Item
1. Business
IT Tech Packaging, Inc. (the
“Company” or “IT Tech Packaging”) is not an operating company but a Nevada holding company with operations primarily
conducted by its subsidiary and variable interest entity, or VIE. We operated our business in China through our PRC subsidiary, Baoding
Shengde Paper Co., Ltd. ( the “PRC Subsidiary” or “Baoding Shengde”) and Hebei Baoding Dongfang Paper Milling
Company Limited (“Dongfang Paper”), which we refer to as our VIE in this annual report, and rely on contractual arrangements
among our PRC subsidiary, the VIE and VIE’s shareholders to operate our business in China. Investors in our common stock should
be aware that they may never directly hold equity interests in the Chinese operating entities, but rather purchasing equity solely in
IT Tech Packaging Inc., our Nevada holding company, which does not directly own substantially all of our business in China conducted by
our PRC Subsidiary and VIE.
Because
of our corporate structure, we as well as the investors are subject to unique risks due to uncertainty of the interpretation and the
application of the PRC laws and regulations, including but not limited to regulatory review of oversea listing of PRC companies through
a special purpose vehicle. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard.
We may also be subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory Commission (“CSRC”)
if we fail to comply with their rules and regulations. Although the Company is currently not required to obtain permission from any of
the PRC central or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our operations
could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry,
if we inadvertently conclude that such approvals are not required when they are, or applicable laws, regulations, or interpretations
change and we are required to obtain approval in the future. For a description of relevant risks related to our corporate structure,
see “Risk Factors – Risks Relating to Doing Business in China” and “Risk Factors – Risks Relating to
Our Corporate Structure.”
Corporate
History
IT Tech Packaging was incorporated
in the State of Nevada on December 9, 2005, under the name “Carlateral, Inc.” Through the steps described below, we became
the holding company with operations primarily conducted by our subsidiaries and our VIE, Dongfang Paper, a producer and distributor of
paper products in China, on October 29, 2007. Effective on August 1, 2018, we changed our corporate name to IT Tech Packaging, Inc. The
name change was effected through a parent/subsidiary short-form merger of IT Tech Packaging, Inc., our wholly-owned Nevada subsidiary
formed solely for the purpose of the name change, with and into us. We were the surviving entity. In connection with the name change,
our common stock began being traded under a new NYSE symbol, “ITP,” at such time.
On
October 29, 2007, pursuant to an agreement and plan of merger (the “Merger Agreement”), the Company acquired Dongfang
Zhiye Holding Limited (“Dongfang Holding”), a corporation formed on November 13, 2006 under the laws of the British
Virgin Islands, and issued the shareholders of Dongfang Holding an aggregate of 7,450,497 (as adjusted for a four-for-one reverse
stock split effected in November 2009) shares of our common stock, which shares were distributed pro-rata to the shareholders of
Dongfang Holding in accordance with their respective ownership interests in Dongfang Holding. At the time of the Merger Agreement,
Dongfang Holding owned all of the issued and outstanding stock and ownership of Dongfang Paper and such shares of Dongfang Paper
were held in trust with Zhenyong Liu, Xiaodong Liu and Shuangxi Zhao, for Mr. Liu, Mr. Liu and Mr. Zhao (the original shareholders
of Dongfang Paper) to exercise control over the disposition of Dongfang Holding’s shares in Dongfang Paper on Dongfang
Holding’s behalf until Dongfang Holding successfully completed the change in registration of Dongfang Paper’s capital
with the relevant PRC Administration of Industry and Commerce as the 100% owner of Dongfang Paper’s shares. As a result of the
merger transaction, Dongfang Holding became a wholly owned subsidiary of the Company, and Dongfang Holding’s wholly owned
subsidiary, Dongfang Paper, became an indirectly owned subsidiary of the Company.
Dongfang
Holding, as the 100% owner of Dongfang Paper, was unable to complete the registration of Dongfang Paper’s capital under its name
within the proper time limits set forth under PRC law. In connection with the consummation of the restructuring transactions described
below, Dongfang Holding directed the trustees to return the shares of Dongfang Paper to their original shareholders, and the original
Dongfang Paper shareholders entered into certain agreements with Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”) to transfer
the control of Dongfang Paper over to Baoding Shengde.
On
June 24, 2009, the Company consummated a number of restructuring transactions pursuant to which it acquired all of the issued and outstanding
shares of Shengde Holdings Inc., a Nevada corporation. Shengde Holdings Inc. was incorporated in the State of Nevada on February 25,
2009, and holds a wholly-owned subsidiary, Baoding Shengde, a limited liability company organized under the laws of the PRC on June 1,
2009. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc., it is regarded as a wholly foreign-owned entity
under PRC law.
Effective
June 24, 2009, Baoding Shengde, Dongfang Paper and the original shareholders of Dongfang Paper entered into a number of contractual arrangements,
as subsequently amended on February 10, 2010, pursuant to which Baoding Shengde acts as the management company for Dongfang Paper, and
Dongfang Paper conducts the principal operations of the business. The contractual arrangements, as amended, effectively transferred the
preponderance of the economic benefits of Dongfang Paper to Baoding Shengde, and as a result, Baoding Shengde assumed effective control
and management over, is considered the primary beneficiary of Dongfang Paper for accounting purposes and we consolidate Dongfang Paper’s
operating results in IT Tech Packaging’s financial statements under U.S. GAAP. The contractual arrangements, as amended, include
the following:
| (i) | Exclusive
Technical Service and Business Consulting Agreement |
The
exclusive technical service and business consulting agreement, entered into by and between Baoding Shengde and Dongfang Paper, provides
that Baoding Shengde shall provide exclusive technical, business and management consulting services to Dongfang Paper, in exchange for
service fees including a fee equivalent to 80% of Dongfang Paper’s total annual net profits. The agreement is terminable upon mutual
written agreement.
|
(ii) |
Call Option Agreement |
The
call option agreement, entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that
the shareholders of Dongfang Paper irrevocably grant to Baoding Shengde an option to purchase all or part of each shareholder’s
equity interest in Dongfang Paper. The exercise price for the options shall be RMB yuan for each of the shareholders’ equity interests,
or if at any time there are PRC laws regulating the minimum exercise price of such options, then to the extent permitted under PRC Law.
The call option agreement contains covenants from Dongfang Paper and its shareholders that they will refrain from taking certain actions
without Baoding Shengde’s consent that would materially affect Dongfang Paper’s operations and asset value, including (i)
supplementing or amending its articles of association or bylaws, (ii) changing Dongfang Paper’s registered capital or shareholding
structure, (iii) selling, transferring, mortgaging or disposing of any interests in Dongfang Paper’s assets or income, or encumbering
Dongfang Paper’s assets or income in a way that would approve a security interest on such assets, (iv) incurring or guaranteeing
any debts not incurred in its normal business operations, (v) entering into any material contract or urging Dongfang Paper management
to dispose of any Dongfang Paper assets, unless it is within the company’s normal business operations; (vi) providing any loan
or guarantee to any third party; (vii) appointing or removing any management personnel or directors that can be changed upon Dongfang
Paper shareholder approval; (viii) declaring or distributing any dividends to the stockholders. The agreement remains effective until
Baoding Shengde or its designees have acquired 100% of the equity interests of Dongfang Paper underlying the options.
| (iii) | Share
Pledge Agreement |
The
share pledge agreement entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that
the Dongfang Paper shareholders will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their
obligations under the other management agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of
the pledged equity interests in the event that the Dongfang Paper shareholders or Dongfang Paper fails to pay the service fees to Baoding
Shengde pursuant to the exclusive technical service and business consulting agreement or fails to perform their other obligations under
the other management agreement. The agreement contains covenants from Dongfang Paper’s shareholders that they will refrain from
taking certain actions without Baoding Shengde’s prior written consent, such as transferring or assigning their equity interests,
or creating or permitting the creation of any pledges which may have an adverse effect on the rights or benefits of Baoding Shengde under
the agreement. The Dongfang Paper shareholders also promise to comply with the laws and regulations relevant to the pledges under the
agreement and to facilitate in good faith the protection of the ability of Baoding Shengde to exercise its rights under the agreement.
The terms of the share pledge agreement remains in effect until all the obligations under the other management agreements have been fulfilled,
whether or not the terms of the other management agreements have expired.
The
proxy agreement, entered into by and between Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper, provides that the
Dongfang Paper shareholders shall irrevocably entrust a designee of Baoding Shengde with such shareholder’s voting rights and the
right to represent such shareholder to exercise his or her rights at any shareholder’s meeting of Dongfang Paper or with respect
to any shareholder action to be taken in accordance with the laws and Dongfang Paper’s Articles of Association. The terms of the
agreement are binding on the parties for as long as the Dongfang Paper shareholders continue to hold any equity interest in Dongfang
Paper. AnDongfang Paper shareholder will cease to be a party to the agreement once it transfers its equity interests with the prior approval
of Baoding Shengde.
On
June 24, 2009, Zhao Tianqing, the sole shareholder of Shengde Holdings Inc., assigned to the Company, for good and valuable consideration,
100 shares representing 100% of the issued and outstanding shares of Shengde Holdings Inc. As a result of this assignment and the restructuring
transactions described above, Shengde Holdings Inc., Baoding Shengde, and Dongfang Paper became directly and indirectly controlled by
the Company, and Dongfang Paper continued to function as the Company’s operating entity.
In
addition to controlling the operations and beneficial ownership of Dongfang Paper, Baoding Shengde also acquired a digital photo paper
production line (including two photo paper coating lines and ancillary equipment) in an asset acquisition transaction on November 25,
2009 and began directly conducting business in the PRC. We suspended production of photo paper in June 2016 and now are upgrading the
production line to produce more competitive photo paper products.
An
agreement was entered into among Baoding Shengde, Dongfang Paper and the shareholders of Dongfang Paper on December 31, 2010, reiterating
that Baoding Shengde is entitled to the distributable profit of Dongfang Paper, pursuant to the above mentioned Exclusive Technical Service
and Business Consulting Agreement. In addition, Dongfang Paper and the shareholders of Dongfang Paper agreed that they would not declare
any of Dongfang Paper’s unappropriated earnings, including any earnings of Dongfang Paper from its establishment to 2010 and thereafter,
as dividend.
| The
contractual agreements described above have not been tested in a court of law. |
| The
following diagram sets forth the current corporate structure of IT Tech Packaging: |
| 100%
ownership |
| Controlled
by contractual arrangements |
Recent
Regulatory Developments
On January 4, 2022, the Cyberspace
Administration of China, or CAC, issued the revised Measures on Cyberspace Security Review (the “Revised Measures”), which
has came into effect on February 15, 2022. Under the Revised Measures, any “network platform operator” controlling personal
information of no less than one million users which seeks to list in a foreign stock exchange should also be subject to cyber security
review.
We do not believe we are “network
platform operator” who control over one million personal information as mentioned above; as such, we believe we are currently not
be subject to the cyber security review by the CAC. However, the definition of “network platform operator” is unclear
and it is also unclear on how it will be interpreted and implemented by the relevant PRC governmental authorities. See “Risk
factors — Risk Factors Relating to Doing Business in China — Our business may be subject to a variety
of PRC laws and other obligations regarding cyber security and data protection.”
On July 6, 2021, the
relevant PRC governmental authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with
the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on
overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory
systems to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official
guidance and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage.
See “Risk Factors — Risk Factors Relating to Doing Business in China — While the approval and/or
other requirements of the CSRC or other PRC governmental authorities are currently not required, they may be required, in connection with
our oversea listing under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon we will be able
to obtain such approval.” As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions
regarding listing abroad or offshore offering from the CSRC or any other PRC governmental authorities.
We
believe that we are currently not required to obtain any permission or approval from the China Securities Regulatory Commission (“CSRC”)
and Cyberspace Administration of China (“CAC”) in the PRC to issue securities to foreign investors. However, there is no
guarantee that this will continue to be the case in the future in relation to any future offerings of our company or the continued listing
of our company’s securities on the NYSE American, or even in the event such permission or approval is required and obtained, it
will not be subsequently revoked or rescinded. If we do not receive or maintain the approvals, or we inadvertently conclude that such
approvals are not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in
the future, we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting
an offering, and these risks could result in a material adverse change in our operations and the value of our securities, significantly
limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly
decline in value or become worthless.
On
December 24, 2021, CSRC issued Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic
Companies (Draft for Comments) (the “Administration Provisions”), and the Administrative Measures for the Filing of Overseas
Securities Offering and Listing by Domestic Companies (the “Measures”), which are open for public comments by January 23,
2022. The Administration Provisions and Measures for overseas listings lay out specific requirements for filing documents and include
unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. Domestic companies seeking
to list abroad must carry out relevant security screening procedures if their businesses involve supervisions such as foreign investment
security and cyber security reviews. Companies endangering national security are among those off-limits for overseas listings. According
to Relevant Officials of the CSRC Answered Reporter Questions (“CSRC Answers”), after the Administration Provisions and Measures
are implemented upon completion of public consultation and due legislative procedures, the CSRC will formulate and issue guidance for
filing procedures to further specify the details of filing administration and ensure that market entities could refer to clear guidelines
for filing, which means it will still take time to put the Administration Provisions and Measures into effect. As the Administration
Provisions and Measures have not yet come into effect, we are currently unaffected by them. However, according to CSRC Answers, only
new initial public offerings and refinancing by existing overseas listed Chinese companies will be required to go through the filing
process; other existing overseas listed companies will be allowed a sufficient transition period to complete their filing procedure.
However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently
drafted.
On December 24, 2021, the
Standing Committee of the National People’s Congress issued Law of the People’s Republic of China on the Prevention and Control
of Noise Pollution(the “Prevention and Control of Noise Pollution”), which will be effected on June 5, 2022. According to
the Prevention and Control of Noise Pollution, entities subject to pollutant discharge licensing management shall not emit industrial
noise without a pollutant discharge permit and shall prevent and control noise pollution according to the requirements of the pollutant
discharge permit.
Consolidation
We conduct substantially all
of our business in China through Dongfang Paper, the VIE, due to PRC legal restrictions of foreign ownership in certain sectors. Substantially
all of IT Tech Packaging’s revenues, costs and net income in China are directly or indirectly generated through the VIE. IT Tech
Packaging, through its PRC Subsidiary, Baoding Shengde, has signed various agreements with the VIE and shareholders of the VIE to allow
the transfer of economic benefits from the VIE to the PRC Subsidiary and to direct the activities of the VIE.
