UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549



FORM
10-Q



(Mark
One)

☒
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the quarterly period ended June 30, 2019



or



☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the transition period from _______ to _______



Commission
file number: 001-34577



|IT
    TECH PACKAGING, INC.                               
|----------------------------------------------------------
|(Exact
    name of registrant as specified in its charter)



|Nevada                                                                                                                  |  | 20-4158835                                                                                
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|(State
                                         or other jurisdiction of
        incorporation
        or organization) |  | (IRS
                                         Employer
        identification
        No.)



|Science
                                         Park, Juli Rd, Xushui District, Baoding City
        Hebei
        Province, The People’s Republic of China 072550
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Address
    of principal executive offices and Zip Code)                                                                                                          



|011
    - (86) 312-8698215                              
|--------------------------------------------------------
|(Registrant’s
    telephone number, including area code)



|                                                                                      
|--------------------------------------------------------------------------------------
|(Former
    name, former address and former fiscal year, if changed since last report)



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒   No  ☐



Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).   Yes  ☒   No  ☐



Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



|Large
    accelerated filer | ☐                           | Accelerated
    filer         | ☐
|--------------------------- | --------------------------- | ----------------------------- | -
|Non-accelerated
    filer   | ☒                           | Smaller
    reporting company | ☒
|                            | Emerging
    growth company | ☐                            



If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):   Yes  ☐   No  ☒



Securities
registered pursuant to Section 12(b) of the Act:





|Title of each class            |  | Trading Symbol(s) |  | Name of each exchange on which registered
|------------------------------ |  | ----------------- |  | -----------------------------------------
|Common Stock, par value $0.001 |  | ITP               |  | NYSE MKT                                 



As
of August 08, 2019, there were 22,022,316 shares of the registrant’s common stock, par value $0.001, outstanding.




















TABLE
OF CONTENTS



|Part
    I. - FINANCIAL INFORMATION                                                               | 1 
|------------------------------------------------------------------------------------------------- | --
|                                                                                                  |   
|Item
    1. Financial Statements                                                                  | 1 
|                                                                                                  |   
|Item
    2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23
|                                                                                                  |   
|Item
    3. Quantitative and Qualitative Disclosures About Market Risk                            | 38
|                                                                                                  |   
|Item
    4. Controls and Procedures                                                               | 38
|                                                                                                  |   
|Part
    II. - OTHER INFORMATION                                                                  | 39
|                                                                                                  |   
|Item
    1. Legal Proceedings                                                                     | 39
|                                                                                                  |   
|Item
    1A. Risk Factors                                                                         | 39
|                                                                                                  |   
|Item
    2. Unregistered Sales of Equity Securities and Use of Proceeds                           | 39
|                                                                                                  |   
|Item
    3. Defaults Upon Senior Securities                                                       | 39
|                                                                                                  |   
|Item
    4. Mine Safety Disclosures                                                               | 39
|                                                                                                  |   
|Item
    5. Other Information                                                                     | 39
|                                                                                                  |   
|Item
    6. Exhibits                                                                              | 39
|                                                                                                  |   
|SIGNATURES                                                                                        | 40





i







PART
I - FINANCIAL INFORMATION



|Item
    1. | Financial
    Statements
|----------- | ------------------------



IT
TECH PACKAGING, INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS

AS
OF JUNE 30, 2019 AND DECEMBER 31, 2018

(Unaudited)



|                                                                                                                                                                                     |  | June 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ----------- | - | ------------ | -
|                                                                                                                                                                                     |  | 2019     |             |   | 2018         |  
|ASSETS                                                                                                                                                                               |  |          |             |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Current Assets                                                                                                                                                                       |  |          |             |   |              |  
|Cash and bank balances                                                                                                                                                               |  | $        | 1,134,371   |   |              | $
|Restricted cash                                                                                                                                                                      |  |          | -           |   |              |  
|Accounts receivable (net of allowance for doubtful accounts of $64,739 and $58,707 as of June 30, 2019 and December 2018, respectively)                                              |  |          | 3,172,277   |   |              |  
|Inventories                                                                                                                                                                          |  |          | 5,795,685   |   |              |  
|Prepayments and other current assets                                                                                                                                                 |  |          | 6,245,313   |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Total current assets                                                                                                                                                                 |  |          | 16,347,646  |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Property, plant, and equipment, net                                                                                                                                                  |  |          | 160,394,499 |   |              |  
|Value-added tax recoverable                                                                                                                                                          |  |          | 2,731,423   |   |              |  
|Deferred tax asset non-current                                                                                                                                                       |  |          | 9,503,459   |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Other non-current assets                                                                                                                                                             |  |          | 46,578,883  |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Total Assets                                                                                                                                                                         |  | $        | 235,555,910 |   |              | $
|                                                                                                                                                                                     |  |          |             |   |              |  
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                 |  |          |             |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Current Liabilities                                                                                                                                                                  |  |          |             |   |              |  
|Short-term bank loans                                                                                                                                                                |  | $        | 6,545,740   |   |              | $
|Current portion of long-term loans from credit union                                                                                                                                 |  |          | 320,014     |   |              |  
|Accounts payable                                                                                                                                                                     |  |          | 1,122,764   |   |              |  
|Advance from customers                                                                                                                                                               |  |          | 100,635     |   |              |  
|Notes payable                                                                                                                                                                        |  |          | -           |   |              |  
|Due to related parties                                                                                                                                                               |  |          | 573,744     |   |              |  
|Accrued payroll and employee benefits                                                                                                                                                |  |          | 251,826     |   |              |  
|Other payables and accrued liabilities                                                                                                                                               |  |          | 52,874,954  |   |              |  
|Income taxes payable                                                                                                                                                                 |  |          | 667,085     |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Total current liabilities                                                                                                                                                            |  |          | 62,456,762  |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Loans from credit union                                                                                                                                                              |  |          | 6,894,846   |   |              |  
|Loans from a related party                                                                                                                                                           |  |          | 2,181,913   |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Total liabilities (including amounts of the consolidated VIE without recourse to the Company of $68,802,820 and $34,008,908 as of June 30, 2019 and December 31, 2018, respectively) |  |          | 71,533,521  |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Commitments and Contingencies                                                                                                                                                        |  |          |             |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Stockholders’ Equity                                                                                                                                                                 |  |          |             |   |              |  
|Common stock, 500,000,000 shares authorized, $0.001 par value per share, 22,022,316 shares issued                                                                                    |  |          | 22,360      |   |              |  
|Additional paid-in capital                                                                                                                                                           |  |          | 51,137,319  |   |              |  
|Statutory earnings reserve                                                                                                                                                           |  |          | 6,080,574   |   |              |  
|Accumulated other comprehensive loss                                                                                                                                                 |  |          | (3,518,955  | ) |              |  
|Retained earnings                                                                                                                                                                    |  |          | 110,301,091 |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Total stockholders’ equity                                                                                                                                                           |  |          | 164,022,389 |   |              |  
|                                                                                                                                                                                     |  |          |             |   |              |  
|Total Liabilities and Stockholders’ Equity                                                                                                                                           |  | $        | 235,555,910 |   |              | $





See
accompanying notes to condensed consolidated financial statements.





1







IT
TECH PACKAGING, INC.

CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2019 AND 2018

(Unaudited)





|                                                               |  | Three
    Months Ended |             |   | Six
    Months Ended |  
|-------------------------------------------------------------- |  | ---------------------- | ----------- | - | -------------------- | -
|                                                               |  | June
    30,           |             |   | June
    30,         |  
|                                                               |  | 2019                   |             |   | 2018                 |  
|                                                               |  |                        |             |   |                      |  
|Revenues                                                       |  | $                      | 33,619,948  |   |                      | $
|                                                               |  |                        |             |   |                      |  
|Cost
    of sales                                              |  |                        | (30,711,819 | ) |                      |  
|                                                               |  |                        |             |   |                      |  
|Gross
    Profit                                               |  |                        | 2,908,129   |   |                      |  
|                                                               |  |                        |             |   |                      |  
|Selling,
    general and administrative expenses               |  |                        | (2,407,859  | ) |                      |  
|Gain
    (Loss) from disposal of property, plant and equipment |  |                        | -           |   |                      |  
|Gain
    on acquisition of a subsidiary                        |  |                        | 31,397      |   |                      |  
|                                                               |  |                        |             |   |                      |  
|Income
    (Loss) from Operations                              |  |                        | 531,667     |   |                      |  
|                                                               |  |                        |             |   |                      |  
|Other
    Income (Expense):                                    |  |                        |             |   |                      |  
|Interest
    income                                            |  |                        | 1,556       |   |                      |  
|Subsidy
    income                                             |  |                        | 236,288     |   |                      |  
|Interest
    expense                                           |  |                        | (238,771    | ) |                      |  
|                                                               |  |                        |             |   |                      |  
|Income
    (Loss) before Income Taxes                          |  |                        | 530,740     |   |                      |  
|                                                               |  |                        |             |   |                      |  
|Provision
    for Income Taxes                                 |  |                        | (80,670     | ) |                      |  
|                                                               |  |                        |             |   |                      |  
|Net
    Income (Loss)                                          |  |                        | 450,070     |   |                      |  
|                                                               |  |                        |             |   |                      |  
|Other
    Comprehensive Loss                                   |  |                        |             |   |                      |  
|Foreign
    currency translation adjustment                    |  |                        | (3,548,683  | ) |                      |  
|                                                               |  |                        |             |   |                      |  
|Total
    Comprehensive Loss                                   |  | $                      | (3,098,613  | ) |                      | $
|                                                               |  |                        |             |   |                      |  
|Earnings
    (Losses) Per Share:                               |  |                        |             |   |                      |  
|                                                               |  |                        |             |   |                      |  
|Basic
    and Diluted Earnings (Losses) per Share              |  | $                      | 0.02        |   |                      | $
|                                                               |  |                        |             |   |                      |  
|Outstanding
    – Basic and Diluted                            |  |                        | 22,022,316  |   |                      |  



See
accompanying notes to condensed consolidated financial statements.





2







IT
TECH PACKAGING, INC.

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(Unaudited)



|                                                                                          |  | Six
    Months Ended |            
|----------------------------------------------------------------------------------------- |  | -------------------- | -----------
|                                                                                          |  | June
    30,         |            
|                                                                                          |  | 2019                 |            
|                                                                                          |  |                      |            
|Cash
    Flows from Operating Activities:                                                 |  |                      |            
|Net income                                                                                |  | $                    | (2,272,525 
|Adjustments to reconcile
    net income to net cash provided by operating activities:     |  |                      |            
|Depreciation and amortization                                                             |  |                      | 7,789,459  
|Loss from disposal
    and impairment of property, plant and equipment                    |  |                      | -          
|Allowance for bad
    debts                                                               |  |                      | 6,224      
|Gain on acquisition
    of a subsidiary                                                   |  |                      | (31,397    
|Deferred tax                                                                              |  |                      | (1,259,134 
|Changes in operating
    assets and liabilities:                                          |  |                      |            
|Accounts receivable                                                                       |  |                      | (311,265   
|Prepayments and other
    current assets                                                  |  |                      | 60,694     
|Inventories                                                                               |  |                      | (2,920,950 
|Accounts payable                                                                          |  |                      | 502,310    
|Advance from customers                                                                    |  |                      | 102,170    
|Notes payable                                                                             |  |                      | (3,691,999 
|Related parties                                                                           |  |                      | 161,857    
|Accrued payroll and
    employee benefits                                                 |  |                      | 39,237     
|Other payables and
    accrued liabilities                                                |  |                      | 558,026    
|Income
    taxes payable                                                                  |  |                      | 454,984    
|Net
    Cash (Used in) Provided by Operating Activities                                   |  |                      | (812,309   
|                                                                                          |  |                      |            
|Cash
    Flows from Investing Activities:                                                 |  |                      |            
|Purchases of property,
    plant and equipment                                            |  |                      | (3,472,355 
|Acquisition
    of a subsidiary                                                           |  |                      | (1,549,384 
|                                                                                          |  |                      |            
|Net
    Cash Used in Investing Activities                                                 |  |                      | (5,021,739 
|                                                                                          |  |                      |            
|Cash
    Flows from Financing Activities:                                                 |  |                      |            
|Proceeds from related
    party loans                                                     |  |                      | -          
|Repayments of related
    party loans                                                     |  |                      | -          
|Proceeds from short
    term bank loans                                                   |  |                      | 3,987,359  
|Proceeds from credit
    union loans                                                      |  |                      | 2,362,879  
|Repayment
    of bank loans                                                               |  |                      | (11,637,180
|                                                                                          |  |                      |            
|Net
    Cash (Used in) Provided by Financing Activities                                   |  |                      | (5,286,942 
|                                                                                          |  |                      |            
|Effect
    of Exchange Rate Changes on Cash and Cash Equivalents                          |  |                      | 137,936    
|                                                                                          |  |                      |            
|Net
    (Decrease) Increase in Cash and Cash Equivalents                                  |  |                      | (10,983,054
|                                                                                          |  |                      |            
|Cash,
    Cash Equivalents and Restricted Cash - Beginning of Period                      |  |                      | 12,117,425 
|                                                                                          |  |                      |            
|Cash,
    Cash Equivalents and Restricted Cash - End of Period                            |  | $                    | 1,134,371  
|                                                                                          |  |                      |            
|Supplemental
    Disclosure of Cash Flow Information:                                     |  |                      |            
|Cash
    paid for interest, net of capitalized interest cost                              |  | $                    | 445,860    
|Cash
    paid for income taxes                                                            |  | $                    | 222,278    
|                                                                                          |  |                      |            
|Cash and bank balances                                                                    |  |                      | 1,134,371  
|Restricted
    cash                                                                       |  |                      | -          
|Total
    cash, cash equivalents and restricted cash shown in the statement of cash flows |  |                      | 1,134,371  



See
accompanying notes to condensed consolidated financial statements.





3







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(1)
Organization and Business Background



IT
Tech Packaging, Inc. (the Company) was incorporated in the State of Nevada on December 9, 2005, under the name “Carlateral,
Inc.” Through the steps described immediately below, we became the holding company for Hebei Baoding Dongfang Paper Milling
Company Limited (“Dongfang Paper”), a producer and distributor of paper products in China, on October 29, 2007, and
effective December 21, 2007, we changed our name to “Orient Paper, Inc.”.



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,” and a new CUSIP number, 46527C100, 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. On June 1, 2009, Shengde Holdings Inc incorporated Baoding Shengde, a limited liability company organized
under the laws of the PRC. Because Baoding Shengde is a wholly-owned subsidiary of Shengde Holdings Inc, it is regarded as a wholly
foreign-owned entity under PRC law.





