and tissue paper products were suspended due to the higher natural gas price and Chinese New Year in the first quarter of 2024 and expected to resume in the third quarter of 2024. The changes in revenue dollar amount and in quantity sold for the three months ended March 31, 2024 and 2023 are summarized as follows: Three Months Ended Three Months Ended Percentage March 31, 2024 March 31, 2023 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 15,640 $ 5,750,601 41,663 $ 16,467,969 (26,023 ) $ (10,717,368 ) -62.46 % -65.08 % Light-Weight CMP 3,030 $ 1,076,199 8,019 $ 3,060,226 (4,989 ) $ (1,984,027 ) -62.21 % -64.83 % Total CMP 18,670 $ 6,826,800 49,682 $ 19,528,195 (31,012 ) $ (12,701,395 ) -62.42 % -65.04 % Offset Printing Paper - $ - - $ - - $ - % % Tissue Paper Products - $ - 191 $ 222,953 (191 ) $ (222,953 ) -100.00 % -100.00 % Total CMP, Offset Printing Paper and Tissue Paper Revenue 18,670 $ 6,826,800 49,873 $ 19,751,148 (31,203 ) $ (12,924,348 ) -62.56 % -65.44 % Monthly sales revenue for the 24 months ended March 31, 2024, are summarized below: The Average Selling Prices (ASPs) for our main products in the three months ended March 31, 2024 and 2023 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light- Weight CMP ASP Tissue Paper Products ASP Three Months ended March 31, 2024 $ - $ 368 $ 355 $ - Three Months ended March 31, 2023 $ - $ 395 $ 382 $ 1,167 Decrease from comparable period in the previous year $ - $ (27 ) $ (27 ) $ (1,167 ) Decrease by percentage - % -6.84 % -7.07 % - % 26 The following chart shows the month-by-month ASPs for the 24-month period ended March 31, 2024: Corrugating Medium Paper Revenue from CMP amounted to $6,826,800 (100.00% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended March 31, 2024, representing a decrease of $12,701,395, or 65.04%, from $19,528,195 for the comparable period in 2023. Production of CMP was suspended in January and February of 2024 and production of offset printing paper was suspended in the first quarter of 2024. We sold 18,670 tonnes of CMP in the three months ended March 31, 2024 as compared to 49,682 tonnes for the same period in 2023, representing a 62.42% decrease in quantity sold. ASP for regular CMP decreased from $395/tonne for the three months ended March 31, 2023 to $368/tonne for the three months ended March 31, 2024, representing a 6.84% decrease. ASP in RMB for regular CMP for the first quarter of 2023 and 2024 was RMB2,712 and RMB2,611, respectively, representing a 3.73% decrease. The quantity of regular CMP sold decreased by 26,023 tonnes, from 41,663 tonnes in the first quarter of 2023 to 15,640 tonnes in the first quarter of 2024. ASP for light-weight CMP decreased from $382/tonne for the three months ended March 31, 2023 to $355/tonne for the three months ended March 31, 2024, representing a 7.07% decrease. ASP in RMB for light-weight CMP for the first quarter of 2023 and 2024 was RMB2,618 and RMB2,522, respectively, representing a 3.68% decrease. The quantity of light-weight CMP sold decreased by 4,989 tonnes, from 8,019 tonnes in the first quarter of 2023, to 3,030 tonnes in the first quarter of 2024. 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 2024 and 2023 were 15.11% and 44.49%, respectively, representing a decrease of 29.38%. 27 Quantities sold for regular CMP that was produced by the PM6 production line from April 2022 to March 2024 are as follows: Offset printing paper Revenue from offset printing paper was $nil for the three months ended March 31, 2024 and 2023. Production of offset printing paper was suspended in the three months ended March 31, 2024 and 2023. Tissue Paper Products Revenue from tissue paper products was $nil and $222,953 for the three months ended March 31, 2024 and 2023, respectively. Production of tissue paper products was suspended during the first quarter of 2024. 28 Revenue of Face Mask Revenue generated from selling face mask were $nil and $35,637 for the three months ended March 31, 2024 and 2023, respectively. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended March 31, 2024 was $6,464,464, a decrease of $13,553,915, or 67.71%, from $20,018,379 for the comparable period in 2023. This was mainly due to the decrease in sales quantity and the decrease in the unit material costs of CMP. Cost of sales for CMP was $6,464,464 for the quarter ended March 31, 2024, as compared to $19,089,115 for the comparable period in 2023. The decrease in the cost of sales of $12,624,651 for CMP was mainly due to the decreases in sales volume and average unit cost of sales of CMP. Average cost of sales per tonne for CMP decreased by 9.90%, from $384 in the first quarter of 2023 to $346 in the first quarter of 2024. 