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 September 30, 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 September 30, 2024 and 2023 Revenue for the three months ended September 30, 2024 was $25,081,500, an increase of $9,309,940, or 59.03%, from $15,771,560 for the same period in the previous year. This was mainly due to the increase of sales volume of corrugating medium paper (“CMP”), partially offset by the decrease in average selling prices (“ASP”) of CMP. 29 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 September 30, 2024 was $25,044,375, representing an increase of $9,287,976, or 58.95%, from $15,756,399 for the third quarter of 2023. Total offset printing paper, CMP and tissue paper products sold during the three months ended September 30, 2024 amounted to 74,884 tonnes, representing an increase of 30,077 tonnes, or 67.13%, compared to 44,807 tonnes sold in the comparable period in the previous year. Production of offset printing paper and tissue paper products were suspended due to the rising natural gas price in first half of 2024 and is expected to resume at the end of 2024. The changes in revenue dollar amount and in quantity sold for the three months ended September 30, 2024 and 2023 are summarized as follows: Three Months Ended Three Months Ended Percentage September 30, 2024 September 30, 2023 Change in Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 62,121 $ 20,910,061 34,186 $ 11,953,552 27,935 $ 8,956,509 81.71 % 74.93 % Light-Weight CMP 　12,763 $ 4,134,314 　10,210 $ 3,469,521 　2,553 $ 664,793 　25.00 % 　19.16 % Total CMP 74,884 $ 25,044,375 44,396 $ 15,423,073 30,488 $ 9,621,302 68.67 % 62.38 % Offset Printing Paper - $ - 170 $ 69,227 (170 ) $ (69,227 ) (100.00 )% (100.00 )% Tissue Paper Products - $ - 241 $ 264,099 (241 ) $ (264,099 ) (100.00 )% (100.00 )% Total CMP, Offset Printing Paper and Tissue Paper Revenue 　74,884 $ 25,044,375 　44,807 $ 15,756,399 　30,077 $ 9,287,976 　67.13 % 　58.95 % Monthly sales revenue for the 24 months ended September 30, 2024, are summarized below: 30 The Average Selling Prices (ASPs) for our main products in the three months ended September 30, 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 September 30, 2024 $ - $ 337 $ 324 $ - Three Months ended September 30, 2023 $ 407 $ 350 $ 340 $ 1,096 Decrease from comparable period in the previous year $ (407 ) $ (13 ) $ (16 ) $ (1,096 ) Decrease by percentage - % (3.71 )% (4.71 )% - % The following chart shows the month-by-month ASPs for the 24-month period ended September 30, 2024: Corrugating Medium Paper Revenue from CMP amounted to $25,044,375 (100.00% of the total offset printing paper, CMP and tissue paper products revenues) for the three months ended September 30, 2024, representing an increase of $9,621,302, or 62.38%, from $15,423,073 for the comparable period in 2023. We sold 74,884 tonnes of CMP in the three months ended September 30, 2024 as compared to 44,396 tonnes for the same period in 2023, representing a 68.67% increase in quantity sold. 31 ASP for regular CMP decreased from $350/tonne for the three months ended September 30, 2023 to $337/tonne for the three months ended September 30, 2024, representing a 3.71% decrease. ASP in RMB for regular CMP for the third quarter of 2023 and 2024 was RMB2,532 and RMB2,386, respectively, representing a 5.76% decrease. The quantity of regular CMP sold increased by 27,935 tonnes, from 34,186 tonnes in the third quarter of 2023 to 62,121 tonnes in the third quarter of 2024. ASP for light-weight CMP decreased from $340/tonne for the three months ended September 30, 2023 to $324/tonne for the three months ended September 30, 2024, representing a 4.71% decrease. ASP in RMB for light-weight CMP for the third quarter of 2023 and 2024 was RMB2,439 and RMB2,297, respectively, representing a 5.81% decrease. The quantity of light-weight CMP sold increased by 2,553 tonnes, from 10,210 tonnes in the third quarter of 2023, to 12,763 tonnes in the third 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 third quarter of 2024 and 2023 were 68.96% and 38.07%, respectively, representing an increase of 30.89%. Quantities sold for regular CMP that was produced by the PM6 production line from October 2022 to September 2024 are as follows: Offset printing paper Revenue from offset printing paper was $nil for the three months ended September 30, 2024, representing a decrease of $69,227, or 100.00%, from $69,227 for the three months ended September 30, 2023. Production of offset printing paper was suspended during the third quarter of 2024. Tissue Paper Products Revenue from tissue paper products was $nil for the three months ended September 30, 2024, representing a decrease of $264,099, or 100.00%, from $264,099 for the three months ended September 30, 2023. Production of tissue paper products was suspended during the third quarter of 2024. 