4







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



To
ensure proper compliance of the Company’s control over the ownership and operations of Dongfang Paper with certain PRC regulations,
on June 24, 2009, the Company entered into a series of contractual agreements (the “Contractual Agreements”)
with Dongfang Paper and Dongfang Paper Equity Owners via the Company’s wholly owned subsidiary Shengde Holdings Inc (“Shengde
Holdings”) a Nevada corporation and Baoding Shengde Paper Co., Ltd. (“Baoding Shengde”), a wholly foreign-owned
enterprise in the PRC with an original registered capital of $10,000,000 (subsequently increased to $60,000,000 in June 2010).
Baoding Shengde is mainly engaged in production and distribution of digital photo paper and is 100% owned by Shengde Holdings.
Prior to February 10, 2010, the Contractual Agreements included (i) Exclusive Technical Service and Business Consulting Agreement,
which generally 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;
(ii) Loan Agreement, which provides that Baoding Shengde will make a loan in the aggregate principal amount of $10,000,000 to
Dongfang Paper Equity Owners in exchange for each such shareholder agreeing to contribute all of its proceeds from the loan to
the registered capital of Dongfang Paper; (iii) Call Option Agreement, which generally provides, among other things, that Dongfang
Paper Equity Owners irrevocably grant to Baoding Shengde an option to purchase all or part of each owner’s equity interest
in Dongfang Paper. The exercise price for the options shall be RMB1 which Baoding Shengde should pay to each of Dongfang Paper
Equity Owner for all their equity interests in Dongfang Paper; (iv) Share Pledge Agreement, which provides that Dongfang Paper
Equity Owners will pledge all of their equity interests in Dongfang Paper to Baoding Shengde as security for their obligations
under the other agreements described in this section. Specifically, Baoding Shengde is entitled to dispose of the pledged equity
interests in the event that Dongfang Paper Equity Owners breach their obligations under the Loan Agreement or Dongfang Paper fails
to pay the service fees to Baoding Shengde pursuant to the Exclusive Technical Service and Business Consulting Agreement; and
(v) Proxy Agreement, which provides that Dongfang Paper Equity Owners shall irrevocably entrust a designee of Baoding Shengde
with such shareholder’s voting rights and the right to represent such shareholder to exercise such owner’s rights
at any equity owners’ meeting of Dongfang Paper or with respect to any equity owner 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 Dongfang Paper Equity Owners continue to hold any equity interest in Dongfang Paper. An Dongfang Paper Equity Owner will cease
to be a party to the agreement once it transfers its equity interests with the prior approval of Baoding Shengde. As the Company
had controlled Dongfang Paper since July 16, 2007 through Dongfang Holding and the trust until June 24, 2009, and continued to
control Dongfang Paper through Baoding Shengde and the Contractual Agreements, the execution of the Contractual Agreements is
considered as a business combination under common control.



On
February 10, 2010, Baoding Shengde and the Dongfang Paper Equity Owners entered into a Termination of Loan Agreement to terminate
the above-mentioned $10,000,000 Loan Agreement. Because of the Company’s decision to fund future business expansions through
Baoding Shengde instead of Dongfang Paper, the $10,000,000 loan contemplated was never made prior to the point of termination.
The parties believe the termination of the Loan Agreement does not in itself compromise the effective control of the Company over
Dongfang Paper and its businesses in the PRC.



An
agreement was also entered into among Baoding Shengde, Dongfang Paper and the Dongfang Paper Equity Owners on December 31, 2010,
reiterating that Baoding Shengde is entitled to 100% of the distributable profit of Dongfang Paper, pursuant to the above mentioned
Contractual Agreements. In addition, Dongfang Paper and the Dongfang Paper Equity Owners shall not declare any of Dongfang Paper’s
unappropriated earnings as dividend, including the unappropriated earnings of Dongfang Paper from its establishment to 2010 and
thereafter.





On June 25, 2019, Dongfang Paper entered into
an acquisition agreement with shareholder of Hebei Tengsheng Paper Co., Ltd.(“Hebei Tengsheng”), a limited liability
company organized under the laws of the PRC, pursuant to which Dongfang Paper will acquire Hebei Tengsheng. As a result, Hebei
Tengsheng becomes a wholly owned subsidiary of Dongfang Paper that manufactures and sells tissue paper products.



The
Company has no direct equity interest in Dongfang Paper. However, through the Contractual Agreements described above, the Company
is found to be the primary beneficiary (the “Primary Beneficiary”) of Dongfang Paper and is deemed to have the effective
control over Dongfang Paper’s activities that most significantly affect its economic performance, resulting in Dongfang
Paper and its subsidiary being treated as a controlled variable interest entity of the Company in accordance with Topic 810 - Consolidation
of the Accounting Standards Codification (the “ASC”) issued by the Financial Accounting Standard Board (the “FASB”).
The revenue generated from Dongfang Paper and Hebei Tengsheng for the three months and six months ended June 30, 2019 and 2018
was accounted for 100% and 99.96%, respectively, of the Company’s total revenue. Dongfang Paper and Hebei Tengsheng also
accounted for 92.30% and 90.6% of the total assets of the Company as of June 30, 2019 and December 31, 2018, respectively.





5







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



As
of June 30, 2019 and December 31, 2018, details of the Company’s subsidiaries and variable interest entities are as follows:



|                                      |  | Date of Incorporation |  | Place
                                   of Incorporation or |  | Percentage of |         |    |                   
|------------------------------------- |  | --------------------- |  | ------------------------------------------------------------ |  | ------------- | ------- | -- | ------------------
|Name                                  |  | or Establishment      |  | Establishment                                                |  | Ownership     |         |    | Principal Activity
|Subsidiary:                           |  |                       |  |                                                              |  |               |         |    |                   
|Dongfang
    Holding                  |  | November 13, 2006     |  | BVI                                                          |  |               | 100     | %  |                   
|Shengde
    Holdings                  |  | February 25, 2009     |  | State of Nevada                                              |  |               | 100     | %  |                   
|Baoding
    Shengde                   |  | June 1, 2009          |  | PRC                                                          |  |               | 100     | %  |                   
|                                      |  |                       |  |                                                              |  |               |         |    |                   
|Variable
    interest entity (“VIE”): |  |                       |  |                                                              |  |               |         |    |                   
|Dongfang
    Paper                    |  | March 10, 1996        |  | PRC                                                          |  |               | Control | *  |                   
|Hebei
    Tengsheng                   |  | April 7, 2011         |  | PRC                                                          |  |               | Control | ** |                   



|*  | Dongfang
    Paper is treated as a 100% controlled variable interest entity of the Company.
|-- | -------------------------------------------------------------------------------------------
|** | Hebei
    Tengsheng is 100% owned subsidiary of Dongfang Paper.                            



However,
uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found to be in violation
of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through its subsidiary, to
enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIE may have interests that are different
than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the
aforementioned agreements.



In
addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future
PRC law, the Company may be subject to penalties, which may include, but not be limited to, the cancellation or revocation of
the Company’s business and operating licenses, being required to restructure the Company’s operations or being required
to discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material
and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate
or control the VIE, which may result in deconsolidation of the VIE. The Company believes the possibility that it will no longer
be able to control and consolidate its VIE will occur as a result of the aforementioned risks and uncertainties is remote.





6







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The
Company has aggregated the financial information of Dongfang Paper in the table below. The aggregate carrying value of Dongfang
Paper’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed
consolidated balance sheets as of June 30, 2019 and December 31, 2018 are as follows:





|                                                     |  | June 30, |             |  | December 31, |  
|---------------------------------------------------- |  | -------- | ----------- |  | ------------ | -
|                                                     |  | 2019     |             |  | 2018         |  
|                                                     |  |          |             |  |              |  
|ASSETS                                               |  |          |             |  |              |  
|                                                     |  |          |             |  |              |  
|Current Assets                                       |  |          |             |  |              |  
|Cash and bank balances                               |  | $        | 1,071,471   |  |              | $
|Restricted cash                                      |  |          | -           |  |              |  
|Accounts receivable                                  |  |          | 3,172,277   |  |              |  
|Inventories                                          |  |          | 5,778,202   |  |              |  
|Prepayments and other current assets                 |  |          | 6,225,179   |  |              |  
|                                                     |  |          |             |  |              |  
|Total current assets                                 |  |          | 16,247,129  |  |              |  
|                                                     |  |          |             |  |              |  
|Property, plant, and equipment, net                  |  |          | 146,700,889 |  |              |  
|Deferred tax asset non-current                       |  |          | 7,900,595   |  |              |  
|Other non-current assets                             |  |          | 46,578,883  |  |              |  
|                                                     |  |          |             |  |              |  
|Total Assets                                         |  | $        | 217,427,496 |  |              | $
|                                                     |  |          |             |  |              |  
|LIABILITIES                                          |  |          |             |  |              |  
|                                                     |  |          |             |  |              |  
|Current Liabilities                                  |  |          |             |  |              |  
|Short-term bank loans                                |  | $        | 6,545,740   |  |              | $
|Current portion of long-term loans from credit union |  |          | 320,014     |  |              |  
|Accounts payable                                     |  |          | 1,122,764   |  |              |  
|Notes payable                                        |  |          | -           |  |              |  
|Due to related parties                               |  |          | 275,579     |  |              |  
|Accrued payroll and employee benefits                |  |          | 247,336     |  |              |  
|Other payables and accrued liabilities               |  |          | 52,874,917  |  |              |  
|Income taxes payable                                 |  |          | 667,085     |  |              |  
|                                                     |  |          |             |  |              |  
|Total current liabilities                            |  |          | 62,053,435  |  |              |  
|                                                     |  |          |             |  |              |  
|Loans from credit union                              |  |          | 4,567,472   |  |              |  
|Loans from a related party                           |  |          | 2,181,913   |  |              |  
|                                                     |  |          |             |  |              |  
|Total liabilities                                    |  | $        | 68,802,820  |  |              | $



The
Company and its consolidated subsidiaries are not required to provide financial support to the VIE, and no creditor (or beneficial
interest holders) of the VIE have recourse to the assets of Company unless the Company separately agrees to be subject to such
claims. There are no terms in any agreements or arrangements, implicit or explicit, which require the Company or its subsidiaries
to provide financial support to the VIE. However, if the VIE does require financial support, the Company or its subsidiaries may,
at its option and subject to statutory limits and restrictions, provide financial support to the VIE.





7







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(2)
Basis of Presentation and Significant Accounting Policies



The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and
notes required by the United States of America generally accepted accounting principles (“GAAP”) for annual financial
statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2018 of the Company, and its subsidiaries and variable interest entity (which we sometimes
refer to collectively as “the Company”, “we”, “us” or “our”).



Principles
of Consolidation



Our
unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary
for a fair presentation of our financial position and results of operations. Such adjustments are of a normal recurring nature,
unless otherwise noted. The balance sheet as of June 30, 2019 and the results of operations for the six months ended June 30,
2019 are not necessarily indicative of the results to be expected for any future period.



Our
unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require
us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. We believe that the estimates, judgments and assumptions are reasonable, based on information available
at the time they are made. Actual results could differ materially from those estimates.



Valuation
of long-lived asset



The
Company reviews the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review.
The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets
and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost
to dispose.



Fair
Value Measurements



The
Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source
of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable
inputs, which may be used to measure fair value and include the following:



Level
1 - Quoted prices in active markets for identical assets or liabilities.



Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.



Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.





8







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.



The
Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable
judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts that
the Company could realize in a current market exchange. As of June 30, 2019 and December 31, 2018, the carrying value of the Company’s
short term financial instruments, such as cash and cash equivalents, accounts receivable, accounts and notes payable, short-term
bank loans, balance due to a related party and obligation under capital lease, approximate at their fair values because of the
short maturity of these instruments; while loans from credit union and loans from a related party approximate at their fair value
as the interest rates thereon are close to the market rates of interest published by the People’s Bank of China.



The
Company does not have any assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December
31, 2018.



Non-Recurring
Fair Value Measurements



The
Company reviews long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate the
possibility of impairment. For the continuing operations, long-lived assets are measured at fair value on a nonrecurring basis
when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. For discontinued
operations, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. The fair value of
these assets were determined using models with significant unobservable inputs which were classified as Level 3 inputs, primarily
the discounted future cash flow.



Share-Based
Compensation



The
Company uses the fair value recognition provision of ASC Topic 718, Compensation-Stock Compensation, which requires the
Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date
fair value of such instruments over the vesting period.



The
Company also applies the provisions of ASC Topic 505-50,Equity Based Payments to Non-Employees to account for
stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair
value of the consideration received or the fair value of the instruments issued in exchange for such services, whichever is more
reliably measurable.



Liquidity
and Going Concern





As of June 30, 2019 the Company
had current assets of $16,347,646 and current liabilities of $62,456,762 (including amounts due to related parties of
$298,165 and interest payable for related party loans of $663,878), resulting in a working capital deficit of
approximately $46,109,116; as of December 31, 2018, the Company had current assets of $24,158,872 and current liabilities of
$29,634,267 (including amounts due to related parties of $1,030,790), resulting in a working capital deficit of approximately
$5,475,395. The deficit as of June 30, 2019 was mainly attributed to the payable for acquisition of Hebei Tengsheng. On June
25, 2019, Dongfang Paper entered into an acquisition agreement with shareholder of Hebei Tengsheng, to buy up 100% shares of
Hebei Tengsheng with a purchase price of RMB 320 million (approximately $47 million). The payable will be due by December 25,
2019. If the amount is not fully paid off, the seller is offered an option to convert the outstanding amount to shares of
the Company. As of June 30, 2019, acquisition payable was $45,021,965, which was included in the current liabilities in
the consolidated balance sheet.



(3)
Restricted Cash



Restricted
cash was nil as of June 30, 2019. Restricted cash of $3,642,616 as of December 31, 2018 was presented for the cash deposited at
the Bank of Cangzhou for purpose of securing the bank acceptance notes from these banks (see Note (9)). The restriction has been
lifted upon the maturity of the notes payable on January 10, 2019.