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 2024 compared to the first quarter of 2023. Cost of sales for tissue paper products was $nil for the quarter ended March 31, 2024, as compared to $929,264 for the comparable period in 2023. The production of tissue paper products was suspended in the first quarter of 2024. Changes in cost of sales and cost per tonne by product for the quarters ended March 31, 2024 and 2023 are summarized below: Three Months Ended Three Months Ended March 31, 2024 March 31, 2023 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 $ 5,424,012 $ 347 $ 16,149,948 $ 388 $ (10,725,936 ) $ (41 ) -66.41 % -10.57 Light-Weight CMP $ 1,040,452 $ 343 $ 2,939,167 $ 367 $ (1,898,715 ) $ (24 ) -64.60 % -6.54 Total CMP $ 6,464,464 $ 346 $ 19,089,115 $ 384 $ (12,624,651 ) $ (38 ) -66.14 % -9.90 Offset Printing Paper $ - $ - $ - $ - $ - $ - % Tissue Paper Products $ - $ - 929,264 $ 4,865 $ (929,264 ) $ (4,865 ) -100.00 % -100.00 Total CMP, Offset Printing Paper and Tissue Paper $ 6,464,464 $ n/a $ 20,018,379 $ n/a $ (13,553,915 ) $ n/a -67.71 % n/a Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended March 31, 2024 was RMB 1,276/tonne (approximately $180/tonne), as compared to RMB 1,502/tonne (approximately $219/tonne) for the three months ended March 31, 2023. These changes (in US dollars) represent a year-over-year decrease of 17.81% 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 2022 to March 2024 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 4% and 12.4% of total sales in the first quarter of 2024, respectively, compared to 4% and 14% of total sales in the first quarter of 2023. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended March 31, 2024 are summarized as follows: Gross Profit (Loss) Gross profit for the three months ended March 31, 2024 was $399,113 (representing 5.81% of the total revenue), representing an increase of $676,112, or 244.08%, from the gross loss of $276,999 (representing 1.40% of the total revenue) for the three months ended March 31, 2023. 30 Offset Printing Paper, CMP and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the three months ended March 31, 2024 was $362,336, representing an increase of $629,567, or 235.59%, from the gross loss of $267,231 for the three months ended March 31, 2023. This was mainly due to the gross loss incurred for tissue paper products in the first quarter of 2023. The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 6.66 percentage points, from -1.35% for the three months ended March 31, 2023, to 5.31% for the three months ended March 31, 2024. Gross profit margin for regular CMP for the three months ended March 31, 2024 was 5.68%, or 3.75 percentage points higher, as compared to gross profit margin of 1.93% for the three months ended March 31, 2023. Such increase was mainly due to the decrease in cost of recycled paper board, partially offset by the decrease in ASP of regular CMP in the first quarter of 2024. Gross profit margin for light-weight CMP for the three months ended March 31, 2024 was 3.32%, or 0.64 percentage points lower, as compared to gross profit margin of 3.96% for the three months ended March 31, 2023. Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended March 31, 2024 are as follows: 31 Face Masks Gross loss for face masks for the three months ended March 31, 2024 and 2023 were gross loss of $nil and $2,839, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended March 31, 2024 were $3,900,783, an increase of $1,405,421, or 56.32% from $2,495,362 for the three months ended March 31, 2023. The decrease was mainly due to the increase in depreciation of idle fixed assets during production suspension. Loss from Operations Operating loss for the quarter ended March 31, 2024 was $3,501,670, a decrease of $729,309, or 26.31%, from $2,772,361 for the quarter ended March 31, 2023. The decrease in loss from operations was primarily due to the increase in selling, general and administrative expenses, partially offset by the increase in gross profit. Other Income and Expenses Interest expense for the three months ended March 31, 2024 decreased by $38,879, from $249,169 in the three months ended March 31, 2023, to $210,290. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $12,204,370 as of March 31, 2024, as compared to $18,212,347 as of March 31, 2023. 