Total assets and liabilities
presented on IT Tech Packaging’s consolidated balance sheets and revenue, expense, net income presented on consolidated statement
of operations and comprehensive income as well as the cash flow from operating, investing and financing activities presented on the consolidated
statement of cash flows are substantially the financial position, operation and cash flow of the VIE. The Company has not provided any
financial support to the VIE for the fiscal years ended at December 31, 2020 and 2019. As of December 31, 2021, our variable interest
entity accounted for an aggregate of 84.13% and 69.51%of our total assets and total liabilities. As of December 31, 2020, our variable
interest entity accounted for an aggregate of 90.7% and 72.4%of our total assets and total liabilities. As of December 31, 2021 and 2020,
$1,921,407 and $3,315,778 of cash and cash equivalents were denominated in RMB, respectively.
IT
Tech Packaging and its directly owned subsidiary, Shengde Holding do not have any substantial assets or liabilities or result of operations.
The following table sets forth the assets, liabilities, results of operations and changes in cash, cash equivalents of the VIE, which
were included in the Company’s consolidated balance sheets and statements of comprehensive income and statements of cash flows
with intercompany transactions eliminated:
| |
As of | |
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Current assets | |
$ | 33,444,699 | | |
$ | 14,072,031 | |
Total non-current assets | |
$ | 169,766,341 | | |
$ | 167,190,706 | |
Total Assets | |
$ | 203,211,040 | | |
$ | 181,262,737 | |
Total liabilities | |
$ | 17,924,476 | | |
$ | 17,950,224 | |
| |
For
the Fiscal Year Ended December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Net cash provided
by operating activities | |
$ | 25,058,780 | | |
$ | 17,294,208 | |
Net cash used in investing
activities | |
$ | (25,071,372 | ) | |
$ | (18,937,689 | ) |
Net cash used in financing
activities | |
$ | (917,041 | ) | |
$ | (218,505 | ) |
Cash
Transfers and Dividend Distribution
IT Tech Packaging
conducts its business operations in China through its Baoding Shengde, or the PRC Subsidiary and Dongfang Paper, the VIE. If needed,
IT Tech Packaging can transfer cash to the PRC Subsidiary through loans and/or capital contributions, and the PRC Subsidiary can
transfer cash to IT Tech Packaging through issuing dividends or other distributions. The PRC Subsidiary can transfer cash to the VIE
through intercompany loans and capital contributions, and the VIE can transfer cash to the PRC Subsidiary as services fees under the
VIE contractual arrangements. For the year ended December 31, 2021, the cash flows occurred between IT Tech Packaging, its
subsidiaries and the VIE included i) funding through Shengde Holdings Inc. to Baoding Shengde, with an amount of $32,052,000 as
capital contributions ii) Baoding Shengde payments to Heibei Tengsheng of $2,027,701 for purchase of products iii) Baoding Shengde loans to Dongfang Paper with
total amount of $19,345,101 and iv) Dongfang Paper payments to Baoding Shengde of $5,016,446 for purchase of raw materials.
Current PRC regulations permit
the PRC Subsidiary to pay dividends to its shareholders only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. The PRC Subsidiary is required to set aside 10% of its after-tax profits to fund a statutory reserve
until such reserve reaches 50% of its registered capital if it distributes its after-tax profits for the current financial year. For details,
see “Risk Factors — Risk Factors Relating to Doing Business in China — We may rely on dividends
and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation
on the ability of our PRC Subsidiary to make payments to us could have a material and adverse effect on our ability to conduct our business.”
In addition, cash transfers from IT Tech Packaging are subject to applicable PRC laws and regulations on loans and direct investment.
For details, see “Risk Factors — Risk Factors Relating to Doing Business in China — PRC regulation
of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay
us from making loans or additional capital contributions to our PRC Subsidiary, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.”
In addition, the PRC government
imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of
China. IT Tech Packaging receives a significant portion of its revenues in Renminbi. Under IT Tech Packaging’s current corporate
structure, IT Tech Packaging’s Nevada holding company may rely on dividend payments from the PRC Subsidiary to fund any cash and
financing requirements it may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without
prior approval of State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval
from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain
SAFE approval to use cash generated from the operations of the PRC Subsidiary and VIE to pay off their respective debt in a currency other
than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands,
we may not be able to pay dividends in foreign currencies to its shareholders. See “Risk Factors — Risk Factors
Relating to Doing Business in China — Governmental control of currency conversion may limit our ability to utilize our
revenues effectively and affect the value of your investment”. In order to secure the amounts owed under the VIE agreements,
the VIE and its shareholders entered into a share pledge agreement with the PRC Subsidiary, pursuant to which if the VIE fails to pay
the service fees to the PRC Subsidiary pursuant to the exclusive technical service and business consulting agreement or fails to perform
their other obligations under the other management agreement, the PRC Subsidiary is entitled to dispose of the pledged equity interests
in the VIE.
IT Tech Packaging declared
and paid four quarterly cash dividends to its U.S. investors in April 2012 and November 2013. As of the date of this annual report, other
than those cash dividends, none of IT Tech Packaging’s subsidiaries have ever issued any dividends or made other distributions to
IT Tech Packaging or their respective holding companies nor has IT Tech Packaging or any of IT Tech Packaging’s subsidiaries ever
paid dividends or made other distributions to U.S. investors. IT Tech Packaging currently intend to retain all future earnings to finance
its operations and to expand its business. As a result, IT Tech Packaging does not expect to pay any cash dividends in the foreseeable
future.
Holding
Foreign Company Accountable Act
Trading
in our securities may be prohibited under the Holding Foreign Companies Accountable Act, or the HFCAA, if the Public Company Accounting
Oversight Board (United States) (the “PCAOB”) determines that it cannot inspect or investigate completely our auditor.
Pursuant
to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate
completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of
a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the
PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the PCAOB’s report identified the specific
registered public accounting firms which are subject to these determinations.
The
PCAOB is currently unable to conduct inspections in China without the approval of Chinese government authorities. If it is later determined
that the PCAOB is unable to inspect or investigate our auditor completely, investors may be deprived of the benefits of such inspection.
Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections of audit work undertaken
in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures, could result
in a lack of assurance that our financial statements and disclosures are adequate and accurate.
Our
auditor, WWC, P.C., Certified Public Accountants, is an independent registered public accounting firm with the PCAOB, and as an auditor
of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess
its compliance with the applicable professional standards. WWC, P.C., Certified Public Accountants, is based in the United States and
has been inspected by the PCAOB on a regular basis, with the last inspection in November 2021. WWC, P.C., Certified Public Accountants,
is not headquartered in mainland China or Hong Kong and was not identified as a firm subject to the determinations announced by the PCAOB
on December 16, 2021. Should the PCAOB be unable to fully conduct inspection of our auditor’s work papers in China, it will make
it difficult to evaluate the effectiveness of our auditor’s audit procedures or equity control procedures. Investors may consequently
lose confidence in our reported financial information and procedures or quality of the financial statements, which would adversely affect
us and our securities.
Moreover,
if trading in our securities is prohibited under the HFCAA in the future because the PCAOB determines that it cannot inspect or fully
investigate our auditor at such future time, an exchange may determine to delist our securities.
See
“Risk Factors—Risks Associated with Our Company— A recent joint statement by the SEC and the Public Company Accounting
Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by Nasdaq, and the newly enacted “Holding
Foreign Companies Accountable Act” all call for additional and more stringent criteria to be applied to emerging market companies
upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments
could add uncertainties to investing in our securities.”
Recent
Business Developments
March
2021 Public Offering
On
March 1, 2021, the Company offered and sold to the public investors an aggregate of 29,277,866 shares of common stock and 14,638,933
warrants to purchase up to 14,638,933 shares of common stock in a firm commitment underwritten public offering for gross proceeds of
approximately $21.9 million. The purchase price for each share of common stock and accompanying warrant sold in the offering was $0.75.
The warrants are exercisable commencing on March 1, 2021 at an exercise price of $0.75 and will expire on March 1, 2026. In the event
of a stock split, stock dividend, combination, subsequent right offering or reclassification of the outstanding shares of Common Stock,
the exercise price and the number of shares issuable upon exercise of the warrants shall be proportionately adjusted. The Company intends
to use the net proceeds from the offering for general corporate and working capital purposes.
January
2021 Public Offering
On
January 20, 2021, the Company offered and sold to certain institutional investors an aggregate of 26,181,818 shares of common stock and
26,181,818 warrants to purchase up to 26,181,818 shares of common stock in a best-efforts public offering for gross proceeds of approximately
$14.4 million. The purchase price for each share of common stock and the corresponding warrant sold in the offering was $0.55. The warrants
are exercisable commencing on January 20, 2021 at an exercise price of $0.55 and will expire on January 20, 2026. In the event of a stock
split, stock dividend, combination, subsequent right offering or reclassification of the outstanding shares of Common Stock, the exercise
price and the number of shares issuable upon exercise of the warrants shall be proportionately adjusted. The Company intends to use the
net proceeds from the offering for general corporate and working capital purposes.
Cogenerating
Project
In
November 2020, we completed inviting bids for the 75 tonne per hour biomass boiler procurement for our biomass cogeneration project.
Multiple well-known enterprises in the biomass industry participated in tendering opening bids. In February 2021, we completed evaluation
on the bidding proposals and announced that Tai Shan Group Co., Ltd., a top manufacturer in the biomass industry in China, has won the
bid. Installation of the boilers is expected to commence in the near future. We expect to participate in the bidding process for urban
central heating projects.
Tissue
Paper Production Line
In July 2021, The Company
announced that the Company’s tissue paper research and development center has received a Level B scale-above Certification as an
industrial R&D enterprise institution in Hebei province after on-site inspection by regulators. The Company has also been
granted twelve new utility patent certificates on paper manufacturing related equipment issued by the State Intellectual Property Office,
including equipment testing, screening and filtering, and mixing.
Summary
of Risk Factors
Investing
in our securities involves significant risks and uncertainties. You should carefully consider all of the information in this prospectus
before making an investment in our securities. Below please find a summary of the principal risks we face, organized under relevant headings.
These risks are discussed more fully in the section titled “Risk Factors.”
Risks
Relating to our Business
| ● | Our
business, financial condition and results of operations may be materially adversely affected
by global health epidemics, including the COVID-19 outbreak. |
| ● | Our
operating history may not serve as an adequate basis to judge our future prospects and results
of operations. |
| ● | Dongfang
Paper and Baoding Shengde’s failure to compete effectively may adversely affect our
ability to generate revenue. |
| ● | We
may not be able to effectively control and manage our growth. |
| ● | We,
through our subsidiaries, may engage in future acquisitions that could dilute the ownership
interests of our stockholders and cause us to incur debt and assume contingent liabilities. |
| ● | We
are responsible for the indemnification of our officers and directors. |
| ● | We
are dependent on certain key personnel and loss of these key personnel could have a material
adverse effect on our business, financial condition and results of operations. |
| ● | We
may not be able to hire and retain qualified personnel to support our growth and if we are
unable to retain or hire these personnel in the future, our ability to improve our products
and implement our business objectives could be adversely affected. |
| ● | Our
operating results may fluctuate as a result of factors beyond our control. |
| ● | We
face risks related to product liability claims. |
| ● | Our
operating results also depend on the availability and pricing of energy and raw materials. |
| ● | A
material disruption at one of our manufacturing facilities could prevent us from meeting
customer demand, reduce our sales, and/or negatively affect our net income. |
| ● | Our
certificates, permits, and licenses related to our papermaking operations are subject to
governmental control and renewal and failure to obtain renewal will cause all or part of
our operations to be terminated. |
| ● | Compliance
with environmental regulations is expensive, and noncompliance may result in adverse publicity
and potentially significant monetary damages and fines or suspension of our business operations. |
| ● | If
we are unable to respond to pricing pressures, our business may be harmed. |
| ● | If
we fail to introduce enhancements to our existing products or to develop new products, our
business and results of operations could be adversely affected. |
| ● | We
have limited insurance coverage and may incur losses resulting from product liability claims
or business interruptions. |
| ● | Our
failure to protect our intellectual property rights may undermine our competitive position,
and external infringements of our intellectual property rights may adversely affect our business. |
| ● | We
may be subject to intellectual property infringement claims or other allegations, which may
materially and adversely affect our business, financial condition and prospects. |
Risks
Related To Doing Business in the PRC
| ● | The
PRC government has significant oversight and discretion over the conduct of a PRC company’s
business operations or to exert control over any offering of securities conducted overseas
and/or foreign investment in China-based issuers, and may intervene with or influence our
operations, may limit or completely hinder our ability to offer or continue to offer securities
to investors, and may cause the value of such securities to significantly decline or be worthless,
as the government deems appropriate to further regulatory, political and societal goals. |
| ● | Our
business may be subject to a variety of PRC laws and other obligations regarding cybersecurity
and data protection. |
| ● | Changes
in the policies of the PRC government could have a significant impact upon the business we
may be able to conduct in the PRC and the profitability of such business. |
| ● | The
PRC laws and regulations governing our current business operations are sometimes vague and
uncertain. Any changes in such PRC laws and regulations may harm our business. |
| ● | A
slowdown, inflation or other adverse developments in the PRC economy may harm our customers
and the demand for our services and products. |
| | |
| ● | We
may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund
any cash and financing requirements we may have, and any limitation on the ability of our
PRC Subsidiary to make payments to us could have a material and adverse effect on our ability
to conduct our business. |
| | |
| ● | Governmental
control of currency conversion may limit our ability to utilize our revenues effectively
and affect the value of investors’ investment. |
| | |
| ● | PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies
and governmental control of currency conversion may delay us from making loans or additional
capital contributions to our PRC Subsidiary, which could materially and adversely affect
our liquidity and our ability to fund and expand our business. |
| ● | The
fluctuation of the Renminbi may harm your investment. |
| ● | Failure
to comply with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may materially adversely affect us. |
| ● | While
the approval and/or other requirements of the CSRC or other PRC governmental authorities
are currently not required, they may be required, in connection with our oversea listing
under PRC rules, regulations or policies, and, if required, we cannot predict whether or
how soon we will be able to obtain such approval. |
| ● | The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions
of Chinese companies by foreign investors, which could make it more difficult for us to pursue
growth through acquisitions in China. |
| ● | The
PRC’s legal and judicial system may not adequately protect our business and operations
and the rights of foreign investors. |
| ● | Because
our principal assets are located outside of the United States and most of our directors and
officers reside outside of the United States, it may be difficult for you to effect service
of legal process, enforce your rights based on U.S. federal securities laws against us and
our officers or to enforce U.S. court judgment against us or them in the PRC. |
| ● | It
may be difficult for overseas regulators to conduct investigation or collect evidence within
China. |
| ● | We
may be required to broaden the coverage of the mandatory social security insurance programs
under the Labor Law of the PRC. |
| ● | The
current tensions in international trade and rising political tensions, particularly between
U.S. and China, may adversely impact our business, financial condition, and results of operations. |
Risks
Related to Our Corporate Structure
| ● | Our
current corporate structure and business operations may be affected by the newly enacted
Foreign Investment Law. |
| ● | Any
failure by our consolidated VIE or their shareholders to perform their obligations under
our contractual arrangements with them would have a material adverse effect on our business. |
| ● | In
order to comply with PRC regulatory requirements, we operate our businesses through companies
with which we have contractual relationships but in which we do not have controlling ownership. |
| ● | Because
we rely on the consulting services agreement with Dongfang Paper for essentially all of our
revenue and cash flows, any difficulty for Dongfang Paper to pay consulting fees to Baoding
Shengde under the consulting agreement may have a material adverse effect on our operations. |
| ● | If
the PRC government determines that the contractual agreements constituting part of our VIE
structure do not comply with applicable PRC regulations, or if these regulations change or
are interpreted differently in the future, we may be unable to assert our contractual rights
over the assets of the VIE, and our common stock may decline in value. |
| ● | The
contractual arrangements under a VIE Structure may not be as effective as direct ownership
in respect of our relationship with the VIE, and thus, we may incur substantial costs to
enforce the terms of the arrangements, which we may not be able to enforce at all. |
| ● | The
shareholders of Dongfang Paper may have actual or potential conflicts of interests with us,
which may adversely affect our business. |
| ● | We
may lose the ability to use and enjoy assets held by the VIE that are material to the operation
of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation
proceeding. |
| ● | Our
arrangements with Dongfang Paper and its shareholders may be subject to a transfer pricing
adjustment by the PRC tax authorities which could have an adverse effect on our income and
expenses. |
| ● | We
may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets
held by the VIE, which could severely disrupt our business, render us unable to conduct some
of our business operations and constrain our growth. |
| ● | The
exercise of our option to purchase part or all of the equity interests in Dongfang Paper
under the Call Option Agreement might be subject to approval by the PRC government. Our failure
to obtain this approval may impair our ability to substantially control Dongfang Paper and
could result in actions by Dongfang Paper that conflict with our interests. |
Risks
Related to Our Common Stock
| ● | The
recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and
the Holding Foreign Companies Accountable Act all call for additional and more stringent
criteria to be applied to emerging market companies upon assessing the qualification of their
auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments
could add uncertainties to investing in our securities. |
| ● | If
we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a timely
manner, our business could be harmed and our stock price could decline. |
| ● | If
we become directly subject to the scrutiny involving U.S. listed Chinese companies, we may
have to expend significant resources to investigate and/or defend the matter, which could
harm our business operations, stock price and reputation. |
| ● | Our
officers and directors control us through their positions and stock ownership and their interests
may differ from other stockholders. |
| ● | We
may not continue to pay cash dividends and any return on investment may be limited to the
value of our common stock. |
| ● | Our
common stock may be affected by limited trading volume and may fluctuate significantly. |
| ● | Future
financings may dilute stockholders or impair our financial condition. |
Impact
of COVID-19 on Our Operations and Financial Performance
Outbreaks of epidemic, pandemic,
or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations.