9









IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(4)
Inventories



Raw
materials inventory includes mainly recycled paper board and recycled white scrap paper. Finished goods include mainly products
of corrugating medium paper, offset printing paper and tissue paper products. Inventories consisted of the following as of
June 30, 2019 and December 31, 2018:





|                                       |  | June
    30, |           |  | December
    31, |  
|-------------------------------------- |  | ------------ | --------- |  | ---------------- | -
|                                       |  | 2019         |           |  | 2018             |  
|Raw Materials                          |  |              |           |  |                  |  
|Recycled
    paper board               |  | $            | 3,097,650 |  |                  | $
|Recycled white scrap
    paper         |  |              | 724,506   |  |                  |  
|Coal & gas                             |  |              | 114,244   |  |                  |  
|Base
    paper and other raw materials |  |              | 218,117   |  |                  |  
|                                       |  |              | 4,154,517 |  |                  |  
|Semi-finished Goods                    |  |              | 33,906    |  |                  |  
|Finished Goods                         |  |              | 1,607,262 |  |                  |  
|Totals                                 |  | $            | 5,795,685 |  |                  | $



(5)
Prepayments and other current assets



Prepayments
and other current assets consisted of the following as of June 30, 2019 and December 31, 2018:



|                                     |  | June
    30, |           |  | December 31, |  
|------------------------------------ |  | ------------ | --------- |  | ------------ | -
|                                     |  | 2019         |           |  | 2018         |  
|Prepaid land lease                   |  | $            | 165,825   |  |              | $
|Prepayment for purchase of materials |  |              | 52,327    |  |              |  
|Value-added tax recoverable          |  |              | 5,750,644 |  |              |  
|Others                               |  |              | 276,517   |  |              |  
|                                     |  | $            | 6,245,313 |  |              | $





(6)
Property, plant and equipment, net



As
of June 30, 2019 and December 31, 2018, property, plant and equipment consisted of the following:



|                                                |  | June 30, |             |   | December 31, |  
|----------------------------------------------- |  | -------- | ----------- | - | ------------ | -
|                                                |  | 2019     |             |   | 2018         |  
|Property, Plant, and Equipment:                 |  |          |             |   |              |  
|Land use rights                                 |  | $        | 11,861,695  |   |              | $
|Building and improvements                       |  |          | 71,854,641  |   |              |  
|Machinery and equipment                         |  |          | 155,191,679 |   |              |  
|Vehicles                                        |  |          | 596,485     |   |              |  
|Construction in progress                        |  |          | 5,380,484   |   |              |  
|Totals                                          |  |          | 244,884,984 |   |              |  
|Less: accumulated depreciation and amortization |  |          | (84,490,485 | ) |              |  
|Property, Plant and Equipment, net              |  | $        | 160,394,499 |   |              | $











As of June 30, 2019 and December 31, 2018,
land use rights represented two parcel of state-owned lands located in Xushui District and Wei County of Hebei Province in China,
with lease terms of 50 years expiring from 2061 to 2066.





10







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Construction
in progress mainly represents payments for improvement of the office building and essentially all industrial-use buildings in
the Headquarters Compound (the “Industrial Buildings”).



As of June 30, 2019 and December 31, 2018,
certain property, plant and equipment of Dongfang Paper with net values of $4,883,169 and $5,782,640, respectively, have been pledged
pursuant to a long-term loan from credit union for Dongfang Paper. Land use right of Dongfang Paper with net values of $5,911,558
and $5,990,586 as of June 30, 2019 and December 31, 2018 were pledged for the bank loan from Industrial & Commercial Bank of
China. Land use right of Hebei Tengsheng with net value of $3,356,741 has been pledged for a bank loan from Industrial & Commercial
Bank of China of Dongfang Paper and another piece of land with a net value of $5,277,233 has been pledged for a long-term loan
from credit union of Baoding Shengde. See “Short-term bank loans ” and Long-term loans from credit unionunder Note (7), Loans Payable, for details of the transaction and asset collaterals.



Depreciation
and amortization of property, plant and equipment was $3,859,399 and $3,680,248 for the three months ended June 30, 2019 and 2018,
respectively. Depreciation and amortization of property, plant and equipment was $7,789,459 and $7,410,833 for the six months
ended June 30, 2019 and 2018, respectively.



(7)
Loans Payable



Short-term
bank loans



|                                                            |  |     |  | June
    30, |           |  | December 31, |  
|----------------------------------------------------------- |  | --- |  | ------------ | --------- |  | ------------ | -
|                                                            |  |     |  | 2019         |           |  | 2018         |  
|Industrial and Commercial
    Bank of China (“ICBC”) Loan 1 |  | (a) |  | $            | -         |  |              | $
|Bank of Cangzhou                                            |  | (b) |  |              | -         |  |              |  
|ICBC Loan 2                                                 |  | (c) |  |              | 2,618,296 |  |              |  
|ICBC Loan 3                                                 |  | (d) |  |              | 3,927,444 |  |              |  
|Total
    short-term bank loans                             |  |     |  | $            | 6,545,740 |  |              | $



|(a) | On
                                         February 6, 2018, the Company entered into a working capital loan agreement with the
                                         ICBC, with a balance of $4,079,730 as of December 31, 2018. The working capital
                                         loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral
                                         for the benefit of the bank. The loan bears a fixed interest rate of 5.4% per annum.
                                         The loan was due and repaid on January 28, 2019.                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | On
                                         January 2, 2018, the Company entered into a working capital loan agreement with the Bank
                                         of Cangzhou, with a balance of $5,099,662 as of December 31, 2018. The loan bore a fixed
                                         interest rate of 6.09% per annum. The working capital loan was secured by the Company’s
                                         land use right and guaranteed by the Company’s CEO and Baoding Shengde with its
                                         production equipment as collateral for the benefit of the bank. The loan was due and
                                         repaid on January 3, 2019.
|(c) | On
    November 22, 2018, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,618,296 and
    $2,622,683 as of June 30, 2019 and December 31, 2018, respectively. The working capital loan is secured by the Company’s
    land use right as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.741% per annum. The loan
    will be due by November 26, 2019.                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(d) | On
    January 28, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $3,927,444 as
    of June 30, 2019. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral
    for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will be due and repaid by
    January     30, 2020.                                                                                                                                                                                                                                                                                                          



As
of June 30, 2019, there were guaranteed short-term borrowings of $6,545,740 and unsecured bank loans of $nil. As of December 31,
2018, there were guaranteed short-term borrowings of $11,802,075 and unsecured bank loans of $nil.



The
average short-term borrowing rates for the three months ended June 30, 2019 and 2018 were approximately 4.77% and 5.59%, respectively.
The average short-term borrowing rates for the six months ended June 30, 2019 and 2018 were approximately 4.76% and 5.58%, respectively.





11







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Long-term
loans from credit union



As
of June 30, 2019 and December 31, 2018, loans payable to Rural Credit Union of Xushui District, amounted to $7,214,861 and $7,197,808,
respectively.





|                                                           |  | June 30, |           |   | December 31, |  
|---------------------------------------------------------- |  | -------- | --------- | - | ------------ | -
|                                                           |  | 2019     |           |   | 2018         |  
|Rural Credit Union of Xushui District Loan 1               |  | $        | 1,250,964 |   |              | $
|Rural Credit Union of Xushui District Loan 2               |  |          | 3,636,522 |   |              |  
|Rural Credit Union of Xushui District Loan 3               |  |          | -         |   |              |  
|Rural Credit Union of Xushui District Loan 4               |  |          | 2,327,374 |   |              |  
|Total                                                      |  |          | 7,214,860 |   |              |  
|Less: Current portion of long-term loans from credit union |  |          | (320,014  | ) |              |  
|Long-term loans from credit union                          |  | $        | 6,894,846 |   |              | $





As
of June 30, 2019, the Company’s long-term debt repayments for the next five years were as follows:



|                  |  | Amount |          
|----------------- |  | ------ | ---------
|Fiscal year       |  |        |          
|Remainder of 2019 |  | $      | 232,737  
|2020              |  |        | 1,250,964
|2021              |  |        | 1,367,332
|2022              |  |        | 1,600,070
|2023              |  |        | 2,763,757
|Total             |  |        | 7,214,860



On
April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent
third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed
for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of June
30, 2019 and December 31, 2018, total outstanding loan balance was $1,250,964 and $1,253,060, respectively, Out of the total outstanding
loan balance, current portion amounted were $116,369 and $87,423 as of June 30, 2019 and December 31, 2018, respectively, which
are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,134,595 and $1,165,637
are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively.



On
July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan
was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023.
The loan is secured by certain of the Company’s manufacturing equipment with net book value of $4,883,169 and $5,782,640
as of June 30, 2019 and December 31, 2018, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per
month. As of June 30, 2019 and December 31, 2018, the total outstanding loan balance was $3,636,523 and $3,642,615, respectively.
Out of the total outstanding loan balance, current portion amounted were $130,915 and $101,993 as of June 30, 2019 and December
31, 2018, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $3,505,608 and $3,540,622 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2019 and
December 31, 2018, respectively.





12







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On
April 20, 2017, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which was due and payable in various installments from August 26, 2017 to April 19, 2019. The loan is guaranteed by Hebei Tengsheng
with its land use right pledged as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed
rate of 0.6% per month. As of June 30, 2019 and December 31, 2018, the total outstanding loan balance was $nil and $2,302,133,
respectively, which are presented as current liabilities in the consolidated balance sheet as of June 30, 2019 and December 31,
2018, respectively.



On
April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng
with its land use right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of
0.6% per month. As of June 30, 2019 and December 31, 2018, the total outstanding loan balance was $2,327,374 and $nil, respectively,
which are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively.



Total
interest expenses for the short-term bank loans and long-term loans for the three months ended June 30, 2019 and 2018 were $214,907
and $328,955, respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months
ended June 30, 2019 and 2018 were $445,860 and $620,294, respectively.



(8)
Related Party Transactions



Mr.
Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On
January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and
extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together
with interest of $391,374 for the period from 2013 to 2015. Approximately $372,866 and $373,490 of interest were outstanding to
Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated
balance sheet as of June 30, 2019 and December 31, 2018, respectively.



On
December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,727,654 to Dongfang Paper for working capital
purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China.
The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016,
the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off
the remaining balance, together with interest of $20,400. As of June 30, 2019 and December 31, 2018, approximately $43,638 and
$43,711 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part
of the current liabilities in the consolidated balance sheet.



On
March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount
up to $17,455,307 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years
from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary
lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636
was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018,
the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed
to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company
repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. As of June 30, 2019 and December 31, 2018, the outstanding
loan balance were $2,181,913 and $2,185,569, respectively, and the accrued interest was $247,374 and $200,253, respectively, which
was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.



As
of June 30, 2019 and December 31, 2018, total amount of loans due to Mr. Zhenyong Liu were $2,181,913 and $2,185,569, respectively.
The interest expense incurred for such related party loans are $23,865 and $78,227 for the three months ended June 30, 2019 and
2018, respectively. The interest expenses incurred for such related party loans are $48,180 and $190,699 for the six months ended
June 30, 2019 and 2018, respectively. The accrued interest owe to the CEO was approximately $663,878 and $617,454, as of June
30, 2019 and December 31, 2018, respectively, which was recorded in other payables and accrued liabilities.



As
of June 30, 2019 and December 31, 2018, amount due to shareholder are $298,165 and $210,148, respectively, which represents funds
from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.



Lease
of Headquarters Compound Real Properties from a Related Party



On
August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the
Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters
Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound
(the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million,
respectively. Sales of the LUR and the Industrial Buildings were completed in year 2013.



In
connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings back to the Company
for its original use for a term of up to three years, with an annual rental payment of approximately $147,680 (RMB1,000,000).
The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two supplementary agreements
with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same rental payment as original
lease agreement.





13







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(9)
Notes payable



Notes
payable was nil as of June 30, 2019. As of December 31, 2018, the Company had bank acceptance notes of $3,642,616 from the Bank
of Cangzhou to one of its major suppliers for settling purchase of raw materials. The acceptance notes are used to essentially
extend the payment of accounts payable and are issued under the banking facilities obtained from bank as well as the restricted
bank deposit of $3,642,616 in the bank as mentioned in Note (3). The bank acceptance notes from the bank bore interest rate at
nil% per annum and 0.05% of notes amount as handling charge. The acceptance notes were due and paid off in January 2019.



(10)
Other payables and accrued liabilities



Other
payables and accrued liabilities consist of the following:



|                                            |  | June
    30, |            |  | December 31, |  
|------------------------------------------- |  | ------------ | ---------- |  | ------------ | -
|                                            |  | 2019         |            |  | 2018         |  
|Accrued electricity                         |  | $            | 240,149    |  |              | $
|Value-added tax payable                     |  |              | 334,311    |  |              |  
|Accrued interest to a related party         |  |              | 663,878    |  |              |  
|Payable for purchase of equipment           |  |              | 5,871,985  |  |              |  
|Accrued commission to salesmen              |  |              | 17,242     |  |              |  
|Payable for acquisition of Heibei Tengsheng |  |              | 45,021,965 |  |              |  
|Others                                      |  |              | 725,424    |  |              |  
|Totals                                      |  | $            | 52,874,954 |  |              | $



(11)
Common Stock



Issuance
of common stock to investors



On
August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our
common stock (the “Offering”). Each share of common stock and accompanying warrant was sold at a price of $1.60. Please
refer to Note (12), Stock Warrants, for details.



Issuance
of common stock pursuant to the 2012 Incentive Stock Plan and 2015 Omnibus Equity Incentive



On
January 12, 2016, the Company granted an aggregate of 1,133,916 shares of common stock under its compensatory incentive plans
to nine officers, directors and employees of and a consultant when the stock was at $1.25 per share, as compensation for their
services in the past years, of which 168,416 shares of common stock were granted under the 2012 Incentive Stock Plan and 965,500
shares were granted under the 2015 Omnibus Equity Incentive. Please see Note (15), Stock Incentive Plans for more details. Total
fair value of the stock was calculated at $1,417,395 as of the date of grant.



On
September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock at $0.88 per share to fifteen
officers, directors and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair
value of the shares of common stock granted was calculated at $470,360 as of the date of issuance.





14









IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(12)
Stock warrants



On
August 27, 2014, the Company issued 1,562,500 shares of our common stock and warrants to purchase up to 781,250 shares of our
common stock. The warrants have an exercise price of $1.70 per share. These warrants are exercisable immediately upon issuance
on September 3, 2014 and have a term of exercise equal to five years from the date of issuance till September 2, 2019. The fair
value of these shares amounted to $780,000, is classified as equity at the date of issuance.



The
fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:



|Terms of warrants       |  |  | 5
                                         years | 
|----------------------- |  |  | ------------------------------------------------ | 
|Expected volatility     |  |  | 72.0                                             | 
|Risk-free interest rate |  |  | 1.69                                             | 
|Expected dividend yield |  |  | 0.81                                             | 



In
connection with the Offering, the Company issued warrants to its placement agent of this Offering, which can purchase an aggregate
of up to 2.50% of the aggregate number of shares of common stock sold in the Offering, i.e. 39,062 shares. These warrants have
substantially the same terms as the warrants issued to purchaser in the Offering, except that the exercise price is $2.00 per
share and the expiration date is from September 3, 2014 to June 26, 2019. The fair value of these shares amounted to $35,191,
is classified in the equity at the date of issuance to net off the proceeds from the issuance of the shares and warrants.