32 Revenue of Face Mask Revenue generated from selling face mask were $nil and $15,198 for the three months ended September 30, 2024 and 2023, respectively. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended September 30, 2024 was $23,163,835, an increase of $7,256,618, or 45.62%, from $15,907,217 for the comparable period in 2023. This was mainly due to the increase in sales quantity of CMP, partially offset by and the decrease of the unit material cost of CMP products. Cost of sales for CMP was $23,163,835 for the quarter ended September 30, 2024, as compared to $14,844,637 for the comparable period in 2023. The increase in the cost of sales of $8,319,198 for CMP was mainly due to the increase in sales volume of CMP, partially offset by the decrease in average unit cost of sales of CMP. Average cost of sales per tonne for CMP decreased by 7.49%, from $334 in the third quarter of 2023 to $309 in the third 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 third quarter of 2024 compared to the third quarter of 2023. Cost of sales for offset printing paper was $ nil for the quarter ended September 30, 2024, as compared to $64,011 for the comparable period in 2023. The production of offset printing paper was suspended in the third quarter of 2024. Cost of sales for tissue paper products was $ nil for the quarter ended September 30, 2024, as compared to $998,569 for the comparable period in 2023. The production of tissue paper products was suspended in the third quarter of 2024. Changes in cost of sales and cost per tonne by product for the quarters ended September 30, 2024 and 2023 are summarized below: Three Months Ended Three Months Ended September 30, 2024 September 30, 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 $ 19,332,518 $ 311 $ 11,116,060 $ 325 $ 8,216,458 $ (14 ) 73.92 % (4.31 )% Light-Weight CMP $ 3,831,317 $ 300 $ 3,728,577 $ 365 $ 102,740 $ (65 ) 2.76 % (17.81 )% Total CMP $ 23,163,835 $ 309 $ 14,844,637 $ 334 $ 8,319,198 $ (25 ) 56.04 % (7.49 )% Offset Printing Paper $ - $ - $ 64,011 $ 377 $ (64,011 ) $ (377 ) (100.00 )% (100.00 )% Tissue Paper Products $ - $ - 998,569 $ 4,143 $ (998,569 ) $ (4,143 ) (100.00 )% (100.00 )% Total CMP, Offset Printing Paper and Tissue Paper $ 23,163,835 $ n/a $ 15,907,217 $ n/a $ 7,256,618 $ n/a 45.62 % n/a Our average unit purchase costs (net of applicable value added tax) of recycled paper board in the three months ended September 30, 2024 were RMB 1,214/tonne (approximately $171/tonne), as compared to RMB 1,239/tonne (approximately $176/tonne) for the three months ended September 30, 2023. These changes (in US dollars) represent a year-over-year decrease of 2.84% 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. 33 The pricing trends of our major raw materials for the 24-month period from October 2022 to September 2024 are shown below: Electricity and gas are our two main energy sources. Electricity and gas accounted for approximately 5% and 14.3% of total sales in the third quarter of 2024, respectively, compared to 5% and 13.3% of total sales in the third quarter of 2023. The monthly energy cost as a percentage of total monthly sales of our main paper products for the 24 months ended September 30, 2024 are summarized as follows: Gross Profit (Loss) Gross profit for the three months ended September 30, 2024 was $1,917,381 (representing 7.64% of the total revenue), representing an increase of $2,070,604, from the gross loss of $153,223 (representing 0.97% of the total revenue) for the three months ended September 30, 2023, as a result of factors described above. 