The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic.
Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread
of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals
suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. During the
early part of 2020, COVID-19 caused temporary closure of our CMP production, and as a result, our revenue of CMP decreased by 49.89
% in the first quarter of 2020.
Since we resumed business
operations after the outbreak of COVID-19, the Company kept continuous attention on the development of the COVID-19 pandemic and reacted
actively to its impact on the financial position and operating results of the Company. As of the date of the annual report, COVID-19’s
adverse impacts on the company’s financial position and operating result as of December 31, 2021 were limited.
Our
Business
We, through our subsidiaries
and VIE, engage in production and distribution of three categories of paper products: corrugating medium paper, offset printing paper,
tissue paper products and medical face masks in China.
Our
principal executive offices are located at Science Park, Juli Road, Xushui District, Baoding City, Hebei Province, People’s Republic
of China.
Our
telephone number is (86) 312-869-8215. Our website is located at http://www.itpackaging.cn.
Manufacturing
Process
Corrugating
Medium Paper and Offset Printing Paper
Our
current products (excluding tissue paper products) generally undergo two stages of manufacturing: (1) creating pulp from recycled paper
products, and (2) treating the pulp and molding it into the desired types of paper products. A brief overview of the pulp and papermaking
process is provided below.
Pulping
The
recycled waste paper is first sorted by machine, and then broken down and beaten or smashed into small pieces using water and mechanical
energy. It is then put through a course screening drum, followed by a fine screening drum to separate different grades of pulp, a process
that we refer as “concentration”. In order to purify the pulp further, an approach flow system is used to filter out any
impurities or inconsistencies, such as sand, in the pulp.
Paper
Making
The
pulp is sieved to remove the excess water and molded into a specific size. The moisture content is further reduced by applying hydraulic
pressure to the pulp. The pulp then enters the drying section where it is rolled over by heated cylinders. The dried paper is then coated
with a mixture of clay, white pigment and binder to produce a surface on which ink can sit without being fully absorbed, enabling crisper,
and more consistent print quality.
The
paper goes through a process called calendaring, which flattens and smoothens the paper into long sheets. The paper is then wound onto
a reel that is mounted in a roll-slitting machine for rewinding, during which cutters are used to cut the paper into the desired widths.
Upon completion, the rolls are fitted with sleeves and labeled, and then sent to quality control before shipment or storage.
Base
Tissue Paper
While
we make tissue paper products, we currently purchase paper pulp from suppliers and use it to manufacture base tissue paper directly.
Products
Corrugating
medium paper
Corrugating
medium paper, or CMP is used in the manufacturing of cardboard. Since the launch of our new Paper Machine (“PM6”) production
line in December 2011, corrugating medium paper has become a major product of the Company. For the year ended December 31, 2021, corrugating
medium paper comprised approximately 88.76% of our total paper production quantities and roughly 83.61% of our total revenue. Raw materials
used in the production of corrugating medium paper include recycled paper board (or Old Corrugating Cardboard or “OCC,” as
it is commonly referred to in the United States) and certain supplementary agents. In January 2013, we suspended the operation of our
PM1 production line for renovation, which was then used to produce corrugating medium paper. In May 2014, we launched the commercial
production of a renovated PM1 production line. The renovated PM1 production line produces light-weight corrugating medium paper with
a specification of 40 to 80 grams per square meter (“g/s/m”). PM1’s light-weight corrugating medium paper products
have a wide range of commercial applications. For example, they can be used as a construction material for wall and floor insulation
or to manufacture moisture-proof packaging materials for the transportation of books and magazines by the publishing industry. It can
also be used as corrugating medium to make corrugating cardboard for packaging that requires light-weight boxes. The manufacturing process
of light-weight corrugating medium paper is similar to that of the regular corrugating medium paper and also uses recycled paper boards
as a major source of raw material. We now have two corrugating medium paper production lines, PM6 and PM1. We refer to products produced
from the PM6 production line as Regular CMP and products produced from the PM1 production line as Light-Weight CMP.
Offset
printing paper
Offset
printing paper is used for offset printing in the publishing industry. Offset printing paper comprised approximately 8.21% of our total
paper production quantities and approximately 10.61% of our total sales revenue for the year ended December 31, 2021. Raw materials used
in making offset printing paper include recycled white scrap paper, fluorescent whitening agent and sizing agent. We currently have two
production lines, PM2 and PM3, for the production of offset printing paper.
Tissue
Paper Products
We
began the commercial production of tissue paper products in Wei County Industry Park in June 2015. We process base tissue paper purchased
from long-term cooperative third party and produce finished tissue paper products, including toilet paper, boxed and soft-packed tissues,
handkerchief tissues and paper napkins, as well as bathroom and kitchen paper towels that are marketed and sold under the Dongfang Paper
brand. In December 2018 and November 2019, we completed the construction, installation and test of operation of PM8 and PM9, respectively,
and commercially launched tissue paper production of PM8 and PM9 at such time. 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. Tissue paper products comprised
approximately 3.01% of our total paper production quantities and approximately 5.45% of our total sales revenue for the year ended December
31, 2021.
Face
Masks
On
April 29, 2020, we launched a production line of non-medical single-use face masks, following the completion of raw materials
preparation, trial run of the equipment and the sample products inspection. In January 2021, the Company announced it has submitted an
application for the license for its new single-use surgical masks from local food and drug administration in Hebei province, and began
commercial production in November 2021.
Market
for our Products
The
PRC Paper Making Industry
According
to the 2020China Paper Industry Annual Report, issued by the China Paper Association, there were approximately 2,500 paper and paper
board manufacturers (down from 2,700 in 2019) in China, with a total output of 112.60 million tonnes, up by 4.60% from 107.65 million
tonnes in 2019. Total domestic consumption was 118.27 million tonnes in 2020, up by 10.49% from 107.04 million tonnes in 2019.
The
output of paper and paper board maintained an average growth rate of approximately 1.41% during the ten-year period from 2011to 2020,
while consumption increased at an average annual rate of 2.17%. The growth is expected to continue. It is estimated that China currently
has the largest paper and paper board products output and consumption in the world. (Data source: 2020 Annual Report of China Paper
Manufacturing, April 2021, China Paper Association)
Data
source: 2020 Annual Report of China’s Paper Industry, April2021, China Paper Association
Corrugating
medium paper production in China totaled 23.90 million tonnes in 2020, a 7.66% increase from 2019. Consumption of corrugating medium
paper in China amounted to 27.76 million tonnes in 2020, an increase of 16.93% as compared to 2019.
Uncoated offset printing paper
production in China totaled 17.30million tonnes in 2020, a 2.81% decrease from 2019. Consumption of uncoated offset printing paper in
China amounted to 17.83million tonnes in 2020, an increase of 1.94% as compared to 2019.
The
paper making industry in China is concentrated in the east coast provinces. The largest paper production capacities by province for 2019and
2020(the most recent year for which relevant information is available) are summarized in the table below. The three provinces with largest
capacities showed moderate increases in paper production capacities; provinces with smaller capacities, such as, Chongqing, Hebei and
Anhui, showed noticeable increases as well.
Province | |
2020Capacity
(10k tonnes) | | |
2019
Capacity (10k tonnes) | | |
%
Change | |
Guangdong | |
| 2,012 | | |
| 1,864 | | |
| 7.94 | |
Shandong | |
| 1,920 | | |
| 1,830 | | |
| 4.92 | |
Jiangsu | |
| 1,402 | | |
| 1,312 | | |
| 6.86 | |
Zhejiang | |
| 1,149 | | |
| 1,429 | | |
| (19.59 | ) |
| |
| | | |
| | | |
| | |
Fujian | |
| 777 | | |
| 784 | | |
| (0.89 | ) |
Henan | |
| 532 | | |
| 498 | | |
| 6.83 | |
Hubei | |
| 427 | | |
| 355 | | |
| 20.28 | |
Chongqing | |
| 352 | | |
| 301 | | |
| 16.94 | |
Anhui | |
| 321 | | |
| 325 | | |
| (1.23 | ) |
| |
| | | |
| | | |
| | |
Hebei | |
| 317 | | |
| 240 | | |
| 32.08 | |
Data
Sources: 2020Annual Report of China’s Paper Industry, April 2021, China Paper Association
Customers
We generally sell our corrugating
medium paper to companies making corrugating cardboards and offset printing paper to printing companies. Our largest customer is a packaging
company in Shandong Province. Our total corrugating medium and offset printing paper revenue in 2021 was primarily derived from customers
in Tianjin City, Hebei Province and Shandong Province.
For
the year ended December 31, 2021, five major customers who individually accounted for more than 5% of our total sales revenue are as
follows:
| |
2021 | | |
| |
| |
Sales Amount | | |
| |
| |
(USD$,
net of | | |
%
of | |
| |
applicable | | |
Total | |
| |
VAT) | | |
Revenue | |
Company A (Shandong) | |
| 9,506,562 | | |
| 5.91 | % |
Company B (Hebei) | |
| 9,243,355 | | |
| 5.75 | % |
Company C (Hebei) | |
| 8,946,350 | | |
| 5.57 | % |
Company D (Tianjin) | |
| 8,748,984 | | |
| 5.44 | % |
Company
E(Tianjin) | |
| 8,394,246 | | |
| 5.22 | % |
Total
Major Customers | |
| 44,857,517 | | |
| 27.89 | % |
Eight
of our top-ten customers of 2021are also in the top-ten customer list in 2020, representing 79.36% of the 2020top-ten customer sales.
Target
Market
We
target corporate customers in the middle range of the marketplace, where, with solid quality and competitive pricing, we see potential
for high volume growth for corrugating medium paper and offset printing paper. Our primary market has been the region of North China,
especially in the province of Hebei.
Our
Production Lines
During
the year ended December 31, 2021, we had six PM production lines in operation and are in the process of launching one more that are designated
as PM7. These production lines include the followings:
|
|
|
|
Designed |
|
|
|
|
|
|
|
|
|
Paper Product |
|
Capacity |
|
|
|
|
|
|
|
PM# |
|
Produced |
|
(tonnes/year) |
|
|
Owned
by |
|
Operated
by |
|
Status
as of December 31, 2021 |
PM1 |
|
Corrugating Medium Paper |
|
|
60,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
In production |
PM2 |
|
Offset Printing Paper |
|
|
50,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
In production |
PM3 |
|
Offset Printing Paper |
|
|
40,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
In production |
PM4 |
|
Digital Photo Paper |
|
|
** |
|
|
Baoding Shengde |
|
Baoding Shengde |
|
Suspended in June 2016 due to low market demand |
PM5 |
|
Digital Photo Paper |
|
|
** |
|
|
Baoding Shengde |
|
Baoding Shengde |
|
Suspended in June 2016 due to low market demand |
PM6 |
|
Corrugating Medium Paper |
|
|
360,000 |
|
|
Baoding Shengde |
|
Dongfang Paper*** |
|
In production |
PM7* |
|
Specialty paper |
|
|
10,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
Under renovation and preparing for launch by the end
of 2021 |
PM8 |
|
Tissue paper |
|
|
15,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
In production |
PM9 |
|
Tissue paper |
|
|
15,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
In production. |
PM10 |
|
Tissue paper |
|
|
20,000 |
|
|
Dongfang Paper |
|
Dongfang Paper |
|
In construction |
*: | Paper
machines under renovation, under construction, or in the planning stage. |
***: | PM6
is funded and owned by Baoding Shengde; ancillary facilities that support the PM6 operation
are built and owned by Dongfang Paper. |
On
December 31, 2009, we acquired a digital photo paper production line, including two coating lines that are designated as PM4 and PM5
and ancillary equipment, for a total purchase price of approximately $13.6 million. We suspended production of photo paper in June 2016.