The
fair value of the warrants issued was estimated by using the Binominal pricing model with the following assumptions:



|Terms of warrants       |  |  | 4.81
                                         years | 
|----------------------- |  |  | --------------------------------------------------- | 
|Expected volatility     |  |  | 69.8                                                | 
|Risk-free interest rate |  |  | 1.62                                                | 
|Expected dividend yield |  |  | 0.81                                                | 



The
Company applied judgment in estimating key assumptions in determining the fair value of the warrants on the date of issuance.
The Company used historical data to estimate stock volatilities and expected dividend yield. The risk-free rates are consistent
with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.



A
summary of stock warrant activities is as below:



|                                                           |  | Three
                                         Months Ended June
                                         30, 2019 |               
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ | --------------
|                                                           |  | Number                                                                                                             |               
|Outstanding and exercisable
    at beginning of the period |  |                                                                                                                    | 820,312       
|Issued during the period                                   |  |                                                                                                                    | -             
|Exercised during the period                                |  |                                                                                                                    | -             
|Cancelled or
    expired during the period                 |  |                                                                                                                    | -             
|Outstanding and
    exercisable at end of the period       |  |                                                                                                                    | 820,312       
|Range of exercise price                                    |  |                                                                                                                    | $1.70 to $2.00





15









IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



No
warrants were issued, exercised, cancelled or expired during the three months ended June 30, 2019. As of June 30, 2019, the aggregated
intrinsic value of warrants outstanding and exercisable was $nil.



No
warrants were issued, exercised, cancelled or expired during the three months ended June 30, 2018. As of December 31, 2018, the
aggregated intrinsic value of warrants outstanding and exercisable was $nil.



(13)
Earnings Per Share



For
the three months ended June 30, 2019 and 2018, basic and diluted net income per share are calculated as follows:





|                                                            |  | Three
    Months Ended June 30, |           
|----------------------------------------------------------- |  | ------------------------------- | ----------
|                                                            |  | 2019                            |           
|Basic income per share                                      |  |                                 |           
|Net income for the period
    - numerator                   |  | $                               | 450,070   
|Weighted average
    common stock outstanding - denominator |  |                                 | 22,022,316
|                                                            |  |                                 |           
|Net income per share                                        |  | $                               | 0.02      
|                                                            |  |                                 |           
|Diluted income per share                                    |  |                                 |           
|Net income for
    the period- numerator                    |  | $                               | 450,070   
|Weighted average
    common stock outstanding - denominator |  |                                 | 22,022,316
|                                                            |  |                                 |           
|Effect of dilution                                          |  |                                 | -         
|Weighted average
    common stock outstanding - denominator |  |                                 | 22,022,316
|                                                            |  |                                 |           
|Diluted income per share                                    |  | $                               | 0.02      



For
the six months ended June 30, 2019 and 2018, basic and diluted net income per share are calculated as follows:



|                                                            |  | Six
    Months Ended 
    June 30, |           
|----------------------------------------------------------- |  | ---------------------------------- | ----------
|                                                            |  | 2019                               |           
|Basic loss per share                                        |  |                                    |           
|Net
    loss for the period - numerator                     |  | $                                  | (2,272,525
|Weighted average
    common stock outstanding - denominator |  |                                    | 22,022,316
|                                                            |  |                                    |           
|Net loss per share                                          |  | $                                  | (0.10     
|                                                            |  |                                    |           
|Diluted loss per share                                      |  |                                    |           
|Net loss for
    the period - numerator                     |  | $                                  | (2,272,525
|Weighted average
    common stock outstanding - denominator |  |                                    | 22,022,316
|                                                            |  |                                    |           
|Effect of dilution                                          |  |                                    | -         
|Weighted average
    common stock outstanding - denominator |  |                                    | 22,022,316
|                                                            |  |                                    |           
|Diluted loss per share                                      |  | $                                  | (0.10     



For
the three and six months ended June 30, 2019 and 2018, 820,312 warrants shares were excluded from the calculations of dilutive
net income per share as their effects would have been anti-dilutive since the average share price was lower than the warrants
exercise price. For the three and six months ended June 30, 2019, there were no securities with dilutive effect issued and outstanding.





16







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(14)
Income Taxes



United
States



The
Company and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory
tax rates up to 34% and 0%, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 TCJAAct”),
which significantly changed U.S. tax law. The Act 2017 TCJA lowered the Company’s U.S. statutory federal income tax rate
from the highest rate of 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign
income which requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that
were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting
Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the 2017 TCJA. SAB 118 provides a measurement
period of up to one year from the 2017 TCJA’s enactment date for companies to complete their accounting under ASC 740. In
accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the 2017 TCJA is incomplete
but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company
cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the
basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 TCJA.



In
connection with the Company’s initial analysis of the impact of the enactment of the 2017 TCJA, the Company recorded a net
tax expense of approximately $80,000 in the fourth quarter of 2017. For various reasons that are discussed more fully below, including
the issuance of additional technical and interpretive guidance, the Company has not completed its accounting for the income tax
effects of certain elements of the 2017 TCJA. However, with respect to the following, the Company was able to make reasonable
estimates of the 2017 TCJA’s effects and, as such, recorded provisional amounts:



Transition
tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the
Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition
to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes
paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified
assets. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional
income tax expense of approximately $80,000 in the fourth quarter of 2017. However, the Company is continuing to gather additional
information and will consider additional technical guidance to more precisely compute and account for the amount of the transition
tax. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S.
federal taxation and finalizes the amounts held in cash or other specified assets. The 2017 TCJA’s transition tax is payable
over eight years beginning in 2018. Hence, the Company only provided $6,528 for the year ended 31 December 2017.



PRC



Dongfang
Paper and Baoding Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise
Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.



The
provisions for income taxes for three months ended June 30, 2019 and 2018 were as follows:



|                                                             |  | Three
    Months Ended |         
|------------------------------------------------------------ |  | ---------------------- | --------
|                                                             |  | June
    30,           |         
|                                                             |  | 2019                   |         
|Provision for Income
    Taxes                               |  |                        |         
|Current Tax Provision U.S.                                   |  | $                      | 14,747  
|Current Tax Provision PRC                                    |  |                        | 677,262 
|Deferred Tax
    Provision PRC                               |  |                        | (611,339
|Total
    Provision for (Deferred tax benefit)/ Income Taxes |  | $                      | 80,670  



The
provisions for income taxes for the six months ended June 30, 2019 and 2018 were as follows:



|                                                             |  | Six
    Months Ended |           
|------------------------------------------------------------ |  | -------------------- | ----------
|                                                             |  | June
    30,         |           
|                                                             |  | 2019                 |           
|Provision for Income Taxes                                   |  |                      |           
|Current Tax Provision U.S.                                   |  | $                    | 14,747    
|Current Tax Provision PRC                                    |  |                      | 677,262   
|Deferred Tax
    Provision PRC                               |  |                      | (1,259,134
|Total
    Provision for (Deferred tax benefit)/ Income Taxes |  | $                    | (567,125  





17







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



In
addition to the reversible future PRC income tax benefits stemming from the timing differences of items such as recognition of
asset disposal gain or loss and asset depreciation, the Company was incorporated in the United States and incurred aggregate net
operating losses of approximately $nil and $6,710,939 for U.S. income tax purposes for the years ended December 31, 2018 and 2016,
respectively. The net operating loss carried forward may be available to reduce future years’ taxable income. These carry
forwards would expire, if not utilized, during the period of 2030 through 2035. As of December 31, 2016, management believed that
the realization of all the U.S. income tax benefits from these losses, which generally would generate a deferred tax asset if
it can be expected to be utilized in the future, appears not more than likely due to the Company’s limited operating history
and continuing losses for United States income tax purposes. Accordingly, As of December 31, 2016, the Company provided a 100%
valuation allowance on the U.S. deferred tax asset benefit to reduce the total deferred tax asset to the amount realizable for
the PRC income tax purposes. Management reviews this valuation allowance periodically and will make adjustments as warranted.
A summary of the otherwise deductible (or taxable) deferred tax items is as follows:





|                                                               |  | June 30, 2019 |           |  | December 31, 2018 |  
|-------------------------------------------------------------- |  | ------------- | --------- |  | ----------------- | -
|Deferred tax assets (liabilities)                              |  |               |           |  |                   |  
|Depreciation and amortization of property, plant and equipment |  | $             | 8,250,025 |  |                   | $
|Impairment of property, plant and equipment                    |  |               | 537,562   |  |                   |  
|Miscellaneous                                                  |  |               | 338,984   |  |                   |  
|Net operating loss carryover of PRC company                    |  |               | 376,888   |  |                   |  
|Total deferred tax assets                                      |  |               | 9,503,459 |  |                   |  
|Less: Valuation allowance                                      |  |               | -         |  |                   |  
|Total deferred tax assets, net                                 |  | $             | 9,503,459 |  |                   | $



The
following table reconciles the statutory rates to the Company’s effective tax rate for:





|                                                        |  | Three Months Ended June 30, |      
|------------------------------------------------------- |  | --------------------------- | -----
|                                                        |  | 2019                        |      
|PRC Statutory rate                                      |  |                             | 25.0 
|Effect of different tax jurisdiction                    |  |                             |      
|Effect of reconciling items in the PRC for tax purposes |  |                             | (9.8 
|Change in valuation allowance                           |  |                             |      
|Effective income tax rate                               |  |                             | 15.20





|                                                        |  | Six Months Ended June 30, |     
|------------------------------------------------------- |  | ------------------------- | ----
|                                                        |  | 2019                      |     
|PRC Statutory rate                                      |  |                           | 25.0
|Effect of different tax jurisdiction                    |  |                           |     
|Effect of reconciling items in the PRC for tax purposes |  |                           | (5.0
|Change in valuation allowance                           |  |                           |     
|Effective income tax rate                               |  |                           | 20  







During the three months ended June 30,
2019 and 2018, the effective income tax rate was estimated by the Company to be 15.2% and 125.1%, respectively. During the six
months ended June 30, 2019 and 2018, the effective income tax rate was estimated by the Company to be 20.0% and 21.5%, respectively.



As
of December 31, 2017, except for the one-time transition tax under the 2017 TCJA which imposes a U.S. tax liability on all unrepatriated
foreign E&Ps, the Company does not believe that its future dividend policy and the available U.S. tax deductions and net operating
losses will cause the Company to recognize any other substantial current U.S. federal or state corporate income tax liability
in the near future. Nor does it believes that the amount of the repatriation of the VIE’s earnings and profits for purposes
of paying dividends will change the Company’s position that its PRC subsidiary Baoding Shengde and the VIE, Dongfang Paper
are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings
are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be
remitted in the foreseeable future, additional tax provisions would be required.





18







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The
Company has adopted ASC Topic 740-10-05, Income Taxes. To date, the adoption of this interpretation has not impacted the Company’s
financial position, results of operations, or cash flows. The Company performed self-assessment and the Company’s liability
for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still
subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which
in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period
could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the
Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations
for the given period. As of December 31, 2018 and 2017, management considered that the Company had no uncertain tax positions
affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain
position in future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial
statements for the years ended December 31, 2018 and 2017, respectively. The Company’s tax positions related to open tax
years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority.



(15)
Stock Incentive Plans



Issuance
of common stock pursuant to the 2011 Incentive Stock Plan and 2012 Incentive Stock Plan



On
August 28, 2011, the Company’s Annual General Meeting approved the 2011 Incentive Stock Plan of IT Tech Packaging, Inc.
(the “2011 ISP”) as previously adopted by the Board of Directors on July 5, 2011. Under the 2011 ISP, the Company
may grant an aggregate of 375,000 shares of the Company’s common stock to the Company’s directors, officers, employees
or consultants. No stock or option was issued under the 2011 ISP until January 2, 2012, when the Compensation Committee granted
109,584 shares of restricted common stock to certain officers and directors of the Company when the stock was at $3.45 per share,
as compensation for their services in the past years. Total fair value of the stock was calculated at $378,065 as of the date
of issuance.



On
September 10, 2012, the Company’s Annual General Meeting approved the 2012 Incentive Stock Plan of IT Tech Packaging, Inc.
(the “2012 ISP”) as previously adopted by the Board of Directors on July 4, 2012. Under the 2012 ISP, the Company
may grant an aggregate of 200,000 shares of the Company’s common stock to the Company’s directors, officers, employees
or consultants. Specifically, the Board and/or the Compensation Committee have authority to (a) grant, in its discretion, Incentive
Stock Options or Non-statutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair
market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares,
restrictions, terms and conditions to be included in such grants; and (d) make all other determinations necessary or advisable
for the 2012 ISP’s administration. On December 31, 2013, the Compensation Committee granted restricted common shares of
297,000, out of which 265,416 shares were granted under the 2011 ISP and 31,584 shares under the 2012 ISP, to certain officers,
directors and employees of the Company when the stock was at $2.66 per share, as compensation for their services in the past years.
Total fair value of the stock was calculated at $790,020 as of the date of grant.



2015
Incentive Plan



On
August 29, 2015, the Company’s Annual General Meeting approved the 2015 Omnibus Equity Incentive Plan of IT Tech Packaging,
Inc. (the “2015 ISP”) as previously adopted by the Board of Directors on July 10, 2015. Under the 2015 ISP, the Company
may grant an aggregate of 1,500,000 shares of the Company’s common stock to the directors, officers, employees and/or consultants
of the Company and its subsidiaries. On January 12, 2016, the Compensation Committee granted un-restricted common shares of 1,133,916,
of which 168,416 shares were granted under the 2012 ISP and 965,500 shares under the 2015 ISP, to certain officers, directors,
employees and a consultant of the Company as compensation for their services in the past years. Total fair value of the stock
was calculated at $1,417,395 as of the date of issuance at $1.25 per share.



On
September 13, 2018, the compensation committee granted an aggregate of 534,500 shares of common stock to fifteen officers, directors
and employees of the Company, which were granted under the 2015 Omnibus Equity Incentive Plan. Total fair value of the shares
of common stock granted was calculated at $470,360 as of the date of issuance at $0.88 per share.