34 Offset Printing Paper, CMP and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the three months ended September 30, 2024 was $1,880,540, representing an increase of $2,031,358, from the gross loss of $150,818 for the three months ended September 30, 2023. The increase was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 8.47 percentage points, from -0.96% for the three months ended September 30, 2023, to 7.51% for the three months ended September 30, 2024. Gross profit margin for regular CMP for the three months ended September 30, 2024 was 7.54%, or 0.53 percentage points higher, as compared to gross profit margin of 7.01% for the three months ended September 30, 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 third quarter of 2024. Gross profit margin for light-weight CMP for the three months ended September 30, 2024 was 7.33%, or 14.80 percentage points higher, as compared to gross profit margin of -7.47% for the three months ended September 30, 2023. The increase was mainly due to the decrease in cost of recycled paper board, partially offset by the decrease of ASP of light-weight CMP in the third quarter of 2024. Monthly gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended September 30, 2024 are as follows: Face Masks Gross loss for face masks for the three months ended September 30, 2024 and 2023 were $nil and $2,393. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended September 30, 2024 were $3,381,502, an increase of $1,046,756, or 44.83% from $2,334,746 for the three months ended September 30, 2023. The increase was mainly due to the increase in depreciation of idle fixed assets during production suspension and accrued liability for legal proceeding the Company was jointly liable for repayment of a loan. Loss from Operations Operating loss for the quarter ended September 30, 2024 was $1,464,121, a decrease of loss of $1,020,392 or 41.07%, from $2,484,513 for the quarter ended September 30, 2023. The increase in income from operations was primarily due to the increase in gross profit, partially offset by the increase in selling, general and administrative expenses. Other Income and Expenses Interest expense for the three months ended September 30, 2024 decreased by $76,388, from $247,818 in the three months ended September 30, 2023, to $171,430. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that aggregated $9,788,224 as of September 30, 2024, as compared to $12,105,731 as of September 30, 2023. 35 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 September 30, 2024 and 2023 was a gain of $2 and $660,429, respectively. Net Loss As a result and the factors discussed above, net loss was $1,973,946 for the quarter ended September 30, 2024, representing a decrease of loss of $1,422, or 0.07%, from $1,975,368 for the quarter ended September 30, 2023. Comparison of the Nine months ended September 30, 2024 and 2023 Revenue for the nine months ended September 30, 2024 was $58,195,129, representing a decrease of $7,387,222, or 11.26%, from $65,582,351 for the same period in the previous year. This was mainly due to the decrease in ASP of CMP, partially offset by the increase in sales quantity of regular 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 nine months ended September 30, 2024 was $58,083,990, a decrease of $7,399,292, or 11.30%, from $65,483,282 for the nine months ended September 30, 2023. This was mainly due to the decrease in sales volume of CMP, offset printing paper and tissue paper products, and the decrease in ASPs of CMP. Total quantities of offset printing paper, CMP and tissue paper products sold during the nine months ended September 30, 2024 amounted to 168,919 tonnes, a decrease of 4,398 tonnes, or 2.54%, compared to 173,317 tonnes sold during the nine months ended September 30, 2023. Total quantities of CMP and offset printing paper sold decreased by 3,672 tonnes in the nine months of 2024 as compared to the same period of 2023. Production of CMP was suspended in January and February of 2024 and resumed in mid of March 2024, and production of offset printing paper and tissue paper products was suspended in the nine months ended September 30, 2024. The changes in revenue and quantity sold for the nine months ended September 30, 2024 and 2023 are summarized as follows: Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Change in Percentage Change Sales Revenue Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity (Tonne) Amount Quantity Amount Regular CMP 140,574 $ 48,644,283 135,912 $ 50,352,851 4,662 $ (1,708,568 ) 3.43 % (3.39 )% Light-Weight CMP 28,345 $ 9,439,707 31,106 $ 11,073,937 (2,761 ) $ (1,634,230 ) (8.88 )% (14.76 )% Total CMP 168,919 $ 58,083,990 167,018 $ 61,426,788 1,901 $ (3,342,798 ) 1.14 % (5.44 )% Offset Printing Paper - $ - 5,573 $ 3,225,109 (5,573 ) $ (3,225,109 ) (100.00 )% (100.00 )% Tissue Paper Products - $ - 726 $ 831,385 (726 ) $ (831,385 ) (100.00 )% (100.00 )% Total CMP, Offset Printing Paper and Tissue Paper Revenue 168,919 $ 58,083,990 173,317 $ 65,483,282 (4,398 ) $ (7,399,292 ) (2.54 )% (11.30 )% ASPs for our main products in the nine-month period ended September 30, 2024 and 2023 are summarized as follows: Offset Printing Paper ASP Regular CMP ASP Light- Weight CMP ASP Tissue Paper Products ASP Nine Months Ended September 30, 2024 $ - $ 346 $ 333 $ - Nine Months Ended September 30, 2023 $ 579 $ 370 $ 356 $ 1,145 Decrease from comparable period in the previous year $ (579 ) $ (24 ) $ (23 ) $ (1,145 ) Decrease by percentage - % (6.49 )% (6.46 )% - % 36 Revenue of Face Masks Revenue generated from selling face masks were $nil and $95,080 for the nine months ended September 30, 2024 and 2023. Cost of Sales Total cost of sales for CMP, offset printing paper and tissue paper products in the nine months ended September 30, 2024 was $52,612,788, a decrease of $12,104,998, or 18.70%, from $64,717,786 for the nine months ended September 30, 2023. This was mainly due to the decrease in the unit material costs of CMP. Cost of sales for CMP was $52,612,788 for the nine months ended September 30, 2024, as compared to $58,592,582 in the same period of 2023. The decrease in the cost of sales of $5,979,794 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 nine months of 2024. Average cost of sales per tonne for CMP decreased by 11.40%, from $351 for the nine months ended September 30, 2023, to $311 in the same period of 2024. 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 $nil for the nine months ended September 30, 2024, as compared to $3,143,496 in the same period of 2023. Cost of sales for tissue paper products was $nil for the nine months ended September 30, 2024, as compared to $2,981,708 in the same period of 2023. Changes in cost of sales and cost per tonne by product for the nine months ended September 30, 2024 and 2023 are summarized below: Nine Months Ended September 30, 2024 Nine Months Ended September 30, 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 $ 44,054,200 $ 313 $ 47,704,888 $ 351 $ (3,650,688 ) $ (38 ) (7.65 )% (10.83 )% Light-Weight CMP $ 8,558,588 $ 302 $ 10,887,694 $ 350 $ (2,329,106 ) $ (48 ) (21.39 )% (13.71 )% Total CMP $ 52,612,788 $ 311 $ 58,592,582 $ 351 $ (5,979,794 ) $ (40 ) (10.21 )% (11.40 )% Offset Printing Paper $ - $ - $ 3,143,496 $ 564 $ (3,143,496 ) $ (564 ) (100.00 )% (100.00 )% Tissue Paper Products $ - $ - $ 2,981,708 $ 4,107 $ (2,981,708 ) $ (4,107 ) (100.00 )% (100.00 )% Total CMP, Offset Printing Paper and Tissue Paper Revenue $ 52,612,788 $ n/a $ 64,717,786 $ n/a $ (12,104,998 ) $ n/a ( 18.70 ) % n/a % Gross profit Gross profit for the nine months ended September 30, 2024 was $5,581,794 (representing 9.59% of the total revenue), representing an increase of $4,832,158, or 644.60%, from the gross profit of $749,636 (representing 1.14% of the total revenue) for the nine months ended September 30, 2023. The increase was mainly due to the decrease in unit cost of materials of CMP, partially offset by the decrease in ASP of CMP. Offset Printing Paper, CMP and Tissue Paper Products Gross profit for offset printing paper, CMP and tissue paper products for the nine months ended September 30, 2024 was $5,471,202, an increase of $4,705,706, or 614.73%, from the gross profit of $765,496 for the nine months ended September 30, 2023. The increase was mainly the result of the factors discussed above. The overall gross profit margin for offset printing paper, CMP and tissue paper products increased by 8.25 percentage points, from 1.17% for the nine months ended September 30, 2023, to 9.42% for the nine months ended September 30, 2024. 