In
order to meet the growing domestic demand for paper, which we believe currently exceeds domestic supply in the case of corrugating medium
paper, especially in the region of North China, we installed a corrugating medium paper production line (PM6) with a designed capacity
of 360,000 tonnes per year. We completed the installation of the PM6 production line in November 2011 and began commercial production
in December 2011.
We
have implemented a plan to renovate one of the old production lines that has been idle since the end of 2007. We previously made paper
with anti-counterfeit features from that production line. When the renovation is completed, we intend to use the renovated production
line to produce high-profit margin specialty papers. Our current plan is to complete the renovation project, put in place a new production
and marketing team and launch the renovated production line as PM7 by the end of 2021.
On
November 27, 2012, we signed a 15-year lease relating to approximately 49.4 acres of land in the Economic Development Zone in Wei County,
Hebei Province, China for the purpose of developing a new tissue paper production plant. We planned to build two tissue paper production
lines, each with 15,000 tonnes/year capacity, and other packaging facilities and infrastructures on the leased land. In December 2012,
we signed a contract with an equipment contractor in Shanghai to build PM8, the first of our two tissue paper production lines in Wei
County. In December 2018 and November 2019, we completed the construction, installation and test of operation of PM8 and PM9, respectively
and commercially launched tissue paper productions of PM8 and PM9 at such time. 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.
We
voluntarily renovated our 150,000 tonnes/year corrugating medium paper PM1 in anticipation of increased regulatory concerns on energy
efficiencies as well as to improve the quality of our corrugating medium products. Rather than converting PM1 to a regular corrugating
medium paper machine, we decided in 2013 that, based on the market conditions and our waste water treatment capability, the better option
was to convert PM1 to produce Light-Weight CMP with a specification of 40 to 80 grams per square meter (“g/s/m”) with a designed
capacity of 60,000 tonnes/year. We started the renovation in January 2013 and launched commercial production of the renovated PM1 production
line in May 2014.
Raw
Materials and Principal Suppliers
The
supplies used in our production processes are comprised mainly of recycled paper board and unprinted recycled white scrap paper, both
of which are ready-to-use items and available from multiple domestic and foreign sources. We currently purchase all of our recycled paper
supplies from some domestic recycling stations and do not rely on imported recycled paper. We also purchase coal and chemical agents
from nearby suppliers. Ongoing inflationary pressures and higher demand for recycled paper could lead to an increase in our costs of
raw materials and production, which we may or may not be able to pass to our customers.
We
sign annual raw materials supplier contracts with our suppliers. Although we have contracts with our suppliers, these contracts do not
lock-in the purchase price of our raw materials or provide hedge against the fluctuation in the market price of these raw materials.
For the year ended December 31, 2021, we had two large suppliers which accounted for approximately 78% and 11% of our total purchases,
respectively.
For
the year ended December 31, 2021, two major suppliers who individually accounted for more than 5% of our total purchase are as follows:
| |
2021 | | |
| |
| |
Purchase | | |
| |
| |
Amount | | |
| |
| |
(USD$,
net of | | |
%
of | |
| |
applicable | | |
Total | |
| |
VAT) | | |
Purchase | |
Company A (Baoding) | |
| 117,370,593 | | |
| 78 | % |
Company
B (Baoding) | |
| 17,100,630 | | |
| 11 | % |
Total
Major Suppliers | |
| 134,471,223 | | |
| 89 | % |
Competition
Dongfang
Paper’s main competitors are: Chenming Paper Group Limited, Huatai Group Limited, Nine Dragons Paper (Holdings) Limited and Sun
Paper Group Limited. A number of our competitors are public entities with larger capacities, broader customer bases and greater financial
resources than those available to us. The businesses of our primary competitors are briefly described below:
Chenming
Paper Group, Ltd. (“Chenming”), based in Shandong Province (located in northeast China), produces primarily news print paper
and art paper (high quality, heavy and two-side coated printing paper). Chenming is believed to be the first company to have listed on
all three stock exchanges in China: Renminbi A-shares and foreign currency B-shares in Shenzhen, the smaller of the mainland’s
two stock exchanges, and H-shares in Hong Kong. Chenming has annual production capacity of 8.5 million tonnes for its coated wood-free
paper product and is believed to rank among the top 500 enterprises in China.
Huatai
Group, Ltd. (“Huatai”), based in Shandong Province (located in the northern part of the eastern coastal region of China),
primarily produces newsprint, fine paper, special printing paper, coated board and tissue paper. Huatai is the first Shandong papermaker
to publicly list its stock and has become a famous brand in China. Its annual paper production is estimated to have reached 4 million
tonnes.
Nine Dragons Paper (Holdings)
Limited (“ND Paper”), based in Guangdong Province (located in southern China), is the largest paper manufacturer in China
and primarily produces craft paper and high-strength corrugating medium paper with annual capacity of 13 million tonnes. ND Paper has
reported that it has five production lines in the city of Tianjin with a total designed capacity of 2.15 million tonnes, producing products
such as craft paper, high strength corrugating medium paper and grey-back duplex board.
Sun
Paper Group, Ltd., based in Shandong Province, primarily produces card paper, whiteboard paper and art paper. It also produces alkaline
peroxide mechanical pulp, sourced in part from wood chips harvested by the company’s poplar plantations. This company has reported
that it has an aggregate annual production capacity of paper and pulp of approximately 5.7 million tonnes and has been listed on the
Shenzhen Stock Exchange since 2006.
With
the exceptions of Chenming and ND Paper, which may compete directly with us in the offset printing paper market and the corrugating medium
paper market, respectively, in the Beijing/Tianjin/greater Hebei regions, we believe that we face only indirect competition from the
above-listed companies, either because we have a different product assortment from these companies, or because, to the extent they do
offer products similar to ours, the transportation costs and storage costs make it difficult for these companies to compete effectively
with us on pricing.
Our
Competitive Edge
Regional
advantage (Northern China). We believe that Dongfang Paper is one of the leading papermaking enterprises in Hebei Province. Our proximity
to large urban centers in northern China, Beijing and Tianjin, gives us access to a large market to sell our products.
There
are other paper manufacturers that are also located in Hebei Province (and close to metropolitan Beijing and Tianjin areas), but most
of these other manufacturers are small in scale and unable to compete with us effectively. We also compete with other large printing
paper manufacturers for Beijing printing company customers. We believe that we have cost and geographical advantages over these larger
competitors.
Cost
advantage. Unlike some of our out-of-province competitors who must set up interim warehouses and ship products from their production
base to such interim warehouses close to their customer base in Beijing, there is no need for us to set up interim warehouses, because
we are approximately 60 miles (100 kilometers) from Beijing, the cultural center of China and our largest target market. While we do
not separately pay for transportation cost on raw material purchases, the transportation cost included in the raw material purchase prices
from our recycled paper suppliers is lower than the transportation cost paid by our competitors in the province of Shandong. We also
enjoy lower transportation costs for coal, a major source of energy used in our production process. Similarly, our customers pay lower
transportation cost to pick up their orders from our finished goods warehouse in Baoding than what they would pay if they had to pick
up goods from locations further away from Beijing. Tianjin, another large urban center, is also approximately 60 miles from our facilities.
Baoding city itself is also home to numerous printing and packaging companies. Our geographical advantage and easy access to low-cost
raw materials allow us to implement a more flexible inventory purchase policy, lower our purchase prices and inventory management expenses
and reduce our production cost. As such, we have lower freight costs and other associated costs of sales, which enable us to charge lower
prices, if necessary, for our products. Additionally, because we buy all recycled paper raw materials from Beijing and Tianjin, rather
than from the United States or Japan, our purchase lead time is shorter as compared to manufacturers who rely on imported recycled paper.
Research
and Development
Our
R&D activities are carried out by a task force led by a group of senior managers (in charge of product development and quality control)
and by a group of selected engineers and technicians. The Company charged the time spent on the R&D projects (manufacturing waste
discharge recycling, digital photo paper and tissue paper manufacturing) to R&D expenses. Our R&D efforts in 2020 has focused
on evaluating and developing new products that are in the pipeline for 2020 and included developing and improving the manufacturing process
of Light-Weight CMP and the production and packaging technology of tissue paper.
One
of our production lines, PM7, is under renovation. Since the fourth quarter of 2010, we have spent approximately $1.57 million in machine
parts and new components to renovate this production line, with which we expect to produce certain specialty papers, including wood-grain
deco and furniture paper, wallpaper and paper with security features (for anti-counterfeiting purposes). While we are optimistic about
the prospect of the specialty papers, we cannot guarantee the launch of the specialty paper production (which is tentatively scheduled
by the end of 2020) or the success of such renovation.
Intellectual
Property
The
Company has registered nine trademarks with the Trademark Bureau under the State of Administration for Industry & Commerce.
Trademark |
|
Certificate
No. |
|
Category |
|
Registrant |
|
Valid
Term |
Shuangxing |
|
3298963 |
|
Fax
paper, thermal paper, blueprint paper, sensitized paper, spectrum sensitized paper, blueprint cloth, photographic paper, cyanotype
solution, diazo paper |
|
Dongfang
Paper |
|
April
7, 2014 through April 6, 2024 |
Fangmenglai |
|
12955328 |
|
Toilet
paper, handkerchief tissues, tissues, paper napkins, paper mats, beer mats, paper place mats, printing paper (including offset paper,
newsprint, books paper, bond paper, plate paper and halftone paper), coated paper |
|
Dongfang
Paper |
|
December
28, 2014 through December 27, 2024 |
Fangqingxin |
|
12955235 |
|
Toilet
paper, handkerchief tissues, tissues for makeup remover, paper napkin, tissues, paper duster cloth, paper face towels, paper table
cloth, paper tablecloths, drawer liner (with or without flavor) |
|
Dongfang
Paper |
|
December
28, 2014 through December 27, 2024 |
Kaimeilai |
|
20212149 |
|
Xuan
Paper (for traditional Chinese painting and calligraphy), Paper, tissue paper, watercolor paper, writing paper, printing publications,
ink, painting brush, packaging plastic film, color box, |
|
Baoding
Shengde |
|
July
28, 2017 through July 27, 2027 |
Shadow |
|
8349821 |
|
Drying
blueprint solution, diazo paper, photographic paper, sensitive paper, blueprint paper, blueprint canvas, spectral photographic plate,
heliographic paper |
|
Baoding
Shengde |
|
June
14, 2011 through June 13, 2021 |
Lanmeier |
|
15635879 |
|
Paper table cover, paper
pinafore, drawer lining (with flavor or not) |
|
Hebei Tengsheng |
|
November 21, 2016 through
November 20, 2026 |
Qingmu |
|
15635916 |
|
Tissue
paper, paper handkerchief, paper napkin, facial paper, grained paper, cardboard, white board, container board, kraft liner, corrugated
medium paper (board) |
|
Hebei
Tengsheng |
|
January
7, 2016 through January 6, 2026 |
Rongou |
|
20063034 |
|
Paper,
tissue paper, paper handkerchief, paper napkin, facial paper, paper billboard, cleansing tissue, packaging paper or plastic bag (envelop,
sachet), carton, paper box |
|
Hebei
Tengsheng |
|
July
14, 2017 through July 13, 2027 |
Weizun |
|
15636093 |
|
Coasters, paper table cover,
paper costers, cleansing paper |
|
Hebei Tengsheng |
|
February 28, 2016 through
February 27, 2026 |
The
Company has also been granted twelve new utility patent certificates on paper manufacturing related equipment issued by the State Intellectual
Property Office, including equipment testing, screening and filtering, and mixing.
Certificate
No. |
|
Description |
|
Registrant |
|
Valid
Term |
13762076 |
|
The utility
model relates to a pulp mixing device |
|
Hebei
Tengsheng |
|
July23,
2021 through July23, 2031 |
13751681 |
|
The invention
relates to a product processing and cutting device |
|
Hebei
Tengsheng |
|
July23,
2021 through July23, 2031 |
14357355 |
|
The utility
model relates to a packaging equipment for pulp waste |
|
Hebei
Tengsheng |
|
October
8, 2021 through October 8, 2031 |
|
|
|
|
|
|
|
14248265 |
|
The utility
model relates to a pulp crushing device |
|
Hebei
Tengsheng |
|
Sep.
24, 2021 through Sep. 24, 2031 |
14254625 |
|
The utility
model relates to a pulp screening and separation device |
|
|
|
Sep.
24, 2021 through Sep. 24, 2031 |
|
|
|
|
Hebei
Tengsheng |
|
|
14260129 |
|
The utility
model relates to a pulp raw material processing device |
|
Hebei
Tengsheng |
|
Sep.
24, 2021 through Sep. 24, 2031 |
14258926 |
|
The utility
model relates to a forming tool for paper pulp products |
|
Hebei
Tengsheng |
|
Sep.
24, 2021 through Sep. 24, 2031 |
14250092 |
|
The utility
model relates to a material mixing device for paper processing |
|
Hebei
Tengsheng |
|
Sep.
24, 2021 through Sep. 24, 2031 |
13477825 |
|
The invention
relates to a pulp concentration detecting device |
|
Hebei
Tengsheng |
|
June
22, 2021 through June 22, 2031 |
14051723 |
|
The utility
model relates to a recycling device for edge material used in paper processing |
|
Hebei
Tengsheng |
|
August
27, 2021 through August 27, 2031 |
13893004 |
|
The utility
model relates to a pulp filter dehydration device |
|
Hebei
Tengsheng |
|
August
6, 2020 through August 6, 2031 |
13874156 |
|
The utility
model relates to a storage rack for raw material used in paper processing |
|
Hebei
Tengsheng |
|
August
6, 2020 through August 6, 2031 |
Domain
names
IT
Tech Packaging has registered the internet domain name, http://www.itpackaging.cn.
Government
Regulation
The
testing, approval, manufacturing, labeling, advertising and marketing, post-approval safety reporting and export of our products are
extensively regulated by governmental authorities in the PRC. We are also subject to various other regulations and permit requirements
by the Chinese government. These regulations and their impact on our business are set forth in more details below.
Environmental
Regulation
Our
operations and facilities are subject to environmental laws and regulations stipulated by the national and the local environment protection
bureaus in the PRC.
Since
the implementation of the State Council’s “Decisions on Environmental Protection Issues” in 1996, the PRC paper industry
has been subject to more rigorous environmental standards. Effective January 1, 2015, a new law promulgated by the National People’s
Congress of the People’s Republic of China makes certain violations of the environmental laws a criminal offense. We believe that
we are one of the few major paper manufacturers in Hebei Province that have obtained a Pollution Discharge Permit. We initially received
the permit in September 1996 and, we have successfully renewed the permit each year by complying with applicable environmental requirements.