(16)
Commitments and Contingencies



Operating
Lease



The
Company leases 32.95 acres of land from a local government in Xushui District, Baoding City, Hebei, China through a real estate
lease with a 30-year term, which expires on December 31, 2031. The lease requires an annual rental payment of approximately $17,722
(RMB 120,000). This operating lease is renewable at the end of the 30-year term.



On
November 27, 2012, the company entered into a 49.4 acres land lease with an investment company in the Economic Development Zone
in Wei County, Hebei Province, China. The lease term of the Wei County land lease commences on the date of the lease and lasts
for 15 years. The lease requires an annual rental payment of $531,648 (RMB 3,600,000).



As
mentioned in Note (8) Related Party Transactions, in connection with the sale of Industrial Buildings to Hebei Fangsheng, Hebei
Fangsheng agrees to lease the Industrial Buildings back to the Company at an annual rental of $147,680 (RMB 1,000,000), for a
total term of up to five years.





19







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Future
minimum lease payments of all operating leases are as follows:



|June
    30,                       |  | Amount |          
|---------------------------------- |  | ------ | ---------
|2020                               |  |        | 686,575  
|2021                               |  |        | 553,236  
|2022                               |  |        | 541,115  
|2023                               |  |        | 541,115  
|2024                               |  |        | 541,115  
|Thereafter                         |  |        | 1,745,531
|Total operating
    lease payments |  | $      | 4,608,686



Capital
commitment



As
of June 30, 2019, the Company has signed several contracts for improvement of Industrial Buildings. Total outstanding commitments
under these contracts were $2,143,906 and $2,300,187 as of June 30, 2019 and December 31, 2018, respectively.



Guarantees
and Indemnities



The
Company agreed with Baoding Huanrun Trading Co., a major supplier of raw materials, to guarantee certain obligations of this third
party, and as of June 30, 2019 and December 31, 2018, the Company guaranteed its long-term loan from financial institutions amounting
to $4,509,288 (RMB31,000,000) that matured at various times in 2018-2023. If Huanrun Trading Co., were to become insolvent, the
Company could be materially adversely affected.



(17)
Segment Reporting



Since
March 10, 2010, Baoding Shengde started its operations and thereafter the Company manages its operations through two business
operating segments: Dongfang Paper, which produces offset printing paper and corrugating medium paper, and Baoding Shengde, which
produces digital photo paper. They are managed separately because each business requires different technology and marketing strategies.



The
Company evaluates performance of its operating segments based on net income. Administrative functions such as finance, treasury,
and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated
between the operating segments based on gross revenue generated. The operating segments do share facilities in Xushui District,
Baoding City, Hebei Province, China. All sales were sold to customers located in the PRC.



Summarized
financial information for the two reportable segments is as follows:





|                              |  | Three Months Ended |           
|----------------------------- |  | ------------------ | ----------
|                              |  | June 30, 2019      |           
|                              |  | Dongfang Paper     |           
|                              |  | HB                 |           
|                              |  |                    |           
|Revenues                      |  | $                  | 32,413,830
|Gross profit                  |  |                    | 3,581,797 
|Depreciation and amortization |  |                    | 1,656,695 
|Interest income               |  |                    | 1,468     
|Interest expense              |  |                    | 199,615   
|Income tax expense(benefit)   |  |                    | 631,292   
|Net income (loss)             |  |                    | 2,480,493 





20







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|                                                        |  | Three
    Months Ended |           
|------------------------------------------------------- |  | ---------------------- | ----------
|                                                        |  | June 30,
    2018      |           
|                                                        |  | Dongfang Paper         |           
|                                                        |  |                        |           
|Revenues                                                |  | $                      | 33,135,162
|Gross
    profit                                        |  |                        | 3,018,995 
|Depreciation
    and amortization                       |  |                        | 3,492,033 
|Loss
    from disposal of property, plant and equipment |  |                        | (113      
|Interest
    income                                     |  |                        | (17,447   
|Interest
    expense                                    |  |                        | 362,158   
|Income
    tax expense(benefit)                         |  |                        | (491,642  
|Net
    income (loss)                                   |  |                        | 340,468   



|             |  | As
    of June 30, 2019 |           
|------------ |  | ----------------------- | ----------
|             |  | Dongfang                |           
|             |  | Paper                   |           
|             |  |                         |           
|Total assets |  | $                       | 66,340,982



|                                                                       |  | Six
    Months Ended |           
|---------------------------------------------------------------------- |  | -------------------- | ----------
|                                                                       |  | June
    30, 2019    |           
|                                                                       |  | Dongfang             |           
|                                                                       |  | Paper                |           
|                                                                       |  |                      |           
|Revenues                                                               |  | $                    | 49,864,122
|Gross
    profit                                                       |  |                      | 3,389,331 
|Depreciation
    and amortization                                      |  |                      | 5,586,749 
|Loss
    from impairment and disposal of property, plant and equipment |  |                      | -         
|Interest
    income                                                    |  |                      | 60,195    
|Interest
    expense                                                   |  |                      | 412,491   
|Income
    tax expense(benefit)                                        |  |                      | 8,988     
|Net
    income (loss)                                                  |  |                      | 39,665    



|                                                        |  | Six
    Months Ended |           
|------------------------------------------------------- |  | -------------------- | ----------
|                                                        |  | June 30,
    2018    |           
|                                                        |  | Dongfang Paper       |           
|                                                        |  |                      |           
|Revenues                                                |  | $                    | 35,023,356
|Gross
    profit                                        |  |                      | 2,323,687 
|Depreciation
    and amortization                       |  |                      | 7,030,192 
|Loss
    from disposal of property, plant and equipment |  |                      | 10,263    
|Interest
    income                                     |  |                      | 27,168    
|Interest
    expense                                    |  |                      | 720,948   
|Income
    tax expense(benefit)                         |  |                      | (964,278  
|Net
    income (loss)                                   |  |                      | (3,209,922



|             |  | As
    of December 31, 2018 |            
|------------ |  | --------------------------- | -----------
|             |  | Dongfang                    |            
|             |  | Paper                       |            
|             |  |                             |            
|Total assets |  | $                           | 183,987,100





21







IT
TECH PACKAGING, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(18)
Concentration and Major Customers and Suppliers



For
the three months ended June 30, 2019, the Company had no single customer contributed over 10% of total sales.



For
the three months ended June 30, 2018, the Company had no single customer contributed over 10% of total sales.



For
the three months ended June 30, 2019, the Company had three major suppliers accounted for 80%, 9% and 4% of total purchases. For
the three months ended June 30, 2018, the Company had one major supplier accounted for 86% of total purchases.



For
the six months ended June 30, 2019, the Company had three major suppliers accounted for 80%, 9% and 4% of the total purchases.
For the six months ended June 30, 2018, the Company had one major supplier which primarily accounted for 84% of the total purchases.



(19)
Concentration of Credit Risk



Financial
instruments for which the Company is potentially subject to concentration of credit risk consist principally of cash. The Company
places its cash in reputable financial institutions in the PRC and the United States. Although it is generally understood that
the PRC central government stands behind all of the banks in China in the event of bank failure, there is no deposit insurance
system in China that is similar to the protection provided by the Federal Deposit Insurance Corporation (“FDIC”) of
the United States as of June 30, 2019 and December 31, 2018. On May 1, 2015, the new “Deposit Insurance Regulations”
was effective in the PRC that the maximum protection would be up to RMB500,000 (US$72,730) per depositor per insured financial
intuition, including both principal and interest. For the cash placed in financial institutions in the United States, the Company’s
U.S. bank accounts are all fully covered by the FDIC insurance as of June 30, 2019 and December 31, 2018, respectively, while
for the cash placed in financial institutions in the PRC, the balances exceeding the maximum coverage of RMB500,000 amounted to
RMB6,391,468 (US929,709) as of June 30, 2019.



(20)
Risks and Uncertainties



The
Company is subject to substantial risks from, among other things, intense competition associated with the industry in general,
other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange
rates, and operating in the PRC under its various laws and restrictions.



(21)
Recent Accounting Pronouncements



In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines
on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at
amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that
is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale
debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit
losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net
investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities,
trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of ASU 2016-13 on our consolidated financial statements.



(22)
Subsequent Event





On June 25, 2019, Dongfang Paper entered
into an acquisition agreement with shareholder of Hebei Tengsheng, to buy up 100% shares of Hebei Tengsheng with a purchase price
of RMB 320 million (approximately $47 million). The value of the assets of Hebei Tengsheng on the date of acquisition is RMB 320
million, including 21 parcel of state-owned lands located in Wei County of Hebei Province in China, with lease terms of 50 years
expiring from 2061 to 2068.



RMB 10 million payment was made to seller
and the remaining balance of RMB 310 million (approximately $45 million) will be due by December 25, 2019. If the amount is not
fully paid off, the seller is offered an option to convert the outstanding amount to shares of the Company.



22







|Item
    2. | Management’s
    Discussion and Analysis of Financial Condition and Results of Operations
|----------- | -----------------------------------------------------------------------------------------



Cautionary
Notice Regarding Forward-Looking Statements



The
following discussion of the financial condition and results of operations of the Company for the periods ended June 30, 2019 and
2018 should be read in conjunction with the financial statements and the notes to the financial statements that are included elsewhere
in this quarterly report.



In
this quarterly report, references to “the Company,” “we,” “our” and “us” refer
to IT Tech Packaging, Inc. and its PRC subsidiary and variable interest entity unless the context requires otherwise.



We
make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial
condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans,
beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” as well as captions elsewhere in this document, are forward-looking statements.
In some cases these statements are identifiable through the use of words such as “anticipate”, “believe”,
“estimate”, “expect”, “intend”, “plan”, “project”, “target”,
“can”, “could”, “may”, “should”, “will”, “would”, and
similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section
27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future
performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially
from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some
of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied
in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking
statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents
that we file with the Securities and Exchange Commission (the “SEC”) should be considered in evaluating forward-looking
statements. In evaluating the forward-looking statements contained in this report, you should consider various factors, including,
without limitation, the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are
able to manage our planned growth efficiently and operate profitably, (c) whether we are able to generate sufficient revenues
or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements
for cash. We assume no obligation to update forward-looking statements, except as otherwise required under federal securities
laws.



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,” and a new CUSIP number, 46527C100, at such time.



Results
of Operations



Comparison
of the Three Months Ended June 30, 2019 and 2018



Revenue
for the three months ended June 30, 2019 was $33,619,948, an increase of $470,758, or 1.42%, from $33,149,190 for the same period
in the previous year. This was mainly due to the increase in sales volume of CMP, offset printing paper and tissue paper products,
partially offset by the decrease in average selling price (ASP) of CMP and offset printing paper.





23







Revenue
of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products



Revenue
from sales of offset printing paper, corrugating medium paper (“CMP”) and tissue paper products for the three months
ended June 30, 2019 was $33,619,948, an increase of $484,786, or 1.46%, from $33,135,162 for the second quarter of 2018. Total
offset printing paper, CMP and tissue paper products sold during the three months ended June 30, 2019 amounted to 70,389 tonnes,
an increase of 17,394 tonnes, or 32.82%, compared to 52,995 tonnes sold in the comparable period in the previous year. The increase
of CMP and offset printing paper in second quarter of 2019 was due to the increase in sales volume of CMP and offset printing
paper, partially offset by the decrease in average selling price (ASP) of these products. With the launch of PM8 in December 2018,
the production and sales of tissue paper products have increased steadily in the first half of 2019. The changes in revenue dollar
amount and in quantity sold for the three months ended June 30, 2019 and 2018 are summarized as follows:





|                                                              |  | Three
    Months Ended |        |  | Three
    Months Ended |   |            |                      |  |  |        |  |  | Percentage           |           
|------------------------------------------------------------- |  | ---------------------- | ------ |  | ---------------------- | - | ---------- | -------------------- |  |  | ------ |  |  | -------------------- | ----------
|                                                              |  | June
    30, 2019      |        |  | June
    30, 2018      |   |            | Change
    in        |  |  | Change | 
|Sales
    Revenue                                             |  | Quantity
    (Tonne)   |        |  | Amount                 |   |            | Quantity
    (Tonne) |  |  | Amount |  |  | Quantity
    (Tonne) |           
|                                                              |  |                        |        |  |                        |   |            |                      |  |  |        |  |  |                      |           
|Regular
    CMP                                               |  |                        | 47,994 |  |                        | $ | 20,883,320 |                      |  |  | 38,541 |  |  | $                    | 23,307,297
|Light-Weight
    CMP                                          |  |                        | 12,582 |  |                        | $ | 5,310,771  |                      |  |  | 9,543  |  |  | $                    | 5,599,914 
|Total
    CMP                                                 |  |                        | 60,576 |  |                        | $ | 26,194,091 |                      |  |  | 48,084 |  |  | $                    | 28,907,211
|Offset
    Printing Paper                                     |  |                        | 8,559  |  |                        | $ | 6,236,965  |                      |  |  | 4,911  |  |  | $                    | 4,227,951 
|Tissue
    Paper Products                                     |  |                        | 1,254  |  |                        | $ | 1,188,892  |                      |  |  | -      |  |  | $                    | -         
|Total
    CMP, Offset Printing Paper and Tissue Paper Revenue |  |                        | 70,389 |  |                        | $ | 33,619,948 |                      |  |  | 52,995 |  |  | $                    | 33,135,162



Monthly
sales revenue (excluding revenue from digital photo paper and tissue paper products) for the 24 months ended June 30, 2019, are
summarized below:



The
Average Selling Prices (ASPs) for our main products in the three months ended June 30, 2019 and 2018 are summarized as follows:



|                                                                    |  | Offset
    Printing Paper ASP |        |   | Regular
    CMP ASP |   |        | Light-Weight
    CMP ASP |  |   | Tissue
    Paper Products ASP |  
|------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ------------------- | - | ------ | ------------------------ |  | - | ----------------------------- | -
|Three
    Months ended June 30, 2018                                |  | $                             | 861    |   |                     | $ | 605    |                          |  | $ | 587                           |  
|Three Months ended
    June 30, 2019                                |  | $                             | 729    |   |                     | $ | 435    |                          |  | $ | 422                           |  
|Increase
    (Decrease) from comparable period in the previous year |  | $                             | -132   |   |                     | $ | -170   |                          |  | $ | -165                          |  
|Decrease
    by percentage                                          |  |                               | -15.33 | % |                     |   | -28.10 | %                        |  |   | -28.11                        | %





24







The
following chart shows the month-by-month ASPs (excluding the ASPs of the digital photo paper and tissue paper products) for the
24-month period ended June 30, 2019:





Corrugating
Medium Paper



Revenue
from CMP amounted to $26,194,091 (77.91% of the total offset printing paper, CMP and tissue paper products revenues) for the three
months ended June 30, 2019, representing a decrease of $2,713,120, or 9.39%, from $28,907,211 for the comparable period in 2018.