37 Gross profit margin for regular CMP for the nine months ended September 30, 2024 was 9.44%, or 4.18 percentage points higher, as compared to gross profit margin of 5.26% for the nine months ended September 30, 2023. Such increase was primarily due to the decrease in material costs, partially offset by the decrease in ASP of regular CMP. Gross profit margin for light-weight CMP for the nine months ended September 30, 2024 was 9.33%, or 7.65 percentage points higher, as compared to gross profit margin of 1.68% for the nine months ended September 30, 2023. Such increase was primarily due to the decrease in material costs, partially offset by the decrease in ASP of light-weight CMP. Face Masks Gross loss for face mask for the nine months ended September 30, 2024 and 2023 was $nil and $8,801, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses for the nine months ended September 30, 2024 were $9,999,833, an increase of $3,846,320, or 62.51% from $6,153,513 for the nine months ended September 30, 2023. The increase was mainly due to the increase in depreciation of idle fixed assets during production suspension and accrued liability for legal proceeding the Company was jointly liable for repayment of a loan. Loss from Operations Operating loss for the nine months ended September 30, 2024 was $4,418,039, a decrease of loss of $1,357,518, or 23.50%, from $5,775,557 for the nine months ended September 30, 2023. The decrease of loss from operations was primarily due to the increase in gross profit, partially offset by the increase in selling, general and administrative expenses. Other Income and Expenses Interest expense for the nine months ended September 30, 2024 decreased by $174,397, from $767,668 for the nine months ended September 30, 2023, to $593,271. The Company had short-term and long-term interest-bearing loans and lease obligation that aggregated $9,788,224 as of September 30, 2024, as compared to $12,105,731 as of September 30, 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 nine months ended September 30, 2022 and 2023 was a gain of $51 and $646,020, respectively. Net Loss As a result of the above, net loss was $5,798,229 for the nine months ended September 30, 2024, representing a decrease of loss of $163,797, or 2.75%, from $5,962,026 for the nine months ended September 30, 2023. Accounts Receivable Net accounts receivable increased by $1,151,844, or 200.14%, to $1,727,370 as of September 30, 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 71.70% of total value of inventory as of September 30, 2024), semi-finished goods and finished goods. As of September 30, 2024, the recorded value of inventory increased by 61.24% to $5,732,539 from $3,555,235 as of December 31, 2023. As of September 30, 2024, the inventory of recycled paper board, which is the main raw material for the production of CMP, was $3,873,233, approximately $3,674,489, or 1848.86%, 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. 38 A summary of changes in major inventory items is as follows: September 30, December 31, $  % 2024 2023 Change Change Raw Materials Recycled paper board $ 3,873,233 $ 198,744 3,674,489 1848.9 % Recycled white scrap paper 10,762 10,647 115 1.1 % Tissue base paper 21,365 21,138 227 1.1 % Gas 65,771 21,428 44,343 206.9 % Mask fabric and other raw materials 138,943 121,011 17,932 14.8 % Total Raw Materials 4,110,074 372,968 3,737,106 1002.0 % Semi-finished Goods 303,433 300,207 3,226 1.1 % Finished Goods 1,319,032 2,885,019 (1,565,987 ) (54.3 )% Total inventory, gross 5,732,539 3,558,194 2,174,345 61.1 % Inventory reserve - (2,959 ) 2,959 (100.0 )% Total inventory, net $ 5,732,539 $ 3,555,235 2,177,304 61.2 % 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 $140,847 (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 September 30, 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 September 30, 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 is complete, while work on the related ancillary facilities is ongoing. These commitments are expected to be financed by bank loans and cash flows generated from our business operations. Cash and Cash Equivalents Our cash, cash equivalents and restricted cash as of September 30, 2024 was $4,892,914, an increase of $500,993, from $4,391,921 as of December 31, 2023. The increase of cash and cash equivalents for the nine months ended September 30, 2024 was attributable to a number of factors including: i. Net cash provided by operating activities Net cash provided by operating activities was $2,831,111 for the nine months ended September 30, 2024. The balance represented a decrease of cash of $4,663,003, or 62.22%, from net cash of $7,494,114 provided for the nine months ended September 30, 2023. Net loss for the nine months ended September 30, 2024 was $5,798,229, representing a decrease of loss from operations of $163,797, or 2.75%, from $5,962,026 for the nine months ended September 30, 2023. Changes in various asset and liability account balances throughout the nine months ended September 30, 2024 also contributed