Waste
Water Treatment
Dongfang
Paper uses a multi-level water recycling process. Waste water from the pulping process is fed into collection pools, where it is divided
into two parts, water and recovered pulp fiber. The latter is returned to the pulping process.
Chemical
agents are added to the waste water, and the waste water is fed into a biogas reactor and filtering pools, producing purified water and
depositing sludge. Most of the purified water is recycled to produce corrugating medium paper and the sludge is pumped into a sludge
pool, condensed and dehydrated. We then use the sludge as a raw material in the manufacture of corrugating medium paper.
We
maintain computerized controls at our production facilities on a 24-hour basis to monitor compliance with environmental rules and regulations.
We are not aware of any environmental investigations, prosecutions, disputes, claims or other environmental proceedings, nor have we
been subject to any action by any environmental administration authorities of the PRC. To our knowledge, our operations meet or exceed
the existing environmental requirements of the PRC.
Human
Capital Resources
Employee
Profiles
As
of December 31, 2021, we have approximately 366full time employees, all of whom were based in PRC. As of December 31, 2021, approximately
23.0% of our current workforce is female and 77.0% male. These employees are organized into a labor union under the labor laws of the
PRC and have collective bargain power against us. We generally maintain good relations with our employees and the labor union.
Total
Rewards
Our
compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business
objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders. We provide employees with
compensation packages that include base salary and annual incentive bonuses. We also provide private insurance coverage for any workplace
accident or injury for all the operators of paper milling machinery in the workshops.
Health
and Safety
The
success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety
and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health
and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them
improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs
and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that
we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government
regulations.
Talent
A
core tenet of our talent system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty
and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and
external ideas supports a continuous improvement mindset and our goals of a diverse and inclusive workforce. Our human resources team
uses internal and external resources to recruit highly skilled and talented workers in the PRC, and we encourage employee referrals for
open positions.
Available
Information
We
are required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange
Commission (“SEC”). The public may read and copy any materials that we file with the SEC. In addition, the SEC maintains
an Internet site that contains reports, proxy and information statements, and other information regarding issuers like our Company that
file electronically with the SEC at http://www.sec.gov.
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports
(including exhibits) filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are also
available free of charge on our Internet site at http://www.itpackaging.cn as soon as reasonably practicable after such reports are electronically
filed with or furnished to the SEC. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated
into this or any of our other filings with the SEC.
Executive
Officers
For
information regarding our executive officers as of March 15, 2022, see Part III, Item 10, “Directors, Executive Officers and Corporate
Governance.”
Item
1A. Risk Factors
Risks
Relating to our Business
Our
business, financial condition and results of operations may be materially adversely affected by global health epidemics, including the
COVID-19 outbreak.
Outbreaks
of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and
results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as
a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts
to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday,
quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among
other things. During the early part of 2020, COVID-19 caused temporary closure of our CMP production, and as a result, our revenue
of CMP decreased by 49.89%.in the first quarter of 2020. It is, however, still unclear how the pandemic will evolve going forward, and
we cannot assure you whether the COVID-19 pandemic will again bring about significant negative impact on our business operations,
financial condition and operating results, including but not limited to negative impact to our total revenues.
While we have resumed business
operations, there remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic.
Hence, the extent of the business disruption and the related impact on our financial results and outlook for 2021 cannot be reasonably
estimated at this time. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain
and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally
to contain the corona virus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that
may arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our
results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from
the spread of COVID-19 or its consequences, including downturns in business sentiment generally.
Our
operating history may not serve as an adequate basis to judge our future prospects and results of operations.
Dongfang
Paper commenced its current line of business operations in 1996 and received its initial Pollution Discharge Permit in September 1996,
which must be renewed every year for Dongfang Paper to stay in business. Although we have never had problem renewing the Pollution Discharge
Permit, we cannot guarantee automatic renewal every year. In addition, Baoding Shengde commenced its current line of business operations
in 2009. Therefore, our operating history may not provide a more meaningful basis on which to evaluate its business. We cannot assure
you that Dongfang Paper or Baoding Shengde will not incur net losses in the future. We expect that operating expenses of Dongfang Paper
and Baoding Shengde will increase as they expand. Any significant failure to realize anticipated revenue growth could result in significant
operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development,
including our potential failure to:
|
● |
raise adequate capital
for expansion and operations; |
|
● |
implement our business
model and strategy and adapt and modify them as needed; |
|
● |
increase awareness of our
brand name, protect our reputation and develop customer loyalty; |
|
● |
manage our expanding operations
and service offerings, including the integration of any future acquisitions; |
|
● |
maintain adequate control
of our expenses; or |
|
● |
anticipate and adapt to
changing conditions in paper markets in which we operate as well as the impact of any changes in government regulations, mergers
and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics. |
If
we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.
Dongfang
Paper and Baoding Shengde’s failure to compete effectively may adversely affect our ability to generate revenue.
Through
Dongfang Paper and Baoding Shengde, we compete in a highly developed market with companies that have significantly greater experience
and history in our industry. If we do not compete effectively, we could lose market share and experience reduced selling prices, adversely
affecting our financial results. Our competitors will expand in the key markets and implement new technologies making them more competitive.
There is also the possibility that competitors will be able to offer additional products, services, lower prices, or other incentives
that we cannot or will not offer or that will make our products less profitable. We cannot assure you that we will be able to compete
effectively with current or future competitors or that the competitive pressures we face will not harm our business.
We
may not be able to effectively control and manage our growth.
If
our business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. An expansion
would increase demands on existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or
adversely affect our operations and cause delay in production and delivery of our paper products, as well as administrative inefficiencies.
We,
through our subsidiaries, may engage in future acquisitions that could dilute the ownership interests of our stockholders and cause us
to incur debt and assume contingent liabilities.
We,
through our subsidiaries, may review acquisition and strategic investment prospects that we believe would complement the current product
offerings of Dongfang Paper, augment its market coverage or enhance its technical capabilities, or otherwise offer growth opportunities.
From time to time we review investments in new businesses and we, through our subsidiaries, expect to make investments in, and to acquire,
businesses, products, or technologies in the future. We expect that when we raise funds from investors for any of these purposes we will
be either the issuer or the primary obligor while the proceeds will be forwarded to Dongfang Paper. In the event of any future acquisitions,
we could:
|
● |
issue equity securities
which would dilute current stockholders’ percentage ownership; |
|
● |
incur substantial debt; |
|
● |
assume contingent liabilities;
or |
|
● |
expend significant cash. |
These
actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if we do obtain
benefits in the form of increased sales and earnings, there may be a lag between the time when the expenses associated with an acquisition
are incurred and the time when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including:
|
● |
difficulties in the assimilation
of acquired operations, technologies and/or products; |
|
● |
unanticipated costs associated
with the acquisition or investment transaction; |
|
● |
the diversion of management’s
attention from other business concerns; |
|
● |
adverse effects on existing
business relationships with suppliers and customers; |
|
● |
risks associated with entering
markets in which Dongfang Paper has no or limited prior experience; |
|
● |
the potential loss of key
employees of acquired organizations; and |
|
● |
substantial charges for
the amortization of certain purchased intangible assets, deferred stock compensation or similar items. |
We
cannot ensure that we will be able to successfully integrate any businesses, products, technology, or personnel that we might acquire
in the future and our failure to do so could have a material adverse effect on our and/or Dongfang Paper’s business, operating
results and financial condition.
We
are responsible for the indemnification of our officers and directors.
Our Articles of Incorporation
provides for the indemnification and/or exculpation of our directors, officers, employees, agents and other entities which deal with us
to the maximum extent provided, and under the terms provided, by the laws and decisions of the courts of the state of Nevada. Although
we do maintain professional error and omission insurance for the officers and directors, due to limitations of the insurance coverage
these indemnification provisions could still result in substantial expenditures which we may be unable to recoup through the insurance
and could adversely affect our business and financial conditions. Zhenyong Liu, our Chairman of the Board and Chief Executive Officer,
Jing Hao, our Chief Financial Officer, Dahong Zhou, our Secretary, and Marco Ku Hon Wai, Wenbing Christopher Wang, Lusha Niu, and Fuzeng
Liu, our directors, are key personnel with rights to indemnification under our Articles of Incorporation.
We
are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial
condition and results of operations.
Our
success is, to a certain extent, attributable to the management, sales and marketing, and paper factory operational expertise of key
personnel. Zhenyong Liu, our Chief Executive Officer and Chairman of the Board, Jing Hao, our Chief Financial Officer, Dahong Zhou, our
Secretary, and Shuting Liang, Dongfang Paper’s General Engineer, Gengqi Yang, Dongfang Paper’s Vice President of Sales and
Marketing, Xuetao Chen, Dongfang Paper’s Vice President of Environmental Protection and Xiaodong Liu, Baoding Shengde’s General
Manager, perform key functions in the operation of our business. There can be no assurance that IT Tech Packaging, Dongfang Paper or
Baoding Shengde will be able to retain these officers after the term of their employment contracts expire. The loss of these officers
could have a material adverse effect upon our business, financial condition, and results of operations. We do not carry key man life
insurance for any of our key personnel or personnel nor do we foresee purchasing such insurance to protect against a loss of key personnel
and personnel.
We
are dependent upon the services of Mr. Zhenyong Liu for the continued growth and operation of our Company because of his experience in
the industry and his personal and business contacts in the PRC. Although Mr. Liu has entered into an employment agreement with Baoding
Shengde, our wholly owned subsidiary and a PRC company, and that we have no reason to believe that Mr. Liu will discontinue his services
with us or Dongfang Paper, the interruption or loss of his services would adversely affect our ability to effectively run our business
and pursue our business strategy as well as our results of operations.
We
may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire these personnel in
the future, our ability to improve our products and implement our business objectives could be adversely affected.
We
must attract, recruit and retain a sizeable workforce of technically competent employees. Competition for senior management and senior
personnel in the PRC is intense, the pool of qualified candidates in the PRC is very limited, and we may not be able to retain the services
of our senior executives or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future.
This failure could materially and adversely affect our future growth and financial condition.
Our
operating results may fluctuate as a result of factors beyond our control.
Our
operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control.
These factors include:
|
● |
the costs of paper products
and development; |
|
● |
the relative speed and
success with which we can obtain and maintain customers, merchants and vendors for our products; |
|
● |
capital expenditure for
equipment; |
|
● |
marketing and promotional
activities and other costs; |
|
● |
changes in our pricing
policies, suppliers and competitors; |
|
● |
the ability of our suppliers
to provide products in a timely manner to their customers; |
|
● |
changes in operating expenses; |
|
● |
increased competition in
the paper markets; and |
|
● |
other general economic
and seasonal factors. |
We
face risks related to product liability claims.
We
presently do not maintain product liability insurance. We face the risk of loss because of adverse publicity associated with product
liability lawsuits, whether or not such claims are valid. We may not be able to avoid such claims. Although product liability lawsuits
in the PRC are rare, and we have not, to date, experienced significant failure of our products, there is no guarantee that we will not
face such liability in the future. This liability could be substantial and the occurrence of such loss or liability may have a material
adverse effect on our business, financial condition and prospects.
Our
operating results also depend on the availability and pricing of energy and raw materials.
In
addition to our dependence upon wood pulp, recycled white scrap paper and paperboard costs, our operating results depend on the availability
and pricing of energy and other raw materials. An interruption in the supply of supplemental chemical agents could cause a material disruption
at our mill. In addition, an interruption in the supply of natural gas could cause a material disruption at our facilities. At present,
our raw materials including natural gas are purchased from a number of suppliers, of which the three largest suppliers account for over
89% of all purchases. If any of these contracts were to be terminated for any reason, or not renewed upon expiration, or if market conditions
were to substantially change creating a significant increase in the price of natural gas and recycled paper, we may not be able to find
alternative, comparable suppliers or suppliers capable of providing coal to us on terms or in amounts satisfactory to us.
We
replaced all the coal boilers with natural gas boiler in September 2017, but due to the gas consumption rise significantly, the government
will from time to time issue mandated restriction/suspension of natural gas supply for all natural gas consumption industries, including
the paper manufacturing industry in order to secure adequate natural gas to households uses in urban and rural areas. We are subject
to the risks of natural gas supply restriction and above-mentioned factors. As a result, our business, financial condition and operating
results could suffer.
A
material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively
affect our net income.
Any
of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly
due to a number of events, including:
|
● |
prolonged power failures; |
|
● |
an equipment failure, including
any malfunction of our waste water treatment facilities; |
|
● |
disruption in the supply
of raw materials, such as wood fiber, energy, or chemicals; |
|
● |
a chemical spill or release; |
|
● |
closure because of environmental-related
concerns; |
|
● |
the effect of a drought
or reduced rainfall on our water supply; |
|
● |
disruptions in the transportation
infrastructure, including roads, bridges, railroad tracks, and tunnels; |
|
● |
fires, floods, earthquakes,
hurricanes, epidemic or other catastrophes; |
|
● |
terrorism or threats of
terrorism; |
|
● |
other operational problems. |
If
any of the abovementioned events were to occur, we may be unable to meet customer demand, which may adversely affect our sales and net
income.
Our
certificates, permits, and licenses related to our papermaking operations are subject to governmental control and renewal and failure
to obtain renewal will cause all or part of our operations to be terminated.
In
1988, the National Environmental Protection Bureau issued Interim Measures on the Administration of Water Pollutants Discharge Permits,
requiring all companies discharging pollution into the water as a direct or indirect byproduct of production to adhere to certain caps
on pollution discharge. On January 24, 2021, the State Council issued Regulations on the Administration of Pollutant Discharge Permits,
which has effected on March 1, 2022.Additionally, such companies were required to obtain and annually renew a Pollution Discharge Permit
in order to conduct their operations. The PRC government has the authority to shut down a company’s operations for its failure
to maintain a valid permit. We renewed our Pollution Discharge Permit in June 2020. Our latest permit is effective from June 28, 2020
through June 27, 2025. Pollution discharge Permit for Hebei Tengsheng was effective from August 10, 2021 through August 9, 2026. An application
to renew will be filed by us with the local environment protection agency before the expiration.
The
failure by us to obtain any certificate, permit, and license necessary for our operations or the failure by us to obtain the renewal
of any such certificate, permit or license may materially and adversely affect our business, prospects, financial condition and results
of operation.
Compliance
with environmental regulations is expensive, and noncompliance may result in adverse publicity and potentially significant monetary damages
and fines or suspension of our business operations.