We
sold 60,576 tonnes of CMP in the three months ended June 30, 2019 as compared to 48,084 tonnes for the same period in 2018, representing
a 25.98% increase in quantity sold.



ASP
for regular CMP dropped from $605/tonne for the three months ended June 30, 2018 to $435/tonne for the three months ended June
30, 2019, representing a 28.10% decrease. ASP in RMB for regular CMP for the second quarter of 2018 and 2019 was RMB3,864 and
RMB2,962, respectively, representing a 23.34% decrease. The quantity of regular CMP sold increased by 9,453 tonnes, from 38,541
tonnes in the second quarter of 2018 to 47,994 tonnes in the second quarter of 2019.



ASP
for light-weight CMP decreased from $587/tonne for the three months ended June 30, 2018 to $422/tonne for the three months ended
June 30, 2019, representing a 28.11% decrease. ASP in RMB for light-weight CMP for the second quarter of 2018 and 2019 was RMB3,753
and RMB2,875, respectively, representing a 23.39% decrease. The quantity of light-weight CMP sold increased by 3,039 tonnes, from
9,543 tonnes in the second quarter of 2018, to 12,582 tonnes in the second quarter of 2019.



We
do not expect that there will be big swings in the market demand and ASPs for CMP and other packaging paper in year 2019.



Our
PM6 production line, which produces regular CMP, has a designated capacity of 360,000 tonnes /year. The utilization rates for
the second quarter of 2019 and 2018 were 52.78% and 41.22%, respectively, representing an increase of 11.56%.





25







Quantities
sold for regular CMP that was produced by the PM6 production line from April 2017 to June 2019 are as follows:





Tissue
Paper Products



We
produce 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, we completed
the construction, installation and test of operation of our PM8 production line. We launched the complete line of processing base
tissue paper with designated capacity of 15,000 tonnes/year, and producing finished tissue paper products with designated capacity
of 10,000 tonnes/year.



Revenue
from tissue paper products was $1,188,892 (3.54% of the total offset printing paper, CMP and tissue paper products revenues) for
the three months ended June 30, 2019, representing an increase of $1,188,892, from $nil for the three months ended June 30, 2018.
We sold 1,254 tonnes of tissue paper in the second quarter of 2019.



Offset
Printing Paper



Revenue
from offset printing paper was $6,236,965 (18.55% of the total offset printing paper, CMP and tissue paper products revenues)
for the three months ended June 30, 2019, representing an increase of $2,009,013, or 47.52%, from $4,227,951 for the three months
ended June 30, 2018. We sold 8,559 tonnes of offset printing paper in the second quarter of 2019, as compared to 4,911 tonnes
in the comparable period of 2018, an increase of 3,648 tonnes, or 74.28%.



ASPs
for offset printing paper for the second quarter of 2018 and 2019 were $861 and $729, respectively, representing a 15.33% decrease.
ASP in RMB for offset printing paper for the second quarter of 2018 and 2019 was RMB5,504 and RMB4,934, respectively, representing
a 10.36% decrease.





26







Cost
of Sales



Total
cost of sales for CMP, offset printing paper and tissue paper products for the quarter ended June 30, 2019 was $30,711,819, an
increase of $595,650, or 1.98%, from $30,116,169 for the comparable period in 2018. This was mainly due to the increase in sales
quantity of CMP, offset printing paper and tissue paper products, partially offset by the decrease in material costs.



Cost
of sales for CMP was $24,231,791 for the quarter ended June 30, 2019, as compared to $26,076,384 for the comparable period in
2018. Average cost of sales per tonne for CMP decreased by 26.20%, from $542 in the second quarter of 2018 to $400 in the second
quarter of 2019. The decrease in average cost of sales was mainly attributable to the lower average unit purchase costs (net of
applicable value added tax) of recycled paper board in second quarter of 2019 compared to the second quarter of 2018.



Cost
of sales for offset printing paper was $4,617,156 for the quarter ended June 30, 2019, as compared to $4,039,785 for the comparable
period in 2018. Average cost of sales per tonne of offset printing paper decreased by 34.51%, from $823 in the three months ended
June 30, 2018, to $539 during the comparable period in 2019. The decrease in average cost of sales of offset printing paper was
mainly due to the decrease in cost of recycled white scrap paper.



Changes
in cost of sales and cost per tonne by product for the quarters ended June 30, 2019 and 2018 are summarized below:





|                                                      |  | Three
    Months Ended |            |  | Three
    Months Ended |   |       |                   |  |   |                    |  |  | Change in         |                                               
|----------------------------------------------------- |  | ---------------------- | ---------- |  | ---------------------- | - | ----- | ----------------- |  | - | ------------------ |  |  | ----------------- | ----------------------------------------------
|                                                      |  | June
    30, 2019      |            |  | June
    30, 2018      |   |       | Change
    in     |  |   | percentage         | 
|                                                      |  | Cost
    of Sales      |            |  | Cost
    per Tonne     |   |       | Cost
    of Sales |  |   | Cost
    per Tonne |  |  | Cost
    of Sales |                                               
|Regular
    CMP                                       |  | $                      | 19,274,205 |  |                        | $ | 402   |                   |  | $ | 21,183,541         |  |  | $                 | 550                                           
|Light-Weight
    CMP                                  |  | $                      | 4,957,586  |  |                        | $ | 394   |                   |  | $ | 4,892,843          |  |  | $                 | 513                                           
|Total
    CMP                                         |  | $                      | 24,231,791 |  |                        | $ | 400   |                   |  | $ | 26,076,384         |  |  | $                 | 542                                           
|Offset
    Printing Paper                             |  | $                      | 4,617,156  |  |                        | $ | 539   |                   |  | $ | 4,039,785          |  |  | $                 | 823                                           
|Tissue
    Paper Products                             |  | $                      | 1,862,872  |  |                        | $ | 1,486 |                   |  |   | -                  |  |  | $                 | -                                             
|Total
    CMP, Offset Printing Paper and Tissue Paper |  | $                      | 30,711,819 |  |                        | $ | n/a   |                   |  | $ | 30,116,169         |  |  |                   | $
                                         n/a



Our
average unit purchase costs (net of applicable value added tax) of recycled paper board and recycled white scrap paper in the
three months ended June 30, 2019 were RMB 1,559/tonne (approximately $230/tonne) and RMB 1,937/tonne (approximately $286/tonne),
as compared to RMB 2,329/tonne (approximately $365/tonne) and RMB 3,012/tonne (approximately $472/tonne) for the three months
ended June 30, 2018. These changes (in US dollars) represent a year-over-year decrease of 36.99% for the recycled paper board.
We use domestic recycled paper (sourced mainly from the Beijing-Tianjin metropolitan area) exclusively. Although we do not rely
on imported recycled paper, the pricing of which tends to be more volatile than domestic recycled paper, our experience suggests
that the pricing of domestic recycled paper bears some correlation to the pricing of imported recycled paper.



The
pricing trends of our major raw materials for the 24-month period from July 2017 to June 2019 are shown below:







27







Electricity
and gas are our two main energy sources. Electricity and gas accounted for approximately 7% and 10.3% of total sales in second
quarter of 2019, respectively, compared to 5.7% and 8% of total sales in first quarter of 2018. The monthly energy cost (electricity,
coal and gas) as a percentage of total monthly sales of our main paper products for the 24 months ended June 30, 2019 are summarized
as follows:



Gross
Profit



Gross
profit for the three months ended June 30, 2019 was $2,908,129 (8.65% of the total revenue), representing a slight decrease of
$107,293, or 3.56%, from the gross profit of $3,015,422 (9.10% of the total revenue) for the three months ended June 30, 2018.



Offset
Printing Paper, CMP and Tissue Paper Products



Gross
profit for offset printing paper, CMP and tissue paper products for the three months ended June 30, 2019 was $2,908,129, a decrease
of $110,865, or 3.67%, from the gross profit of $3,018,994 for the three months ended June 30, 2018. Such decrease was mainly
due to the decrease in ASP of regular CMP and offset printing paper, partially offset by the increase in sales volume of these
products and decrease in raw material costs in the second quarter of 2019.



The
overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 0.46 percentage points, from
9.11% for the three months ended June 30, 2018, to 8.65% for the three months ended June 30, 2019.



Gross
profit margin for regular CMP for the three months ended June 30, 2019 was 7.71%, or 1.40 percentage points lower, as compared
to gross profit margin of 9.11% for the three months ended June 30, 2018.



Gross
profit margin for light-weight CMP for the three months ended June 30, 2019 was 6.65%, or 5.98 percentage points lower, as compared
to gross profit margin of 12.63% for the three months ended June 30, 2018.



Gross
profit margin for offset printing paper was 25.97% for the three months ended June 30, 2019, an increase of 21.52 percentage points,
as compared to 4.45% for the three months ended June 30, 2018.





28







Gross
profit margin for tissue paper products was -56.69% for the three months ended June 30, 2019.



Monthly
gross profit margins on the sales of our CMP and offset printing paper for the 24-month period ended June 30, 2019 are as follows:





Selling,
General and Administrative Expenses



Selling,
general and administrative expenses for the three months ended June 30, 2019 were $2,407,859, a decrease of $619,406, or 20.46%
from $3,027,265 for the three months ended June 30, 2018. The decrease was mainly due to additional repair and maintenance costs
incurred during the production suspension period in 2018.



Income
(Loss) from Operations



Operating
income for the quarter ended June 30, 2019 was $531,667, an increase of $543,397, or 4632.54%, from loss from operations of $11,730
for the quarter ended June 30, 2018.



Other
Income and Expenses



Interest
expense for the three months ended June 30, 2019 decreased by $168,411, from $407,182 in the three months ended June 30, 2018,
to $238,771. The Company had short-term and long-term interest-bearing loans, related party loans and leasing obligations that
aggregated $15,942,513 as of June 30, 2019, as compared to $25,904,543 as of June 30, 2018.



Net
Income



As
a result and the factors discussed above, net income was $450,070 for the quarter ended June 30, 2019, representing an increase
of $340,076, or 309.18%, from $109,994 for the quarter ended June 30, 2018.





29







Comparison
of the six months ended June 30, 2019 and 2018



Revenue
for the six months ended June 30, 2019 was $51,070,240, an increase of $16,032,856, or 45.76%, from $35,037,384 for the same period
in the previous year.



Revenue
of Offset Printing Paper, Corrugating Medium Paper and Tissue Paper Products



Revenue
from sales of offset printing paper, CMP and tissue paper products for the six months ended June 30, 2019 was $51,070,240, an
increase of $16,046,883, or 45.82%, from $35,023,357 for the six months ended June 30, 2018. This was mainly due to the increase
in sales volume of Regular CMP, offset printing paper and tissue paper products, which was partially offset by the decrease in
ASP of Regular CMP and offset printing paper. Total quantities of offset printing paper, CMP and tissue paper products sold during
the six months ended June 30, 2019 amounted to 105,709 tonnes, an increase of 49,412 tonnes, or 87.77%, compared to 56,297 tonnes
sold during the six months ended June 30, 2018. Total quantities of CMP and offset printing paper sold increased by 46,555 tonnes
in the six months of 2019 as compared to the same period of 2018. We sold 2,857 tonnes of tissue paper products in the six months
of 2019. The increase was mainly due to the production suspension that took place from late January 2018 to March 13, 2018 due
to a government-mandated restriction on the natural gas supply, and the launch of our PM8 production line in December 2018 for
production and sales of tissue paper products. The changes in revenue and quantity sold for the six months ended June 30, 2019
and 2018 are summarized as follows:



A
summary of the above changes and further analyses of the changes in our sales revenue are as follows:





|                                                              |  | Six
    Months Ended |         |  | Six
    Months Ended |   |            |                      |  |  |        |  |  | Percentage           |           
|------------------------------------------------------------- |  | -------------------- | ------- |  | -------------------- | - | ---------- | -------------------- |  |  | ------ |  |  | -------------------- | ----------
|                                                              |  | June
    30, 2019    |         |  | June
    30, 2018    |   |            | Change
    in        |  |  | Change | 
|Sales
    Revenue                                             |  | Quantity
    (Tonne) |         |  | Amount               |   |            | Quantity
    (Tonne) |  |  | Amount |  |  | Quantity
    (Tonne) |           
|                                                              |  |                      |         |  |                      |   |            |                      |  |  |        |  |  |                      |           
|Regular
    CMP                                               |  |                      | 74,286  |  |                      | $ | 33,108,199 |                      |  |  | 40,213 |  |  | $                    | 24,215,016
|Light-Weight
    CMP                                          |  |                      | 20,006  |  |                      | $ | 8,675,903  |                      |  |  | 10,794 |  |  | $                    | 6,251,761 
|Total
    CMP                                                 |  |                      | 94,292  |  |                      | $ | 41,784,102 |                      |  |  | 51,007 |  |  | $                    | 30,466,777
|Offset
    Printing Paper                                     |  |                      | 8,560   |  |                      | $ | 6,236,965  |                      |  |  | 5,290  |  |  | $                    | 4,556,580 
|Tissue
    Paper Products                                     |  |                      | 2,857   |  |                      | $ | 3,049,173  |                      |  |  | -      |  |  |                      | -         
|Total
    CMP, Offset Printing Paper and Tissue Paper Revenue |  |                      | 105,709 |  |                      | $ | 51,070,240 |                      |  |  | 56,297 |  |  | $                    | 35,023,357



ASPs
for our main products in the six-month period ended June 30, 2019 and 2018 are summarized as follows:



|                                                         |  | Offset
    Printing Paper ASP |        |   | Regular
    CMP ASP |   |        | Light-Weight
    CMP ASP |  |   | Tissue
    Paper Products ASP |  
|-------------------------------------------------------- |  | ----------------------------- | ------ | - | ------------------- | - | ------ | ------------------------ |  | - | ----------------------------- | -
|Six Months Ended June 30, 2018                           |  | $                             | 861    |   |                     | $ | 602    |                          |  | $ | 579                           |  
|Six Months Ended June 30, 2019                           |  | $                             | 729    |   |                     | $ | 446    |                          |  | $ | 434                           |  
|Decrease from comparable period in the
    previous year |  | $                             | -132   |   |                     | $ | -156   |                          |  | $ | -145                          |  
|Decrease by percentage                                   |  |                               | -15.33 | % |                     |   | -25.91 | %                        |  |   | -25.04                        | %





30







Cost
of Sales



Total
cost of sales for CMP, offset printing paper and tissue paper products in the six months ended June 30, 2019 was $48,354,577,
an increase of $15,654,907, or 47.87%, from $32,699,671 for the six months ended June 30, 2018. This was mainly a result of the
increase in volume sold, partially offset by decrease in cost of recycled paper board and recycled white scrap paper. Cost of
sales for CMP was $40,047,877 for the six months ended June 30, 2019, as compared to $28,207,207 in the same period of 2018. The
increase in the cost of sales of $11,840,670 for CMP was mainly due to the increase in the quantities of CMP sold, partially offset
by the decrease in cost of recycled paper board in the six months of 2019. Average cost of sales per tonne for CMP decreased by
23.15%, from $553 for the six months ended June 30, 2018, to $425 in the same period of 2019. The decrease was mainly attributable
to the lower average unit purchase costs (net of applicable value added tax) of recycled paper board in the six months of 2019
as compared to same period of 2018. Cost of sales for offset printing paper was $4,617,156 for the six months ended June 30, 2019,
as compared to $4,492,463 in the same period of 2018. Average cost of sales per tonne of offset printing paper decreased by 36.51%,
from $849 in the six months ended June 30, 2018, to $539 in the same period of 2019. The decrease was mainly attributable to lower
average unit purchase costs (net of applicable value added tax) of recycled white scrap paper. Cost of sales for tissue paper
products was $3,689,544 for the six months ended June 30, 2019. Average cost of sales per tonne of tissue paper products was $1,291
for the six months ended June 30, 2019.