to the net change in cash from operating activities in the nine months ended September 30, 2024. Chief among such changes is the increase of accounts receivable in the amount of $1,160,996 during the nine months of 2024. There was also an increase of $2,108,280 in the ending inventory balance as of September 30, 2024 (a decrease to net cash for the nine months ended September 30, 2024 cash flow purposes). In addition, the Company had non-cash expenses relating to depreciation and amortization in the amount of $10,346,181. The Company also had a net increase of $122,747 in prepayment and other current assets (a decrease to net cash) and a net increase of $1,406,850 in other payables and accrued liabilities and related parties (an increase to net cash), as well as an increase in income tax payable of $345,270 (an increase to net cash) during the nine months ended September 30, 2024. 39 ii. Net cash used in investing activities We incurred $315,152 in net cash expenditures for purchases of property, plant and equipment during the nine months ended September 30, 2024, as compared to $9,211,711 for the same period of 2023. iii. Net cash provided by financing activities Net cash used in financing activities was $2,112,706 for the nine months ended September 30, 2024, as compared to net cash provided by financing activities in the amount of $1,997,269 for the nine months ended September 30, 2023. The net cash outflow for the nine months ended September 30, 2024 was mainly for repayment of bank loans. Short-term bank loans September 30, December 31, 2024 2023 Bank of Cangzhou 1 $ 142,706 $ - Bank of Cangzhou 2 285,413 - Industrial and Commercial Bank of China (“ICBC”) Loan 1 - 2,824 ICBC Loan 2 - 70,594 ICBC Loan 3 - 350,149 ICBC Loan 4 2,854 - ICBC Loan 5 142,706 - ICBC Loan 6 142,706 - ICBC Loan 7 139,852 - Total short-term bank loans $ 856,238 $ 423,567 On December 31, 2023, the Company entered into a working capital loan agreement with the Bank of Cangzhou, to borrow $142,706 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 $251,593 as of September 30, 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 $285,413 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 $nil and $2,824 as of September 30, 2024 and December 31, 2023, respectively. The loan bore a fixed interest rate of 3.45% per annum. The loan was repaid in June 2024. On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $70,594 as of September 30, 2024 and December 31, 2023, respectively. The loan bore a fixed interest rate of 3.45% per annum. The loan was repaid in June 2024. On September 22, 2023, the Company entered into a working capital loan agreement with the ICBC, with a balance of $nil and $350,149 as of September 30, 2024 and December 31, 2023, respectively. The loan bore a fixed interest rate of 3.45% per annum. The loan was repaid in June 2024. On June 11, 2024, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,854 as of September 30, 2024. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by June 11, 2025. 40 On June 21, 2024, the Company entered into a working capital loan agreement with the ICBC, with a balance of $142,706 as of September 30, 2024. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by June 21, 2025. On June 22, 2024, the Company entered into a working capital loan agreement with the ICBC, with a balance of $142,706 as of September 30, 2024. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by June 22, 2025. On June 24, 2024, the Company entered into a working capital loan agreement with the ICBC, with a balance of $139,852 as of September 30, 2024. The loan bears a fixed interest rate of 3.45% per annum. The loan will be due by June 24, 2025. As of September 30, 2024, there were guaranteed short-term borrowings of $142,707 and unsecured bank loans of $713,531. 