We
are required to comply with all Chinese national and local regulations regarding the protection of the environment. Compliance with environmental
regulation is expensive. The Chinese government is adopting even more stringent environmental protection and operational safety regulations
and the costs of complying with these regulations are expected to increase. Although we have obtained all of the necessary approvals
and permits for our production facilities currently existing, we cannot assure you that we will be able to comply with all applicable
environmental protection and operational safety requirements, and obtain all of the required governmental approvals and permits that
may be or may become applicable to us on a timely basis, or at all, or will be able to complete all our registrations and filings with
the government, in time for our future projects. The relevant governmental authorities may impose on us fines for any non-compliance,
set deadlines for rectification, and order us to cease construction or production if we fail to comply with their requirements.
If
we are unable to respond to pricing pressures, our business may be harmed.
In
order to remain competitive, from time to time we have to adjust the prices of our products to remain competitive. We may not have available
sufficient financial or other resources to continue to make investments necessary to maintain our competitive position.
If
we fail to introduce enhancements to our existing products or to develop new products, our business and results of operations could be
adversely affected.
We
believe that our future success depends in part on our ability to enhance our existing products and develop new products in order to
continue to meet customer demand. Our failure to introduce new or enhanced products on a timely and cost-competitive basis, or the development
of processes that make our existing products obsolete, could harm our business and results of operations.
We
have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.
As
the insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business
insurance products. We do not have any product liability insurance or business interruption insurance. Based on the insurance products
available in China, even if we decide to take out business interruption coverage, such insurance as currently available offers limited
coverage compared to that offered in many other jurisdictions. Any business disruption, natural disaster, or product liability claim
could result in our incurring substantial costs and diversion of resources, which would have an adverse effect on our business and results
of operations.
Our
failure to protect our intellectual property rights may undermine our competitive position, and external infringements of our intellectual
property rights may adversely affect our business.
Our
success and ability to compete depends in part on our intellectual property. We primarily rely on a combination of trademark, trade secret,
and copyright laws, as well as confidentiality procedures and contractual restrictions with our employees, contractors and others to
establish and protect our intellectual property rights. However, confidentiality and license arrangements may be breached by counterparties,
and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our
intellectual property rights or to enforce our contractual rights. In addition, our trade secrets may be leaked or otherwise become available
to, or be independently discovered by, our competitors. The steps we take to protect our intellectual property rights may be inadequate
or we may be unable to secure intellectual property protection for some of our properties. Infringement of intellectual property rights
continues to pose a serious risk of doing business.
We
may in the future file, patent applications on certain of our innovations. It is possible, however, that these innovations may not be
patentable. In addition, given the cost, effort and risks associated with patent application, we may choose not to seek patent protection
for some innovations. Furthermore, our patent applications may not lead to granted patents, the scope of the protection gained may be
insufficient or an issued patent may be deemed invalid or unenforceable. We also cannot guarantee that any of our present or future patents
or other intellectual property rights will not lapse or be invalidated, circumvented, challenged, or abandoned.
If
we are unable to protect our intellectual property, our competitors could use our intellectual property to market offerings similar to
ours and our ability to compete effectively would be impaired. Moreover, others may independently develop technologies that are competitive
to ours or infringe on our intellectual property. The enforcement of our intellectual property rights depends on our legal actions against
these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed.
In addition, defending our intellectual property rights might entail significant expense and diversion of management resources. Any of
our intellectual property rights may be challenged by others or invalidated through administrative processes or litigations. We can provide
no assurance that we will prevail in such litigations, and, even if we do prevail, we may not obtain a meaningful relief. Accordingly,
despite our efforts, we may be unable to prevent external parties from infringing or misappropriating our intellectual property. Any
intellectual property that we own may not provide us with competitive advantages or may be successfully challenged by external parties.
We
may be subject to intellectual property infringement claims or other allegations, which may materially and adversely affect our business,
financial condition and prospects.
We
cannot be certain that we do not or will not infringe patents, copyrights, trademarks or other intellectual property rights held by external
parties. From time to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks, copyrights
or other intellectual property rights, or misappropriation of creative ideas or formats, or other infringement of proprietary, which
may materially and adversely affect our business, financial condition and prospects.
Risks
Related To Doing Business in the PRC
The
PRC government has significant oversight and discretion over the conduct of a PRC company’s business operations or to exert control
over any offering of securities conducted overseas and/or foreign investment in China-based issuers, and may intervene with or influence
our operations, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value
of such securities to significantly decline or be worthless, as the government deems appropriate to further regulatory, political and
societal goals.
The
PRC government may intervene or influence our operations at any time, which could result in a material change in our operations and/or
the value of our common stock. For example, the PRC government has recently published new policies that significantly affected certain
industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations
or policies regarding any industry that could adversely affect the business, financial condition and results of operations of our company.
Furthermore, the PRC government has also recently indicated an intent to exert more oversight and control over securities offerings and
other capital markets activities that are conducted overseas and foreign investment in China-based companies. Any such action, once taken
by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of such securities to significantly decline or in extreme cases, become worthless.
Recently,
the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance
notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed
overseas using variable interest entity structure, adopting new measures to extend the scope of cyber security reviews, and expanding
the efforts in anti-monopoly enforcement. Currently, these statements and regulatory actions have had no impact on our daily business
operation, the ability to accept foreign investments and list our securities on an U.S. or other foreign exchange. Since these statements
and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and
what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and
the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign
investments and list our securities on an U.S. or other foreign exchange.
Our business may
be subject to a variety of PRC laws and other obligations regarding cyber security and data protection.
Our
business may be subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private
information, such as personal information and other data. These laws continue to develop, and the PRC government may adopt other rules
and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.
Pursuant to the PRC Cyber security Law, which was promulgated by the
Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information and
important data collected and generated by a critical information infrastructure operator in the course of its operations in China must
be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or may
affect national security, it should be subject to cyber security review by the Cyberspace Administration of China (“CAC”).
Due to the lack of further interpretations, the exact scope of “critical information infrastructure operator” remains unclear.
On
April 13, 2020, twelve Chinese government agencies jointly promulgated the Measures for Cyber security Review (2020 version) (“Old
Measures”), which became effective on June 1, 2020, set forth the cyber security review mechanism for critical information
infrastructure operators, and provided that critical information infrastructure operators (“CIIOs”) who intend to procure
network products and services that affect or may affect national security shall be subject to a cyber security review. On June 10,
2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which took effect in September 2021.
The Data Security Law provides for a security review procedure for the data activities that may affect national security. Moreover,
the CAC issued the Measures of Cyber security Review (Revised Draft for Comments) on July 10, 2021, which requires operators with personal
information of more than one million users who want to list abroad to file a cyber security review with the CAC. Furthermore, the
General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the
Opinions on Severe and Lawful Crackdown on Illegal Securities Activities, which was available to the public on July 6, 2021. These opinions
emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based
companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal
with the risks and incidents facing China-based overseas-listed companies and the demand for cyber security and data privacy protection.
The
Data Security Law also sets forth the data security protection obligations for entities and individuals handling personal data, including
that no entity or individual may acquire such data by stealing or other illegal means, and the collection and use of such data should
not exceed the necessary limits The costs of compliance with, and other burdens imposed by, PRC Cyber security Law and any other cyber
security and related laws may limit the use and adoption of our products and services and could have an adverse impact on our business.
Further, if the enacted version of the Measures for Cyber security Review mandates clearance of cyber security review and other specific
actions to be completed by companies like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.
On
January 4, 2022, the CAC issued the revised Measures on Cyberspace Security Review (the “Revised Measures”)that has came into
effect on February 15, 2022, which required that, among others, in addition to “operator of critical information infrastructure,”
any “network platform operator data processor” controlling personal information of no less than one million users which seeks
to list in a foreign stock exchange should also be subject to cyber security review. We do not believe we are among the “operator
of critical information infrastructure” or “network platform operator data processor” who control over one million personal
information as mentioned above; however, the definition of “network platform operator” is unclear. The revised draft of the
Measures for Cyber security Review is in the process of being formulated and it is also unclear on how it will be interpreted, amended
and implemented by the relevant PRC governmental authorities. The Revised Measures also establish a Cyber security Review Office (the
“CRO”), an administrative body within the CAC, to formulate the regulations for cyber security review and to lead the cyber
security review process. Applicable CIIOs and NP operators are required to submit an application to the CRO, and the CRO will assess whether
a cyber security review is required.
As
these laws, opinions and the measures were recently issued, official guidance and interpretation of these remain unclear in several respects
at this time, and the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws, opinions
and the measures. Therefore, it is uncertain whether the future regulatory changes would impose additional restrictions on our business.
We
believe that we are currently not be subject to the cyber security review by the CAC, given the factors discussed above. However, there
remains uncertainty as to how the Revised Measures will be interpreted or implemented and whether the PRC regulatory agencies, including
the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Revised Measures. If any
such new laws, regulations, rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions
to comply and to minimize the adverse effect of such laws on us.
We
cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do. In the event that we are subject
to any mandatory cyber security review and other specific actions required by the CAC, we face uncertainty as to whether any clearance
or other required actions can be timely completed, or at all. Given such uncertainty, we may be further required to suspend our relevant
business, or face other penalties, which could materially and adversely affect our business, financial condition, and results of operations.
Changes
in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the
profitability of such business.
Our
business operations, financial condition, results of operations and prospects may be adversely affected by the current and future political
environment in the PRC. The PRC has operated as a socialist state since the middle of the 20th century and is controlled by the Communist
Party of China. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business
activities. The PRC has only permitted provincial and local economic autonomy and private economic activities since 1978. The government
of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, including
the paper industry, through regulation and state ownership. Our ability to operate in the PRC may be adversely affected by changes in
Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations,
land use rights, property and other matters. Under its current leadership, the government of the PRC has been pursuing economic reform
policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government
of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Policies
of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic
development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its
economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe
that this trend will continue, there can be no assurance that this will be the case.
A
change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or
the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation
or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than three
decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s
political, economic and social life.
The
PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and
regulations may harm our business.
The PRC laws and regulations
governing our current business operations are sometimes vague and uncertain. The PRC’s legal system is a civil law system based
on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the
United States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including
but not limited to the laws and regulations governing our business, the enforcement and performance of our contractual arrangements with
our VIE, Dongfang Paper, and its shareholders, or the enforcement and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive
system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such
as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations
are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively. Our major operating entity, Dongfang Paper, conducts its operations
in China, and as a result, we are required to comply with PRC laws and regulations. We cannot assure you that our current ownership and
operating structure would not be found in violation of any current or future PRC laws or regulations. Any of these or similar actions
could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which
could materially and adversely affect our business, financial condition and results of operations. We cannot predict what effect the interpretation
of existing or new PRC laws or regulations may have on our business. If the relevant authorities find that we are in violation of PRC
laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
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revoking Dongfang Paper’s
business and other licenses; |
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requiring that we restructure
our ownership or operations; and |
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requiring that we discontinue
any portion or all of our business. |
Among
the material laws that we are subject to are the Price Law of The People’s Republic of China, Measurement Law of The People’s
Republic of China, Tax Law, Environmental Protection Law, Contract Law, Patent Law, Accounting Laws and Labor Law.
A
slowdown, inflation or other adverse developments in the PRC economy may harm our customers and the demand for our services and products.
All
of our operations are conducted in the PRC and all of our revenue is generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years, we cannot assure you that this growth will continue. In 2021, China’s Gross Domestic Product (“GDP”)
growth rate was 8.1% as compared to 2.3% in 2020. A slowdown in overall economic growth, an economic downturn, a recession or other adverse
economic developments in the PRC could significantly reduce the demand for our products and harm our business.
Additionally,
while the PRC economy experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical
areas of the country. Rapid economic growth could lead to growth in the money supply and rising inflation. If prices for our products
rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may harm our profitability. In order to control
inflation in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state
bank lending. Such an austere policy can lead to a slowing of economic growth.
We
may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may
have, and any limitation on the ability of our PRC Subsidiary to make payments to us could have a material and adverse effect on our
ability to conduct our business.
IT
Tech Packaging Inc. is a Nevada holding company and conducts all of its business through its operating subsidiaries and the VIE. IT Tech
Packaging Inc. relies principally on dividends and other distributions on equity from our PRC Subsidiary for cash requirements, including
for services of any debt IT Tech Packaging Inc. may incur.
Our
PRC Subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC
Subsidiary to pay dividends to its shareholders only out of its accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. If our PRC Subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC Subsidiary to distribute
dividends or other payments to its shareholders could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.
In
addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable
to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises
are incorporated.
Governmental
control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of investors’ investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of
currency out of China. We receive a significant portion of our revenues in Renminbi. Under our current corporate structure, our Nevada
holding company may rely on dividend payments from our PRC Subsidiary to fund any cash and financing requirements we may have. Under
existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade
and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with
certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated
from the operations of our PRC subsidiary in China may be used to pay dividends to our Nevada holding company.
However,
approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need
to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and VIE to pay off their respective debt in a
currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency
other than Renminbi.
The
PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including
overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions
falling under the capital account. The PRC government may at its discretion further restrict access in the future to foreign currencies
for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to
satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders of our common stock.
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion
may delay us from making loans or additional capital contributions to our PRC Subsidiary, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
Any
funds IT Tech Packaging Inc. transfers to its PRC Subsidiary, either as a shareholder loan or as an increase in registered capital, are
subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on
foreign invested enterprises, or FIEs, in China, capital contributions to our PRC Subsidiary are subject to the approval of or report
investment information to the MOFCOM or their respective local branches and registration with a local bank authorized by the SAFE. In
addition, any foreign loan procured by our PRC Subsidiary cannot exceed statutory limits and is required to be registered with SAFE or
its local branches. Any medium or long-term loan to be provided by IT Tech Packaging Inc. to the VIE must be registered with the National
Development and Reform Commission, or NDRC, and the SAFE or its local branches. We may not be able to complete such registrations on
a timely basis, with respect to future capital contributions or foreign loans by IT Tech Packaging Inc. to its PRC Subsidiary. If we
fail to complete such registrations, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect
our liquidity and our ability to fund and expand business.
On
March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement
of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect on June 1, 2015. SAFE Circular 19 launched a nationwide
reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange
capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital
for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The SAFE
issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE
Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign
debts from foreign currency to Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion
of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary
basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign
currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited
by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. As this circular
is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange related rules.
Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly
limit our ability to fund the establishment of new entities in China by the VIE, to invest in or acquire any other PRC companies through
our PRC Subsidiary, or to establish new consolidated VIE in China, which may adversely affect our business, financial condition and results
of operations.
On
October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience
of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use
Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine,
does not violate applicable laws, and complies with the negative list on foreign investment. However, since the SAFE Circular 28 is newly
promulgated, it is unclear how SAFE and competent banks will carry this out in practice.