Changes
in cost of sales and cost per tonne by product for the six months ended June 30, 2018 and 2017 are summarized below:





|                                                              |  | Six
    Months Ended |            |  | Six
    Months Ended |   |       |                   |  |   |                    |  |  | Change in         |    
|------------------------------------------------------------- |  | -------------------- | ---------- |  | -------------------- | - | ----- | ----------------- |  | - | ------------------ |  |  | ----------------- | ---
|                                                              |  | June
    30, 2019    |            |  | June
    30, 2018    |   |       | Change
    in     |  |   | percentage         | 
|                                                              |  | Cost
    of Sales    |            |  | Cost
    per Tonne   |   |       | Cost
    of Sales |  |   | Cost
    per tonne |  |  | Cost
    of Sales |    
|Regular
    CMP                                               |  | $                    | 31,545,280 |  |                      | $ | 425   |                   |  | $ | 22,274,927         |  |  | $                 | 554
|Light-Weight
    CMP                                          |  | $                    | 8,502,597  |  |                      | $ | 425   |                   |  | $ | 5,932,280          |  |  | $                 | 550
|Total
    CMP                                                 |  | $                    | 40,047,877 |  |                      | $ | 425   |                   |  | $ | 28,207,207         |  |  | $                 | 553
|Offset
    Printing Paper                                     |  | $                    | 4,617,156  |  |                      | $ | 539   |                   |  | $ | 4,492,463          |  |  | $                 | 849
|Tissue
    Paper Products                                     |  | $                    | 3,689,544  |  |                      | $ | 1,291 |                   |  | $ | -                  |  |  | $                 | -  
|Total
    CMP, Offset Printing Paper and Tissue Paper Revenue |  | $                    | 48,354,577 |  |                      | $ | n/a   |                   |  | $ | 32,699,671         |  |  | $                 | n/a





31







Gross
Profit



Gross
profit for the six months ended June 30, 2019 was $2,715,663 (5.32% of the total revenue), representing an increase of $395,549,
or 17.05%, from the gross profit of $2,320,114 (6.62% of the total revenue) for the six months ended June 30, 2018. The increase
was mainly due to (i) the increase in quantities sold of CMP, offset printing paper and (ii) the decrease of material purchase
price of CMP and offset printing paper, partially offset by the decrease of ASP of these products.



Offset
Printing Paper, CMP and Tissue Paper Products



Gross
profit for offset printing paper, CMP and tissue paper products for the six months ended June 30, 2019 was $2,715,663, an increase
of $391,976, or 16.87%, from the gross profit of $2,323,687 for the six months ended June 30, 2018.



The
overall gross profit margin for offset printing paper, CMP and tissue paper products decreased by 1.31 percentage points, from
6.63% for the six months ended June 30, 2018, to 5.32% for the six months ended June 30, 2019.



Gross
profit margin for regular CMP for the six months ended June 30, 2019 was 4.72%, or 3.29 percentage points lower, as compared to
gross profit margin of 8.01% for the six months ended June 30, 2018. Such decrease was primarily due to the decrease in ASP of
regular CMP, partially offset by the decrease of material purchase price.



Gross
profit margin for light-weight CMP for the six months ended June 30, 2019 was 2.00%, or 3.11 percentage points lower, as compared
to gross profit margin of 5.11% for the six months ended June 30, 2018.



Gross
profit margin for offset printing paper was 25.97% for the six months ended June 30, 2019, an increase of 24.56 percentage points,
as compared to 1.41% for the six months ended June 30, 2018.



Gross
profit margin for tissue paper products for the six months ended June 30, 2019 was -21.00%.



Selling,
General and Administrative Expenses



Selling,
general and administrative expenses for the six months ended June 30, 2019 were $5,389,332, a decrease of $1,451,727, or 21.22%
from $6,841,059 for the six months ended June 30, 2018. The decrease was mainly due to the depreciation of idle equipment and
additional repair and maintenance costs incurred during the suspension of production in the first quarter of 2018.



Loss
from Operations



Operating
loss for the six months ended June 30, 2019 was $2,642,272, a decrease of $1,888,936, or 41.69%, from $4,531,208 for the six months
ended June 30, 2018. The decrease in operating loss was primarily due to the increase in gross profit and decrease in selling,
general and administrative expenses.



Other
Income and Expenses



Interest
expense for the six months ended June 30, 2019 decreased by $316,953, from $810,993 in the six months ended June 30, 2018, to
$494,040. The Company had short-term and long-term interest-bearing loans and related party loans that aggregated $15,942,514
as of June 30, 2019, as compared to $25,904,543 as of June 30, 2018.



Net
Loss



As
a result of the above, net loss was $2,272,525 for the six months ended June 30, 2019, representing a decrease of $1,703,757,
or 42.85%, from $3,976,282 for six months ended June 30, 2018.



Accounts
Receivable



Net
accounts receivable increased by $295,645, or 10.28%, to $3,172,277 as of June 30, 2019, as compared with $2,876,632 as of December
31, 2018. We usually collect accounts receivable within 30 days of delivery and completion of sales.



32







Inventories



Inventories
consist of raw materials (accounting for 71.68% of total value of inventory as of June 30, 2019), semi-finished goods and finished
goods. As of June 30, 2019, the recorded value of inventory increased by 98.24% to $5,795,685 from $2,923,516 as of December 31,
2018. As of June 30, 2019, the inventory of recycled paper board, which is the main raw material for the production of CMP, was
$3,097,650, approximately $2,685,333, or 651.28%, higher than the balance as of December 31, 2018. Due to the volatility of recycled
paper board price, we reduced the Company’s inventory of recycled paper board in December 2018.



A
summary of changes in major inventory items is as follows:





|                                                     |  | June
    30, 2019 |           |  | December 31,
     2018 |   |           | $
    Change |  |  | %
    Change |  
|---------------------------------------------------- |  | ----------------- | --------- |  | ---------------------- | - | --------- | ------------ |  |  | ------------ | -
|Raw Materials                                        |  |                   |           |  |                        |   |           |              |  |  |              |  
|Recycled paper board                                 |  | $                 | 3,097,650 |  |                        | $ | 412,317   |              |  |  | 2,685,333    |  
|Recycled white scrap paper                           |  |                   | 724,506   |  |                        |   | 611,861   |              |  |  | 112,645      |  
|Tissue base paper                                    |  |                   | 182,096   |  |                        |   | 24,027    |              |  |  | 158,069      |  
|Coal & gas                                           |  |                   | 114,244   |  |                        |   | 167,230   |              |  |  | (52,986      | )
|Digital photo
    base paper and other raw materials |  |                   | 36,021    |  |                        |   | 140,268   |              |  |  | (104,247     | )
|Total Raw Materials                                  |  |                   | 4,154,517 |  |                        |   | 1,355,703 |              |  |  | 2,798,813    |  
|                                                     |  |                   |           |  |                        |   |           |              |  |  |              |  
|Semi-finished Goods                                  |  |                   | 33,906    |  |                        |   | -         |              |  |  | 33,906       |  
|Finished Goods                                       |  |                   | 1,607,262 |  |                        |   | 1,567,813 |              |  |  | 39,450       |  
|Totals                                               |  | $                 | 5,795,685 |  |                        | $ | 2,923,516 |              |  |  | 2,872,169    |  



Accounts
Payable and Notes Payable



Accounts
payable and notes payable was $1,122,764 as of June 30, 2019, a decrease of 3,148,906, or 73.72%, from $4,271,670 as of December
31, 2018. Accounts payable was $1,122,764 and $629,054 as of June 30, 2019 and December 31, 2018, respectively. We have been relying
on the bank acceptance notes issued under our credit facilities with Bank of Cangzhou to make the majority of our raw materials
payments to our vendors. Our notes payable to Bank of Cangzhou were $nil and $3,642,616 as of June 30, 2019 and December 31, 2018,
respectively. In January 2018, Bank of Cangzhou issued bank acceptance notes on our behalf for $3,642,616, which we paid off in
January 2019.





33







Liquidity





As of June 30, 2019 the
Company had current assets of $16,347,646 and current liabilities of $62,456,762 (including amounts due to related parties of
$298,165 and interest payable for related party loans of $663,878), resulting in a working capital deficit of approximately $46,109,116;
as of December 31, 2018, the Company had current assets of $24,158,872 and current liabilities of $29,634,267 (including amounts
due to related parties of $1,030,790), resulting in a working capital deficit of approximately $5,475,395. The deficit as of June
30, 2019 was mainly attributed to the payable for acquisition of Hebei Tengsheng. On June 25, 2019, Dongfang Paper entered an
acquisition agreement with shareholder of Hebei Tengsheng, to buy up 100% shares of Hebei Tengsheng with a purchase price of RMB
320 million (approximately $47 million). The payment will be due on December 25, 2019. If the amount is not duly paid off, the
seller is offered an option to swap the unpaid amount to shares of the Company. As of June 30, 2019, acquisition payable was $45,021,965,
which was included in the current liabilities in the consolidated balance sheet.



Renewal
of operating lease



On
August 7, 2013, the Company’s Audit Committee and the Board of Directors approved the sale of the land use right of the
Headquarters Compound (the “LUR”), the office building and essentially all industrial-use buildings in the Headquarters
Compound (the “Industrial Buildings”), and three employee dormitory buildings located within the Headquarters Compound
(the “Dormitories”) to Hebei Fangsheng for cash prices of approximately $2.77 million, $1.15 million, and $4.31 million
respectively. In connection with the sale of the Industrial Buildings, Hebei Fangsheng agreed to lease the Industrial Buildings
back to the Company for its original use for a term of up to three years, with an annual rental payment of approximately $147,680
(RMB1,000,000). The lease agreement expired in August 2016. On August 6, 2016 and August 6, 2018, the Company entered into two
supplementary agreements with Hebei Fangsheng, who agreed to extend the lease term for another four years in total, with the same
rental payment as original lease agreement. The accrued rental owed to Hebei Fangsheng was approximately $275,579 and $203,188
as of June 30, 2019 and December 31, 2018, respectively, and such amounts were recorded as part of the current liabilities.



Capital
Expenditure Commitment as of June 30, 2019



We
finance our daily operations mainly by cash flows generated from our business operations and loans from banking institutions.
As of June 30, 2019, we had approximately $2 million in capital expenditure commitments that were mainly related to improvement
of Industrial Buildings. These commitments are expected to be financed by bank loans and cash flows generated from our business
operations.



Cash
and Cash Equivalents



Our
cash, cash equivalents and restricted cash as of June 30, 2019 was $1,134,371, a decrease of $10,983,054, from $12,117,425 as
of December 31, 2018. The decrease of cash and cash equivalents for the six months ended June 30, 2019 was attributable to a number
of factors:



i.
Net cash provided by operating activities



Net
cash used operating activities was $2,361,214 for the six months ended June 30, 2019. The balance represented a decrease of cash
of $3,509,375, or 305.65%, from $1,148,161 provided for the six months ended June 30, 2018. Net loss for the six months ended
June 30, 2019 was $2,272,525, representing a decrease of $1,703,757, or 42.85%, from a net loss of $3,976,282 for the six months
ended June 30, 2018. Changes in various asset and liability account balances throughout the six months ended June 30, 2019 also
contributed to the net change in cash from operating activities in six months ended June 30, 2019. Chief among such changes is
the increase of accounts receivable in the amount of $311,265 during the six months of 2019 and the decrease of notes payable
in the amount of $3,691,999. There was also an increase of $2,920,950 in the ending inventory balance as of June 30, 2019 (a decrease
to net cash for the six months ended June 30, 2019 cash flow purposes). In addition, the Company had non-cash expenses relating
to depreciation and amortization in the amount of $7,789,459. The Company also had a net decrease of $60,694 in prepayment and
other current assets (an increase to net cash) and a net increase of $759,120 in other payables and accrued liabilities and related
parties (an increase to net cash), as well as an increase in income tax payable of $454,984 (an increase to net cash) during the
six months ended June 30, 2019.





34







ii.
Net cash used in investing activities



We
incurred $5,021,739 in net cash expenditures for investing activities during the six months of 2019, as compared to $1,233,667
for the same period of 2018. Payments in the six months ended June 30, 2019 were for acquisition of Hebei Tengsheng and expenditures
on improvement of industrial building.



iii.
Net cash provided by financing activities



Net
cash used in financing activities was $5,286,942 for the six months ended June 30, 2019, as compared to net cash provided by financing
activities in the amount of $782,840 financing activities for the six months ended June 30, 2018. The decrease was mainly attributable
to repayment of bank loans in the six months ended June 30, 2018.