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 September 30, 2024 and 2023 were approximately 4.47% and 4.52%. The average short-term borrowing rates for the nine months ended September 30, 2024 and 2023 were approximately 4.47% and 4.66%. Long-term loans As of September 30, 2024 and December 31, 2023, long-term loans were $8,931,986 and $11,378,429, respectively. On July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years, which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan was extended for additional 5 years and 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 September 30, 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 September 30, 2024 and December 31, 2023, the total outstanding loan balance was $3,566,229 and $3,528,315. Out of the total outstanding loan balance, current portion amounted was $1,996,460 and $1,269,290, which is presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,569,769 and $2,259,025 is presented as non-current liabilities in the consolidated balance sheet as of September 30, 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, December 24, 2021 and April 16, 2024 and extended for additional 5 years in total, which is due on April 15, 2026 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 September 30, 2024 and December 31, 2023, the total outstanding loan balance was $2,283,301 and $2,259,026, respectively, which are presented as non-current liabilities and current liabilities, respectively, in the consolidated balance sheet as of September 30, 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 September 30, 2024 and December 31, 2023, the total outstanding loan balance was $1,855,182 and $1,835,458, respectively, which are presented as current liabilities in the consolidated balance sheet as of September 30, 2024 and December 31, 2023. 41 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. The loan was repaid in July 2024. As of September 30, 2024 and December 31, 2023, the total outstanding loan balance was $nil and $2,541,404. Out of the total outstanding loan balance, current portion amounted was $nil 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 September 30, 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 September 30, 2024 and December 31, 2023, total outstanding loan balance was $1,227,274 and $1,214,226, respectively. Out of the total outstanding loan balance, current portion amounted $513,743 and $225,903, which is presented as current liabilities and the remaining balance of $713,531 and $988,323 is presented as non-current liabilities in the consolidated balance sheet as of September 30, 2024 and December 31, 2023, respectively. Total interest expenses for the short-term bank loans and long-term loans for the three months ended September 30, 2024 and 2023 were $171,430 and $247,628, respectively. Total interest expenses for the short-term bank loans and long-term loans for the nine months ended September 30, 2024 and 2023 were $593,271 and $760,807, respectively. 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 $365,804 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 September 30, 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 September 30, 2024 and December 31, 2023, approximately $42,812 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 September 30, 2024 and December 31, 2023, the outstanding interest was $196,132 and $194,047, respectively, which was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet. 42 As of September 30, 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 and nine months ended September 30, 2024 and 2023. The accrued interest owing to Mr. Zhenyong Liu was approximately $604,748 and $598,319, as of September 30, 2024 and December 31, 2023, respectively, which was recorded in other payables and accrued liabilities. 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 nine months ended September 30, 2024 and 2023 were $nil and $263,342. As of September 30, 2024 and December 31, 2023, 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. 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 nine months ended September 30, 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 September 30, 2024 and December 31, 2023 to translate the Chinese RMB to the U.S. Dollars are 7.0074:1 and 7.0827:1, respectively. Revenues and expenses are translated using the prevailing average exchange rates at 7.0999:1 and 7.0341:1 for the nine months ended September 30, 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 $4,423,895 (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. 43 Recent Accounting Pronouncements In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Under this ASU, public entities must annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). This ASU’s amendments are effective for all entities that are subject to Topic 740, Income Taxes, for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of this pronouncement on our disclosures. 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.