In
light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies,
we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans by IT Tech Packaging to its PRC Subsidiary or with respect to future capital
contributions by IT Tech Packaging Inc. to its PRC Subsidiary. If we fail to complete such registrations or obtain such approvals, our
ability to to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
The
fluctuation of the Renminbi may harm your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the
PRC’s political and economic conditions. According to the Bureau of the Fiscal Service, as of December 31, 2021, $1 is converted
into 6.3757Yuan (RMB). As we rely entirely on revenues earned in the PRC, any significant revaluation of the Renminbi may materially
and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into Renminbi for Dongfang Paper’s operations, appreciation of the Renminbi against
the U.S. dollar would diminish the value of the proceeds of the offering and this could harm our business, financial condition and results
of operations because it would reduce the proceeds available to us for capital investment in proportion to the appreciation of the Renminbi.
Thus, if we raise 1,000,000 U.S. dollars and the Renminbi appreciates against the U.S. dollar by 15%, then the proceeds will be worth
only RMB5,544,087 as opposed to RMB 6,375,700 prior to the appreciation. Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates
against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced in proportion to the amount the U.S. dollar
appreciates. In addition, the depreciation of significant RMB denominated assets could result in a charge to our income statement and
a reduction in the dollar value of these assets. Thus, if Dongfang Paper has RMB1,000,000 in assets and Renminbi is depreciated against
the U.S. dollar by 15%, then the assets will be valued at $136,387 as opposed to $156,846 prior to the depreciation.
On
July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under
the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
This change in policy resulted in an approximately 2.44% appreciation of the Renminbi against the U.S. dollar as of December 31, 2021.
While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure
on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant depreciation
of the Renminbi against the U.S. dollar.
Failure
to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may materially adversely
affect us.
The
PRC State Administration of Foreign Exchange, or SAFE, has promulgated regulations, including the Notice on Relevant Issues Relating
to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular No.
37, effective on July 14, 2014, and its appendixes, that require PRC residents, including PRC institutions and individuals, to register
with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose
of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises
or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37
further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such
as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event.
In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the
PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying
out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in their ability to contribute
additional capital into its PRC subsidiary. Further, failure to comply with the various SAFE registration requirements described above
could result in liability under PRC law for foreign exchange evasion.
Because
of uncertainty over the interpretation of Circular 37, we cannot assure you that, if challenged by government agencies, the structure
of our organization has fully complied with all applicable registrations or approvals required by Circular 37. Moreover, because of uncertainty
over how Circular 37 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will
affect our business operations or future strategies. A failure by such PRC resident beneficial holders or future PRC resident stockholders
to comply with Circular 37, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict
our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and prospects.
While
the approval and/or other requirements of the CSRC or other PRC governmental authorities are currently not required, they may be required,
in connection with our oversea listing under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon
we will be able to obtain such approval.
On
August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission (“CSRC”), promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors (“M&A Rules”), which became effective
on September 8, 2006 and then was further amended on June 22, 2009. This regulation, among other things, has certain provisions that
purport to require offshore SPVs formed for the purpose of listing and controlled by PRC individuals or companies, to obtain the approval
of the CSRC prior to listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official
website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
In addition, the PRC government
authorities may strengthen oversight over offerings that are conducted overseas. For instance, on July 6, 2021, the relevant PRC governmental
authorities promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities, which emphasized the need to strengthen
the supervision over overseas listings by PRC companies. Effective measures, such as promoting the construction of relevant regulatory
systems, are to be taken to deal with the risks and incidents of China-based overseas-listed companies, cyber security and data privacy
protection requirements and similar matters. The Measures for Cyber security Review issued by the CAC on January 4, 2022 also required
that, among others, “critical information infrastructure” or internet platform operator holding over one million users’
personal information to apply for a cyber security review before any listing at a foreign country. These statements and regulations are
recently issued and there remain substantial uncertainties about their interpretation and implementation.
On
December 24, 2021, CSRC issued Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic
Companies (Draft for Comments) (the “Administration Provisions”), and the Administrative Measures for the Filing of Overseas
Securities Offering and Listing by Domestic Companies (the “Measures”), which are open for public comments by January 23,
2022. The Administration Provisions and Measures for overseas listings lay out specific requirements for filing documents and include
unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. Domestic companies seeking
to list abroad must carry out relevant security screening procedures if their businesses involve supervisions such as foreign investment
security and cyber security reviews. Companies endangering national security are among those off-limits for overseas listings. According
to Relevant Officials of the CSRC Answered Reporter Questions (“CSRC Answers”), after the Administration Provisions and Measures
are implemented upon completion of public consultation and due legislative procedures, the CSRC will formulate and issue guidance for
filing procedures to further specify the details of filing administration and ensure that market entities could refer to clear guidelines
for filing, which means it will still take time to put the Administration Provisions and Measures into effect. As the Administration
Provisions and Measures have not yet come into effect, we are currently unaffected by them. However, according to CSRC Answers, only
new initial public offerings and refinancing by existing overseas listed Chinese companies will be required to go through the filing
process; other existing overseas listed companies will be allowed a sufficient transition period to complete their filing procedure.
However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently
drafted.
We believe that, as of the
date of this annual report, we are not required to obtain any permission from PRC authorities to operate and issue securities to foreign
investors, including permissions from the CSRC or CAC. However, there is no guarantee that this will continue to be the case in the future
in connection with the listing or continued listing of our securities on NYSE American, or even in the event such permission or approval
is required and obtained, the approval could be subsequently revoked or rescinded. Any failure to obtain or a delay in obtaining the necessary
permissions from the PRC authorities to conduct offerings or listing outside of China may subject us to sanctions imposed by the PRC regulatory
authorities. If we do not receive or maintain the approvals, or we inadvertently conclude that such approvals are not required, or applicable
laws, regulations, or interpretations change such that we are required to obtain approval in the future, we may be subject to an investigation
by competent regulators, fines or penalties, or an order prohibiting us from conducting an offering, and these risks could result in a
material adverse change in our operations and the value of our company’s securities, significantly limit or completely hinder our
ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless.
As
of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection to our operations
from the CSRC, CAC or any other PRC governmental authorities, and our PRC Subsidiary and the VIE have obtained all requisite permissions
from PRC governmental authorities to operate our business as currently conducted under relevant PRC laws and regulations and no permissions
have been denied by governmental authorities.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
Among
other things, the M&A Rules established additional procedures and requirements that could make merger and acquisition activities
by foreign investors more time consuming and complex. Such regulation requires, among other things, that the Ministry of Commerce be
notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise or a
foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations
of Undertakings, issued by the State Council in 2008, are triggered. Moreover, the Anti-Monopoly Law requires that the anti-monopoly
law enforcement authority shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition,
the security review rules issued by the State Council that became effective in March 2011 specify that mergers and acquisitions
by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign
investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict
review by the Ministry of Commerce, and the rules prohibit any activities attempting to bypass a security review, including by structuring
the transaction through a proxy or contractual control arrangement.
In
the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations
and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
approval from the Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market share.
The
PRC’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
The
PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People’s Congress amended the Constitution
of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the PRC.
However, the PRC’s system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and
enforcement of existing laws is inconsistent. Many judges in the PRC lack the depth of legal training and experience that would be expected
of a judge in a more developed country. Because the PRC judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation
of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift
and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction.
The PRC’s legal system is based on the civil law regime, that is, it is based on written statutes; a decision by one judge does
not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may
be varied to reflect domestic political changes.
The
trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control
by foreign parties of their investments in Chinese enterprises. However, the promulgation of new laws, changes to existing laws and the
pre-emption of local regulations by national laws may adversely affect foreign investors. A change in leadership, social or political
disruption, or unforeseen circumstances affecting the PRC’s political, economic or social life, may affect the PRC government’s
ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
The
practical effect of the PRC legal system on our business operations in the PRC can be viewed from two separate but intertwined considerations.
First, as a matter of substantive law, the foreign invested enterprise laws provide significant protection from government interference.
In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to foreign invested enterprise
participants. These laws, however, do impose standards concerning corporate formation and governance, which are qualitatively different
from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices, which are not
consistent with U.S. generally accepted accounting principles. PRC’s accounting laws require that an annual “statutory audit”
be performed in accordance with PRC accounting standards and that the books of account of foreign invested enterprises are maintained
in accordance with Chinese accounting laws. Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law requires
a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities,
at the risk of business license revocation. While the enforcement of substantive rights may appear less clear than United States procedures,
foreign invested enterprises and wholly foreign-owned enterprises are Chinese registered companies, which enjoy the same status as other
Chinese registered companies in business-to-business dispute resolution. Any award rendered by an arbitration tribunal is enforceable
in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Therefore, as
a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the operation of foreign invested enterprises.
Because
our principal assets are located outside of the United States and most of our directors and officers reside outside of the United States,
it may be difficult for you to effect service of legal process, enforce your rights based on U.S. federal securities laws against us
and our officers or to enforce U.S. court judgment against us or them in the PRC.
All
of our directors and officers reside outside the United States. In addition, our operating company is located in the PRC and substantially
all of our assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce
their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the
U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear
if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers
and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.
It
may be difficult for overseas regulators to conduct investigation or collect evidence within China.
Shareholder
claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or
practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory
investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism
with the securities regulatory authorities of another country or region to implement cross-border supervision and administration,
such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical
cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020,
no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory
of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for
an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase
difficulties faced by our investors in protecting their interests.
We
may be required to broaden the coverage of the mandatory social security insurance programs under the Labor Law of the PRC.
The
PRC Labor Law, effective January 1, 2008, requires that employers enroll in the following social security insurance programs and offer
certain employer-sponsored premium benefits to eligible employees: (1) retirement endowment, (2) healthcare insurance, (3) unemployment
insurance, (4) workers’ compensation insurance, and (5) pregnancy insurance. Of these insurance programs, the retirement endowment
fund requires employee withholdings of 4% to 8% of the gross compensation, while the employer’s matching contribution varies from
16% to 20% of such compensation. While the Company is enrolled in the retirement endowment fund and is withholding employees’ portion
and the employer’s portion of the endowment contribution, many of the Company’s employees have elected to waive their coverage
under these mandatory social security insurance programs in favor of certain other low-cost, local government-sponsored social security
insurance programs for residents in non-urban districts. Although we have verified with the local government agencies for the validity
of the employee waivers and reasonably believe that we are not required to cover the employees who waived the benefits, the local government
may change its policy and ask us to broaden our insurance coverage to those who have specifically waived their rights.
The
current tensions in international trade and rising political tensions, particularly between U.S. and China, may adversely impact our
business, financial condition, and results of operations.
Although cross-border business
may not be an area of our focus, if we plan to expand our business internationally in the future, any unfavorable government policies
on international trade, such as capital controls or tariffs, may affect the demand for our products and services, impact our competitive
position, or prevent us from being able to conduct business in certain countries. If any new tariffs, legislation, or regulations are
implemented, or if existing trade agreements are renegotiated, such changes could adversely affect our business, financial condition,
and results of operations. Recently, there have been heightened tensions in international economic relations, such as the one between
the United States and China. The U.S. government has recently imposed, and has recently proposed to impose additional, new, or higher
tariffs on certain products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded
by imposing, and proposing to impose additional, new, or higher tariffs on certain products imported from the United States. Following
mutual retaliatory actions for months, on January 15, 2020, the United States and China entered into the Economic and Trade
Agreement between the United States of America and the People’s Republic of China as a phase one trade deal, effective on February 14,
2020.
In
addition, political tensions between the United States and China have escalated due to, among other things, trade disputes, the
COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative
Region and the PRC central government and the executive orders issued by U.S. President Donald J. Trump in August 2020 that prohibit
certain transactions with certain Chinese companies and their applications. Rising political tensions could reduce levels of trades,
investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse
effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse
effect on our business, prospects, financial condition and results of operations.
Although
the direct impact of the current international trade tensions and political tensions between the United States and China, and any
escalation of such tensions, on the paper making industry in China is uncertain, the negative impact on general, economic, political
and social conditions may adversely impact our business, financial condition and results of operations.
Risks
Related to Our Corporate Structure
Our
current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress, China’s national legislative body (the “NPC”) approved the
Foreign Investment Law, which became effective on January 1, 2020. Since it is relatively new, uncertainties exist in relation to
its interpretation and its implementation rules that are yet to be issued. The Foreign Investment Law does not explicitly classify whether
variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises
if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under the definition
of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws,
administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions
of the State Council to provide for contractual arrangements as a form of foreign investment. There can be no assurance that our control
over our consolidated VIEs through contractual arrangements will not be deemed as a foreign investment in the future.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that
operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Special
Administrative Measures for Market Access of Foreign Investment (Negative List), which was approved by the CPC Central Committee and
the State Council and issued by the State Development and Reform Commission and the Ministry of Commerce with an effective date of July 30,
2019and renew on January 1, 2022. The Foreign Investment Law provides that foreign-invested entities operating in “restricted”
or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities.
If our control over our consolidated VIEs through contractual arrangements are deemed as foreign investment in the future, and any business
of our consolidated VIEs is considered “restricted” or “prohibited” from foreign investment under the “negative
list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that
allow us to have control over our consolidated VIEs may be deemed as invalid and illegal, and we may be required to unwind such contractual
arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.
Furthermore,
if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
Any
failure by our consolidated VIEs or their shareholders to perform their obligations under our contractual arrangements with them would
have a material adverse effect on our business.
We,
through our wholly foreign-owned enterprise in the PRC, have entered into a series of contractual arrangements with our consolidated
VIEs and their shareholders. For a description of these contractual arrangements, see “Overview and Corporation History.”
If our consolidated VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements, we
may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies
under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be
effective under PRC laws. For example, if the shareholders of our consolidated VIEs were to refuse to transfer their equity interests
in the consolidated VIEs to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if
they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual
obligations. In addition, if there are any disputes or governmental proceedings involving any interest in such shareholders’ equity
interests in our VIEs, our ability to exercise shareholders’ rights or foreclose the equity interest pledges according to the contractual
arrangements may be impaired. If these disputes or proceedings were to impair our control over our VIEs, we may not be able to maintain
effective control over our business operations in the PRC and thus would not be able to continue to consolidate our VIEs’ financial
results, which would in turn result in a material adverse effect on our business, operations and financial condition.
In
order to comply with PRC regulatory requirements, we operate our businesses through companies with which we have contractual relationships
but in which we do not have controlling ownership.