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, 2024 and 2023 was a gain of $34 and $152,097, respectively. Net Loss As a result and the factors discussed above, net loss was $ 3,746,536 for the quarter ended March 31, 2024, representing a decrease of $1,013,371, or 37.08 %, from $2,733,165 in net loss for the quarter ended March 31, 2023. 32 Accounts Receivable Net accounts receivable increased by $1,810,651, or 314.61%, to $2,386,177 as of March 31, 2024, as compared with $575,526 as of December 31, 2023. We usually collect accounts receivable within 30 days of delivery and completion of sales. Inventories Inventories consist of raw materials (accounting for 36.15% of total value of inventory as of March 31, 2024), semi-finished goods and finished goods. As of March 31, 2024, the recorded value of inventory decreased by 1.77% to $3,492,364 from $3,555,235 as of December 31, 2023. As of March 31, 2024, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $1,031,201, approximately $832,457, or 418.86%, higher than the balance as of December 31, 2023. 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 2023. A summary of changes in major inventory items is as follows: March 31, December 31, 2024 2023 $ Change % Change Raw Materials Recycled paper board $ 1,031,201 $ 198,744 832,457 418.86 % Recycled white scrap paper 10,629 10,647 -18 -0.17 % Tissue base paper 21,101 21,138 -37 -0.18 % Gas 33,083 21,428 11,655 54.39 % Other raw materials 166,410 121,011 45,399 37.52 % Total Raw Materials 1,262,424 372,968 889,456 238.48 % Semi-finished Goods 299,686 300,207 -521 -0.17 % Finished Goods 1,930,254 2,885,019 -954,765 -33.09 % Total inventory, gross 3,492,364 3,558,194 -65,830 -1.85 % Inventory reserve - (2,959 ) 5 100 % Total inventory, net $ 3,492,364 $ 3,555,235 (65,825 ) -1.77 % 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 $140,829 (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, 2024 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, 2024, 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 as of March 31, 2024 and December 31, 2023. Cash and Cash Equivalents Our cash, cash equivalents and restricted cash as of March 31, 2024 was $5,417,560, an increase of $1,025,639, from $4,391,921 as of December 31, 2023. The increase of cash and cash equivalents for the three months ended March 31, 2024 was attributable to a number of factors including: i. Net cash provided by (used in) operating activities Net cash provided by operating activities was $624,420 for the three months ended March 31, 2024. The balance represented a decrease of cash of $4,185,507, or 87.02%, from $4,809,928 provided for the three months ended March 31, 2023. Net loss for the three months ended March 31, 2024 was $ 3,746,536 , representing a decrease of $ 1,013,371 , or 37.08%, from a net loss of $2,733,165 for the three months ended March 31, 2023. Changes in various asset and liability account balances throughout the three months ended March 31, 2024 also contributed to the net change in cash from operating activities in three months ended March 31, 2024. Chief among such changes is the increase of accounts receivable in the amount of $1,847,112 during the three months of 2024. There was also a decrease of $59,612 in the ending inventory balance as of March 31, 2024 (an increase to net cash for the three months ended March 31, 2024 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $3,481,788. The Company also had a net decrease of $ 1,276,805 in prepayment and other current assets (an increase to net cash) and a net increase of $ 908,127 in other payables and accrued liabilities and related parties (an increase to net cash) during the three months ended March 31, 2024. 34 ii. Net cash used in investing activities We incurred $9,027 in net cash expenditures for investing activities during the three months ended March 31, 2024, as compared to $295,018 for the same period of 2023. iii. Net cash provided by financing activities Net cash provided by financing activities was $422,488 for the three months ended March 31, 2024, as compared to net cash provided by financing activities in the amount of $2,564,646 for the three months ended March 31, 2023. Short-term bank loans March 31, December 31, 2024 2023 Bank of Cangzhou 1 $ 140,944 $ - Bank of Cangzhou 2 281,889 - Industrial and Commercial Bank of China (“ICBC”) Loan 1 2,819 2,824 ICBC Loan 2 70,472 70,594 ICBC Loan 3 349,542 350,149 Total short-term bank loans $ 845,666 $ 423,567 On December 31, 2023, the Company entered into a working capital loan agreement with the Bank of Cangzhou, to borrow $140,944 at a fixed interest rate of 5.5% per annum. The loan is secured by certain of the Company’s manufacturing equipment with net book value of $306,528 as of March 31, 2024. The loan will be due by December 30, 2024. On December 31, 2023, the Company entered into a working capital loan agreement with the Bank of Cangzhou, to borrow $281,889 at a fixed interest rate of 5.5% per annum. The loan will be due by December 30, 2024. On September 15, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,819 and $2,824 as of March 31, 2024 and December 31, 2023, respectively. 