Short-term
bank loans



|                                                            |  |     |  | June
    30, |           |  | December 31, |  
|----------------------------------------------------------- |  | --- |  | ------------ | --------- |  | ------------ | -
|                                                            |  |     |  | 2019         |           |  | 2018         |  
|Industrial and Commercial
    Bank of China (“ICBC”) Loan 1 |  | (a) |  | $            | -         |  |              | $
|Bank of Cangzhou                                            |  | (b) |  |              | -         |  |              |  
|ICBC Loan 2                                                 |  | (c) |  |              | 2,618,296 |  |              |  
|ICBC Loan 3                                                 |  | (d) |  |              | 3,927,444 |  |              |  
|Total
    short-term bank loans                             |  |     |  | $            | 6,545,740 |  |              | $



|(a) | On
                                         February 6, 2018, the Company entered into a working capital loan agreement with the
                                         ICBC, with a balance of $4,079,730 as of December 31, 2018. The working capital
                                         loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral
                                         for the benefit of the bank. The loan bears a fixed interest rate of 5.4% per annum.
                                         The loan was due and repaid on January 28, 2019.                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | On
                                         January 2, 2018, the Company entered into a working capital loan agreement with the Bank
                                         of Cangzhou, with a balance of $5,099,662 as of December 31, 2018. The loan bore a fixed
                                         interest rate of 6.09% per annum. The working capital loan was secured by the Company’s
                                         land use right and guaranteed by the Company’s CEO and Baoding Shengde with its
                                         production equipment as collateral for the benefit of the bank. The loan was due and
                                         repaid on January 3, 2019.
|(c) | On
    November 22, 2018, the Company entered into a working capital loan agreement with the ICBC, with a balance of $2,618,296 and
    $2,622,683 as of June 30, 2019 and December 31, 2018, respectively. The working capital loan is secured by the Company’s
    land use right as collateral for the benefit of the bank. The loan bears a fixed interest rate of 4.741% per annum. The loan
    will be due on November 26, 2019.                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(d) | On
    January 28, 2019, the Company entered into a working capital loan agreement with the ICBC, with a balance of $3,927,444 as
    of June 30, 2019. The working capital loan was guaranteed by Hebei Tengsheng with its land use right pledged as collateral
    for the benefit of the bank. The loan bears a fixed interest rate of 4.785% per annum. The loan will due and repaid on January
    30, 2020.                                                                                                                                                                                                                                                                                                                 



As
of June 30, 2019, there were guaranteed short-term borrowings of $6,545,740 and unsecured bank loans of $nil. As of December 31,
2018, there were guaranteed short-term borrowings of $11,802,075 and unsecured bank loans of $nil.



The
average short-term borrowing rates for the three months ended June 30, 2019 and 2018 were approximately 4.77% and 5.59%, respectively.
The average short-term borrowing rates for the six months ended June 30, 2019 and 2018 were approximately 4.76% and 5.58%, respectively.



Long-term
loans from credit union



As
of June 30, 2019 and December 31, 2018, loans payable to Rural Credit Union of Xushui District, amounted to $7,214,861 and $7,197,808,
respectively.





35







On
April 16, 2014, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due in various installments from June 21, 2014 to November 18, 2018. The loan is guaranteed by an independent
third party. Interest payment is due quarterly and bears the rate of 0.64% per month. On November 6, 2018, the loan was renewed
for additional 5 years and will be due and payable in various installments from December 21, 2018 to November 5, 2023. As of June
30, 2019 and December 31, 2018, total outstanding loan balance was $1,250,964 and $1,253,060, respectively, Out of the total outstanding
loan balance, current portion amounted were $116,369 and $87,423 as of June 30, 2019 and December 31, 2018, respectively, which
are presented as current liabilities in the consolidated balance sheet and the remaining balance of $1,134,595 and $1,165,637
are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively.



On
July 15, 2013, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 5 years,
which was originally due and payable in various installments from December 21, 2013 to July 26, 2018. On June 21, 2018, the loan
was extended for additional 5 years and will be due and payable in various installments from December 21, 2018 to June 20, 2023.
The loan is secured by certain of the Company’s manufacturing equipment with net book value of $4,883,169 and $5,782,640
as of June 30, 2019 and December 31, 2018, respectively. Interest payment is due quarterly and bears a fixed rate of 0.64% per
month. As of June 30, 2019 and December 31, 2018, the total outstanding loan balance was $3,636,523 and $3,642,615, respectively.
Out of the total outstanding loan balance, current portion amounted were $130,915 and $101,993 as of June 30, 2019 and December
31, 2018, respectively, which are presented as current liabilities in the consolidated balance sheet and the remaining balance
of $3,505,608 and $3,540,622 are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2019 and
December 31, 2018, respectively.



On
April 20, 2017, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which was due and payable in various installments from August 26, 2017 to April 19, 2019. The loan is guaranteed by Hebei Tengsheng
with its land use right pledged as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed
rate of 0.6% per month. As of June 30, 2019 and December 31, 2018, the total outstanding loan balance was $nil and $2,302,133,
respectively, which are presented as current liabilities in the consolidated balance sheet as of June 30, 2019 and December 31,
2018, respectively.



On
April 17, 2019, the Company entered into a loan agreement with the Rural Credit Union of Xushui District for a term of 2 years,
which was due and payable in various installments from August 21, 2019 to April 16, 2021. The loan is secured by Hebei Tengsheng
with its land use right as collateral for the benefit of the bank. Interest payment is due quarterly and bears a fixed rate of
0.6% per month. As of June 30, 2019 and December 31, 2018, the total outstanding loan balance was $2,327,374 and $nil, respectively,
which are presented as non-current liabilities in the consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively.



Total
interest expenses for the short-term bank loans and long-term loans for the three months ended June 30, 2019 and 2018 were $214,907
and $328,955, respectively. Total interest expenses for the short-term bank loans and long-term loans for the six months ended
June 30, 2019 and 2018 were $445,860 and $620,294, respectively.



Shareholder
Loans



Mr.
Zhenyong Liu, the Company’s CEO has loaned money to Dongfang Paper for working capital purposes over a period of time. On
January 1, 2013, Dongfang Paper and Mr. Zhenyong Liu renewed the three-year term loan previously entered on January 1, 2010, and
extended the maturity date further to December 31, 2015. On December 31, 2015, the Company paid off the loan of $2,249,279, together
with interest of $391,374 for the period from 2013 to 2015. Approximately $372,866 and $373,490 of interest were outstanding to
Mr. Zhenyong Liu, which were recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated
balance sheet as of June 30, 2019 and December 31, 2018, respectively.



On
December 10, 2014, Mr. Zhenyong Liu provided a loan to the Company, amounted to $8,727,654 to Dongfang Paper for working capital
purpose with an interest rate of 4.35% per annum, which was based on the primary lending rate of People’s Bank of China.
The unsecured loan was provided on December 10, 2014, and would be originally due on December 10, 2017. During the year of 2016,
the Company repaid $6,012,416 to Mr. Zhenyong Liu, together with interest of $288,596. In February 2018, the company paid off
the remaining balance, together with interest of $20,400. As of June 30, 2019 and December 31, 2018, approximately $43,638 and
$43,711 of interest were outstanding to Mr. Zhenyong Liu, which was recorded in other payables and accrued liabilities as part
of the current liabilities in the consolidated balance sheet.



On
March 1, 2015, the Company entered an agreement with Mr. Zhenyong Liu which allows Dongfang Paper to borrow from the CEO an amount
up to $17,455,307 (RMB120,000,000) for working capital purposes. The advances or funding under the agreement are due three years
from the date each amount is funded. The loan is unsecured and carries an annual interest rate set on the basis of the primary
lending rate of the People’s Bank of China at the time of the borrowing. On July 13, 2015, an unsecured amount of $4,324,636
was drawn from the facility. On October 14, 2016 an unsecured amount of $2,883,091 was drawn from the facility. In February 2018,
the company repaid $1,507,432 to Mr. Zhenyong Liu. The loan would be originally due on July 12, 2018. Mr. Zhenyong Liu agreed
to extend the loan for additional 3 years and the remaining balance will be due on July 12, 2021. On November 23, 2018, the company
repaid $3,768,579 to Mr. Zhenyong Liu, together with interest of $158,651. As of June 30, 2019 and December 31, 2018, the outstanding
loan balance were $2,181,913 and $2,185,569, respectively, and the accrued interest was $247,374 and $200,253, respectively, which
was recorded in other payables and accrued liabilities as part of the current liabilities in the consolidated balance sheet.





36







As
of June 30, 2019 and December 31, 2018, total amount of loans due to Mr. Zhenyong Liu were $2,181,913 and $2,185,569, respectively.
The interest expense incurred for such related party loans are $23,865 and $78,227 for the three months ended June 30, 2019 and
2018, respectively. The interest expenses incurred for such related party loans are $48,180 and $190,699 for the six months ended
June 30, 2019 and 2018, respectively. The accrued interest owe to the CEO was approximately $663,878 and $617,454, as of June
30, 2019 and December 31, 2018, respectively, which was recorded in other payables and accrued liabilities.



As
of June 30, 2019 and December 31, 2018, amount due to shareholder are $298,165 and $210,148, respectively, which represents funds
from shareholders to pay for various expenses incurred in the U.S. The amount is due on demand with interest free.



Critical
Accounting Policies and Estimates



The
Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States,
which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. Management makes these estimates using the best information available at the time the estimates are made.
However, actual results could differ materially from those estimates. The most critical accounting policies are listed below:



Revenue
Recognition Policy



The
Company recognizes revenue when goods are delivered and a formal arrangement exists, the price is fixed or determinable, the delivery
is completed, no other significant obligations of the Company exist, and collectability is reasonably assured. Goods are considered
delivered when the customer’s truck picks up goods at our finished goods inventory warehouse.



Long-Lived
Assets



The
Company evaluates the recoverability of long-lived assets and the related estimated remaining useful lives when events or circumstances
lead management to believe that the carrying value of an asset may not be recoverable and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amount. In such circumstances, those assets are written
down to estimated fair value. Our judgments regarding the existence of impairment indicators are based on market conditions, assumptions
for operational performance of our businesses, and possible government policy toward operating efficiency of the Chinese paper
manufacturing industry. For the three months ended June 30, 2019 and 2018, no events or circumstances occurred for which an evaluation
of the recoverability of long-lived assets was required. We are currently not aware of any events or circumstances that may indicate
any need to record such impairment in the future.



Foreign
Currency Translation



The
functional currency of Dongfang Paper and Baoding Shengde is the Chinese Yuan Renminbi (“RMB”).  Under ASC
Topic 830-30, all assets and liabilities are translated into United States dollars using the current exchange rate at the end
of each fiscal period. The current exchange rates used by the Company as of June 30, 2019 and December 31, 2018 to translate the
Chinese RMB to the U.S. Dollars are 6.8747:1 and 6.8632:1, respectively. Revenues and expenses are translated using the prevailing
average exchange rates at 6.7714:1, and 6.3870:1 for the six months ended June 30, 2019 and 2018, respectively. Translation adjustments
are included in other comprehensive income (loss).



Off-Balance
Sheet Arrangements



We
were the guarantor for Baoding Huanrun Trading Co., for its long-term bank loans in an amount of $4,509,288 (RMB31,000,000), which
matures at various times in in 2018 -2023. Baoding Huanrun Trading Co. is one of our major suppliers of raw materials. This helps
us to maintain a good relationship with the supplier and negotiate for better terms in payment for materials. If Huanrun Trading
Co. were to become insolvent, the Company could be materially adversely affected. Except as aforesaid, we have no material off-balance
sheet transactions.



Recent
Accounting Pronouncements



In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines
on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at
amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that
is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale
debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit
losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net
investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities,
trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements.





37







|Item
    3. | Quantitative
    and Qualitative Disclosures about Market Risk.
|----------- | ---------------------------------------------------------------



Foreign
Exchange Risk



While
our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated
in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result,
we are exposed to foreign exchange risks as our revenues and results of operations may be affected by fluctuations in the exchange
rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets
as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort
to reduce our exposure to foreign exchange risk.



Inflation



Although
we are generally able to pass along minor incremental cost inflation to our customers, inflation such as increases in the costs
of our products and overhead costs may adversely affect our operating results. We do not believe that inflation in China has had
a material impact on our financial position or results of operations to date, however, a high rate of inflation in the future
may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and
administrative expenses as a percentage of net revenues if the selling prices of our products do not increase in line with the
increased costs.



|Item4. | Controls
    and Procedures.
|------ | ----------------------------



As
required by Rule 13a-15 of the Securities Exchange Act, as amended (the “Securities Act”), we have evaluated the effectiveness
of the design and operation of our disclosure controls and procedures, which were designed to provide reasonable assurance of
achieving their objectives. This evaluation was carried out under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer
and principal financial officer have concluded that, as of June 30, 2019, our disclosure controls and procedures were effective
at the reasonable assurance level to ensure (1) that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules
and forms, and (2) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal executive officer and principal financial officer, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.



Changes
in Internal Control over Financial Reporting



There
were no changes with respect to our internal control over financial reporting that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting in the quarterly period ended June 30, 2019.





38







PART
II - OTHER INFORMATION



|Item
    1. | Legal
    Proceedings.
|----------- | ----------------------



None.



|Item 1A. | Risk
    Factors.
|-------- | -----------------



Information
about risk factors for the three months ended June 30, 2019, does not differ materially from that set forth in Part I, Item 1A
of the Company’s 2018 Annual Report on Form 10-K.



|Item
    2. | Unregistered
    Sales of Equity Securities and Use of Proceeds.
|----------- | ----------------------------------------------------------------



None.



|Item
    3. | Defaults
    Upon Senior Securities.
|----------- | ------------------------------------



None.



|Item
    4. | Mine
    Safety Disclosures.
|----------- | ----------------------------



Not
applicable.



|Item
    5. | Other
    Information.
|----------- | ----------------------



None.



|Item
    6. | Exhibits.
|----------- | ---------



(a) Exhibits



|31.1    |  | Certification
    of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act
    of 1934, as amended.
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2    |  | Certification
    of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act
    of 1934, as amended.
|32.1    |  | Certification
    pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                            
|32.2    |  | Certification
    pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                            
|101.INS |  | XBRL
    Instance Document                                                                                                                                             
|101.SCH |  | XBRL
    Schema Document                                                                                                                                               
|101.CAL |  | XBRL
    Calculation Linkbase Document                                                                                                                                 
|101.LAB |  | XBRL
    Label Linkbase Document                                                                                                                                       
|101.PRE |  | XBRL
    Presentation Linkbase Document                                                                                                                                
|101.DEF |  | XBRL
    Definition Linkbase Document                                                                                                                                  





39







SIGNATURES



Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.



|                         | IT
    TECH PACKAGING, INC.
|------------------------ | ---------------------------
|                         |                            
|Date:
    August 8, 2019 | /s/
    Zhenyong Liu       
|                         | Name:                      
|                         | Title:                     
|                         |                            
|                         |                            
|Date:
    August 8, 2019 | /s/
    Jing Hao           
|                         | Name:                      
|                         | Title:                     
|                         |                            





40