We
do not have direct or indirect equity ownership of Dongfang Paper which operates a majority of our business. Although we have entered
into contractual arrangements with Dongfang Paper and its individual owners pursuant to which we receive an economic interest in Dongfang
Paper, and exert a controlling influence over Dongfang Paper, in a manner substantially similar to a controlling equity interest, these
contractual arrangements are not as effective in providing control over Dongfang Paper as direct ownership. For example, Dongfang Paper
may be unwilling or unable to perform their contractual obligations under our commercial agreements, including payment of consulting
fees under the Exclusive Technical Service and Business Consulting Agreement as they become due. If that were to occur, we would not
be able to conduct our operations in the manner currently planned. In addition, we may not succeed in enforcing our rights under the
contractual arrangements insofar as our contractual rights and legal remedies under Chinese law may be inadequate. Furthermore, Dongfang
Paper may seek to renew their agreements on terms that are disadvantageous to us. If we are unable to renew these agreements on favorable
terms when these agreements expire, or to enter into similar agreements with other parties, we will lose control of Dongfang Paper.
Because
we rely on the consulting services agreement with Dongfang Paper for essentially all of our revenue and cash flows, any difficulty for
Dongfang Paper to pay consulting fees to Baoding Shengde under the consulting agreement may have a material adverse effect on our operations.
We
are a holding company and currently conduct business through Dongfang Paper in China. As a result, we rely on payments from the consulting
services agreement which forms a part of the contractual arrangements between Baoding Shengde and Dongfang Paper. Since Baoding Shengde
is not a legal shareholder of Dongfang Paper under PRC statutes, the arrangement for Dongfang Paper to pay a substantial portion of its
net income to Baoding Shengde may be challenged by the PRC government, which could prevent us from receiving required funds or making
required payments to some of our service providers.
If the PRC government determines that the contractual agreements
constituting part of our VIE structure do not comply with applicable PRC regulations , or if these regulations change or are interpreted
differently in the future, we may be unable to assert our contractual rights over the assets of the VIE, and our common stock may decline
in value.
Recently, the PRC government
adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to variable
interest entities. There are currently no relevant laws or regulations in the PRC that prohibit companies whose entity interests are within
the PRC from listing on overseas stock exchanges. Although we believe that our corporate structure and contractual arrangements comply
with current applicable PRC laws and regulations, in the event that PRC government determines that the contractual arrangements constituting
part of our VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future,
we may be unable to assert our contractual rights over the assets of the VIE, and our common stock may decline in value or be worthless.
Additionally, our common stock may decline in value or become worthless if we are unable to assert our contractual control rights over
the assets of our PRC Subsidiary that conducts all or substantially all of our business operations.
The
contractual arrangements under a VIE Structure may not be as effective as direct ownership in respect of our relationship with the VIE,
and thus, we may incur substantial costs to enforce the terms of the arrangements, which we may not be able to enforce at all.
The
contractual arrangements may not be as effective as direct ownership in respect of our relationship with the VIE. For example, the VIE
and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations
in an acceptable manner or taking other actions that are detrimental to our interests. If we had direct ownership of the VIE, we would
be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIE, which in turn could implement
changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the VIE Agreements,
we rely on the performance by the VIE and its shareholders of their obligations under the contracts to exercise control over the VIE.
The shareholders of the consolidated VIE may not act in the best interests of our company or may not perform their obligations under
these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual
arrangements with the VIE.
If
the VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial
costs and expend additional resources to enforce such arrangements. For example, if the shareholders of the VIE refuse to transfer their
equity interest in the VIE to us or our designee if we exercise the purchase option pursuant to the contractual arrangements, or if they
otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
In addition, if any third parties claim any interest in such shareholders’ equity interests in the VIE, our ability to exercise
shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other
disputes between the shareholders of the VIE and third parties were to impair our relationship with the VIE, our ability to consolidate
the financial results of the VIE would be affected, which would in turn result in a material adverse effect on the business, operations
and financial condition.
The
shareholders of Dongfang Paper may have actual or potential conflicts of interests with us, which may adversely affect our business.
As of the date of this annual
report, we are not aware of any conflicts between the shareholders of the VIE and IT Tech Packaging. However, the shareholders of Dongfang
Paper, the VIE, may have actual or potential conflicts of interest with IT Tech Packaging in the future. These shareholders may refuse
to sign or breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements IT Tech Packaging has with them
and the VIE, which would have a material and adverse effect on IT Tech Packaging’ ability to effectively control the VIE and receive
economic benefits from them. For example, the shareholders may be able to cause IT Tech’ agreements with the VIE to be performed
in a manner adverse to IT Tech Packaging by, among other things, failing to remit payments due under the contractual arrangements to IT
Tech Packaging on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act
in the best interests of IT Tech Packagingor such conflicts will be resolved in IT Tech Packaging’s favor. Currently, IT Tech Packaging
does not have any arrangements to address potential conflicts of interest between these shareholders and IT Tech Packaging. If we cannot
resolve any conflict of interest or dispute between IT Tech Packaging and these shareholders, IT Tech Packaging would have to rely on
legal proceedings, which could result in disruption of IT Tech Packaging’s business and subject IT Tech Packaging to substantial
uncertainty as to the outcome of any such legal proceedings.
Our
Chairman, Chief Executive Officer and 5.4% shareholder, Zhenyong Liu, owns 93.39% of the equity interest in Dongfang Paper. Conflicts
of interests between his duties to IT Tech and to Dongfang Paper may arise. We cannot assure you that when conflicts of interest arise,
he will act in the best interests of IT Tech or that any conflict of interest will be resolved in our favor. These conflicts may result
in management decisions that could negatively affect our operations and potentially result in the loss of opportunities.
We
may lose the ability to use and enjoy assets held by the VIE that are material to the operation of its business if the entity goes bankrupt
or becomes subject to a dissolution or liquidation proceeding.
As
part of our contractual arrangements with the VIE, the entity holds certain assets that are material to the operation of our business,
including permits, domain names and IP rights. If the VIE goes bankrupt and all or part of its assets become subject to liens or rights
of third-party creditors, we may be unable to continue some or all of its business activities, which could adversely affect our business,
financial condition and results of operations. Under the contractual arrangements, the VIE may not, in any manner, sell, transfer, mortgage
or dispose of its assets or legal or beneficial interests in the business without our prior consent. If the VIE undergoes a voluntary
or involuntary liquidation proceeding, the independent third party creditors may claim rights to some or all of these assets, thereby
hindering our ability to operate our business, which could adversely affect our business, financial condition and results of operations.
Our
arrangements with Dongfang Paper and its shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities which
could have an adverse effect on our income and expenses.
We
could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with Dongfang Paper and its
shareholders were not entered into based on arm’s length negotiations. If the PRC tax authorities determine that these contracts
were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer
pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
We
may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by the VIE, which could severely disrupt
our business, render us unable to conduct some of our business operations and constrain our growth.
IT
Tech Packaging relies on contractual arrangements with the VIE to use, or otherwise benefit from, certain foreign restricted licenses
and permits that it needs or may need in the future as its business continues to expand. The contractual arrangements contain terms that
specifically obligate the VIE’s shareholders to ensure the valid existence of the VIE and restrict the disposal of material assets
of the VIE. However, in the event the VIE’s shareholders breach the terms of these contractual arrangements and voluntarily
liquidate the VIE, or the VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors,
or is otherwise disposed of without IT Tech’s consent, IT Tech may be unable to conduct its business operations or otherwise benefit
from the assets held by the VIE, which could have an adverse effect on IT Tech’s business, financial condition and results of operations.
Furthermore, if the VIE undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors
may claim rights to some or all of the assets of the VIE, thereby hindering IT Tech’s ability to operate its business.
The
exercise of our option to purchase part or all of the equity interests in Dongfang Paper under the Call Option Agreement might be subject
to approval by the PRC government. Our failure to obtain this approval may impair our ability to substantially control Dongfang Paper
and could result in actions by Dongfang Paper that conflict with our interests.
Our
Call Option Agreement with Dongfang Paper and its shareholders gives our Chinese subsidiary, Baoding Shengde or its designated entity
or natural person, the option to purchase all or part of the equity interests in Dongfang Paper. The option may not be exercised by Baoding
Shengde if the exercise would violate any applicable laws and regulations in China or cause any license or permit held by, and necessary
for the operation of Dongfang Paper, to be cancelled or invalidated. Under the laws of China, if a foreign entity, through a foreign
investment company that it invests in, acquires a domestic related company, China’s regulations regarding mergers and acquisitions
may technically apply to the transaction. If these regulations apply, an examination and approval of the transaction by China’s
Ministry of Commerce (“MOFCOM”), or its local counterparts would be required. In addition, an appraisal of the equity interest
or the assets to be acquired would also be mandatory. Since the scope of business activities (making of cultural paper products) as defined
in the business license of Baoding Shengde does not involve the MOFCOM approval and monitoring, we do not believe at this time that an
approval or an appraisal is required for Baoding Shengde to exercise its option to acquire Dongfang Paper. In light of the different
views on this issue, however, it is possible that the central MOFCOM office in Beijing will issue a standardized opinion imposing the
approval and appraisal requirement. If we are not able to purchase the equity of Dongfang Paper, then we will lose a substantial portion
of our ability to control Dongfang Paper and our ability to ensure that Dongfang Paper will act in our interests.
Risks
Related to Our Common Stock
The
recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable
Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of
their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to investing
in our securities.
On
April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint
statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including
China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers
in China and higher risks of fraud in emerging markets.
On
May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily
operating in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the
board of directors for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or
listed company based on the qualifications of the company’s auditor. We are very likely to be deemed as a company primarily
operating in a Restrictive Market under such proposed rules of Nasdaq. Therefore, Nasdaq might apply the additional and more
stringent criteria for our initial and continued listing, which might cause delay or even denial of our listing
application.
On
May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, or HFCAA, requiring a foreign company to certify
it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign
auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years,
the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives
approved the Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed
into law.
On
March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure
requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report
on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction
and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that
jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required
to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction,
and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence
on, such a registrant.
On
June 22, 2021, the U.S. Senate passed Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if passed
by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering
the prohibitions under the Holding Foreign Companies Accountable Act from three years to two.
On
September 22, 2021, the PCAOB adopted rules to create a framework for the PCAOB to use when determining, as contemplated under the HFCAA,
whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because
of a position taken by one or more authorities in that jurisdiction.
On
December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the Holding
Foreign Companies Accountable Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit
report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or
investigate completely because of a position taken by an authority in foreign jurisdictions.
On
December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely
registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China, because of a position
taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because
of a position taken by one or more authorities in Hong Kong.. The PCAOB has made such designations as mandated under the HFCAA. Pursuant
to each annual determination by the PCAOB, the SEC will, on an annual basis, identify issuers that have used non-inspected audit firms
and thus are at risk of such suspensions in the future.
The
PCAOB is currently unable to conduct inspections in China without the approval of Chinese government authorities. If it is later determined
that the PCAOB is unable to inspect or investigate our auditor completely, investors may be deprived of the benefits of such inspection.
Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections of audit work undertaken
in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures, could result
in a lack of assurance that our financial statements and disclosures are adequate and accurate.
Our auditor, WWC, P.C., Certified
Public Accountants, is an independent registered public accounting firm with the PCAOB, and as an auditor of publicly traded companies
in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the
applicable professional standards. WWC, P.C., Certified Public Accountants, is based in the United States and has been inspected by the
PCAOB on a regular basis, with the last inspection in November 2021. WWC, P.C., Certified Public Accountants, is not headquartered in
mainland China or Hong Kong and was not identified as a firm subject to the determinations announced by the PCAOB on December 16, 2021.
Should the PCAOB be unable to fully conduct inspection of our auditor’s work papers in China, it will make it difficult to evaluate
the effectiveness of our auditor’s audit procedures or equity control procedures. Investors may consequently lose confidence in
our reported financial information and procedures or quality of the financial statements, which would adversely affect us and our securities.
Moreover, if trading in our securities is prohibited under the HFCAA in the future because the PCAOB determines that it cannot inspect
or fully investigate our auditor at such future time, an exchange may determine to delist our securities.
If
we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner, our business could be harmed and our
stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of U.S. public companies’
internal control over financial reporting. The standards that must be met for management to assess the internal control over financial
reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards.
While we have not detected any significant deficiency or material weakness in our internal control and with respect to the assessment
of the internal control for the year ended December 31, 2021, we cannot guarantee the implementation of controls and procedures in future
years to be without any significant deficiency or material weakness.
If
we become directly subject to the scrutiny involving U.S. listed Chinese companies, we may have to expend significant resources to investigate
and/or defend the matter, which could harm our business operations, stock price and reputation.
U.S.
public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors, financial
commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes,
a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny,
the publicly traded stock of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased
in value. Many of these companies are now subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal
and/or external investigations into the allegations. If we become the subject of any such scrutiny, whether any allegations are true
or not, we may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or
allegations will be costly and time-consuming and distract our management from our business plan and could result in our reputation
being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
Our
officers and directors control us through their positions and stock ownership and their interests may differ from other stockholders.
As
of March 1, 2021, there were 96,968,400 shares of our common stock issued and outstanding. Mr. Zhenyong Liu, our Chief Executive Officer,
beneficially owns approximately 4.7% of our common stock. As a result, he is able to influence the outcome of stockholder votes on various
matters, including the election of directors and extraordinary corporate transactions including business combinations. Yet Mr. Liu’s
interests may differ from those of other stockholders. Furthermore, ownership of 4.7% of our common stock by Mr. Liu reduces the public
float and liquidity, and may affect the market price, of our common stock as traded on the NYSE American.
We
may not continue to pay cash dividends and any return on investment may be limited to the value of our common stock.
While
we intend to retain the majority of any future earnings for use in the operation and expansion of our business, we did declare four quarterly
cash dividends in April 2012 and November 2013. Although it is likely that our Board of Directors will continue the quarterly cash dividend
as a regular dividend policy in the coming years, there is no guarantee that the cash dividend will not be discontinued or reduced. Should
we decide to continue the cash dividend, as a holding company, our ability to pay dividends and meet other obligations depends upon the
receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of local currency into
U.S. dollars or other hard currency and other regulatory restrictions.
Our
common stock may be affected by limited trading volume and may fluctuate significantly.
Our
common stock is traded on the NYSE American. Although a trading market has developed for our common stock, there can be no assurance
that the trading market for our common stock will be sustained. Failure to maintain a trading market for our common stock may adversely
affect our shareholders’ ability to sell our common stock in short time periods, or at all. Our common stock has experienced, and
may experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common
stock.
Future
financings may dilute stockholders or impair our financial condition.
In
the future, we may need to raise additional funds through public or private financing, which might include the sale of equity securities.
The issuance of equity securities could result in financial and voting dilution to our existing stockholders. The issuance of debt could
result in effective subordination of stockholders’ interests to the debt, create the possibility of default, and limit our financial
and business alternatives.