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 $70,472 and $70,594 as of March 31, 2024 and December 31, 2023, respectively. 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 $349,542 and $350,149 as of March 31, 2024 and December 31, 2023, respectively. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by September 21, 2024. As of March 31, 2024, there were guaranteed short-term borrowings of $nil and unsecured bank loans of $704,722. 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 three months ended March 31, 2024 and 2023 were approximately 4.48% and 4.72%. Long-term loans As of March 31, 2024 and December 31, 2023, long-term loans were $11,358,704 and $11,378,429, respectively. 35 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 as of March 31, 2024 and December 31, 2023. 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 March 31, 2024 and December 31, 2023, the total outstanding loan balance was $3,522,200 and $3,528,315. Out of the total outstanding loan balance, current portion amounted was $1,267,090 and $1,269,290, which is presented as current liabilities in the consolidated balance sheet and the remaining balance of $2,255,110 and $2,259,025 is presented as non-current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023, 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 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 March 31, 2024 and December 31, 2023, the total outstanding loan balance was $2,255,109 and $2,259,026, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023. 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 March 31, 2024 and December 31, 2023, the total outstanding loan balance was $1,832,276 and $1,835,458, respectively, which are presented as current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023. 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, 2024 and December 31, 2023, the total outstanding loan balance was $2,536,998 and $2,541,404. Out of the total outstanding loan balance, current portion amounted was $2,536,998 and $1,284,820, which is presented as current liabilities in the consolidated balance sheet and the remaining balance of $nil and $1,256,584 is presented as non-current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, total outstanding loan balance was $1,212,121 and $1,214,226, respectively. Out of the total outstanding loan balance, current portion amounted $225,511 and $225,903, which is presented as current liabilities and the remaining balance of $986,610 and $988,323 is presented as non-current liabilities in the consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively. Total interest expenses for the short-term bank loans and long-term loans for the three months ended March 31, 2024 and 2023 were $209,586 and $244,679, 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 $361,289 and $361,915 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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, approximately $42,283 and $42,357 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 March 31, 2024 and December 31, 2023, the outstanding interest was $193,710 and $194,047, 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, 2024 and December 31, 2023, 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, 2024 and 2023. The accrued interest owing to Mr. Zhenyong Liu was approximately $597,282 and $598,319, as of March 31, 2024 and December 31, 2023, respectively, which was recorded in other payables and accrued liabilities. 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, 2024 and 2023, 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, 2024 and December 31, 2023 to translate the Chinese RMB to the U.S. Dollars are 7.0950:1 and 7.0827:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 7.1008:1 and 6.8613:1 for the three months ended March 31, 2024 and 2023, 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 $4,369,274 (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. 38 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.