Executive Summary / Key Takeaways

• IT Tech Packaging, Inc. (ITP) operates within the competitive Chinese paper and packaging market, characterized by a complex VIE structure and a strategic focus on corrugating medium paper (CMP), tissue paper, and other specialized products.
• Recent financial performance in Q1 2025 showed significant revenue growth (+58.76%) driven by higher CMP volume, but profitability deteriorated sharply with gross margin falling to 0.77% and a net loss of $3.50M, primarily due to declining average selling prices and increased raw material costs.
• The company faces substantial doubt about its ability to continue as a going concern, stemming from recent losses, suspended production at key facilities (Baoding Shengde, offset printing, tissue paper), high depreciation, decreased demand, and a working capital deficit excluding VAT recoverable.
• Management's plan to address these challenges includes optimizing raw materials, stabilizing capacity utilization, exploring new products/pricing, rigorous cost/cash flow control, and utilizing capital market financing, evidenced by a recent $1.4 million public offering.
• The successful resumption of suspended production lines, particularly offset printing and tissue paper expected in H2 2025, is critical to improving utilization rates, reducing unit costs, and restoring profitability, forming the core of the near-term investment thesis.

The Foundation: A Paper Producer's Evolution in China

IT Tech Packaging, Inc. ($ITP) traces its roots back to 2005, evolving significantly through strategic acquisitions to become a key player in China's paper and packaging industry. Its core operations are centered around the production and distribution of diversified paper products, primarily corrugating medium paper (CMP), offset printing paper, and tissue paper, managed through a variable interest entity (VIE) structure involving Dongfang Paper and its subsidiary Tengsheng Paper. This structure, while common for foreign-listed Chinese companies, introduces unique legal and regulatory risks inherent to operating within the PRC framework.

The company's strategic journey has seen it expand its product portfolio and production capacity. Beyond traditional paper products, ITP ventured into digital photo paper and single-use face masks through its Baoding Shengde subsidiary. A notable strategic push has been into the tissue paper market, marked by the launch of production lines like PM8 and PM9 and the planned commercialization of a new line, PM10. This expansion reflects a strategic intent to capitalize on domestic market demand for tissue products and diversify revenue streams. Furthermore, the company has explored "high and new technology" initiatives, such as a Biomass Combined Heat and Power (CHP) generation project, aimed at enhancing operational efficiency and securing stable profit modes, though specific quantifiable benefits or timelines for these initiatives are not detailed in the most recent filings.

Within the competitive landscape, ITP operates alongside both large global players and numerous domestic competitors. Giants like International Paper (IP), WestRock (WRK), and Packaging Corporation of America (PKG) represent formidable competition, particularly in export markets and higher-value segments. These global peers often boast superior scale, more advanced automation leading to higher production efficiencies (e.g., IP's AI-driven processes potentially reducing operating costs by 10-15% compared to ITP's methods, WRK's advanced recycling processes offering 10-15% lower operating costs, and PKG's automated lines achieving 20% higher throughput), and larger R&D budgets enabling faster innovation. Quantitatively, ITP's latest TTM financial ratios reveal a challenging position compared to these larger rivals: ITP's TTM Gross Profit Margin of 7.98% pales in comparison to IP's 28%, WRK's 18%, and PKG's 21%. Similarly, ITP's TTM Net Profit Margin of -12.02% highlights significant unprofitability, contrasting sharply with IP's 3%, WRK's -8%, and PKG's 10%. ITP's Debt/Equity ratio of 0.07 appears low, but this must be viewed in the context of its overall financial distress and going concern issues.

ITP's competitive advantages lie primarily in its localized distribution network and brand recognition within North China, particularly for its Dongfang Paper products. This regional focus allows for potentially faster delivery and stronger customer relationships compared to global players. While specific quantifiable benefits of its paper production technology beyond general efficiency improvements are not detailed in the recent filings, the strategic investment in new lines like PM10 suggests an effort to modernize and improve operational capabilities. However, the company acknowledges being subject to intense industry competition, and its smaller scale and technological gaps (older machinery potentially leading to higher energy consumption and lower throughput compared to peers) represent significant vulnerabilities that impact its cost structure and market share capture potential.

Recent Performance and Liquidity Challenges

The first quarter of 2025 painted a mixed picture for ITP, highlighting both operational activity and significant financial strain. Revenue saw a substantial increase of 58.76% to $10.90 million compared to $6.86 million in Q1 2024. This growth was primarily volume-driven, with total CMP sales volume surging by 69.29%. However, this top-line expansion was undermined by deteriorating pricing power; average selling prices for regular CMP decreased by 5.71% and for light-weight CMP by 5.92%.

The impact of lower ASPs, coupled with a 2.22% increase in the average unit purchase cost of recycled paper board (a key raw material), severely compressed profitability. Despite a slight decrease in the average cost of sales per tonne for CMP (-1.16%) attributed to improved utilization of the PM6 line (increasing from 15.11% to 30.44%), the gross profit plummeted by 78.93% to just $84,086. This resulted in a stark decline in gross profit margin from 5.81% in Q1 2024 to a mere 0.77% in Q1 2025. The light-weight CMP segment even posted a negative gross margin of -3.12%.

Selling, general, and administrative expenses saw a welcome decrease of 11.27% to $3.46 million, partly due to reduced depreciation on idle assets. However, the collapse in gross profit led to an operating loss of $3.38 million, a slight increase in magnitude from the $3.50 million operating loss in the prior year period. The net loss for the quarter was $3.50 million, compared to a net loss of $3.75 million in Q1 2024.

Compounding the operational losses are significant liquidity concerns. As of March 31, 2025, ITP reported current assets of $29.50 million and current liabilities of $20.93 million, suggesting positive working capital of $8.57 million. However, a substantial portion of current assets ($13.17 million) consists of VAT recoverable related to suspended production, deemed unrecoverable in the short term. Excluding this, the company faces a net working capital deficit of $4.61 million. Cash and cash equivalents decreased by $1.88 million during the quarter, standing at $4.03 million (plus $1.04 million restricted cash).

Cash flow from operations was negative, with a net cash outflow of $2.47 million for the quarter, a significant deterioration from the $624,420 provided by operations in Q1 2024. This was driven by increases in accounts receivable (up 639.85% to $2.13M) and inventories (up 97.40% to $4.64M, with recycled paper board inventory surging 139.72% in anticipation of future production). Investing activities were minimal, while financing activities provided $585,456, primarily from new bank loans. Total interest-bearing loans aggregated $9.72 million as of quarter-end.

The combination of recurring losses, negative operating cash flow, and the working capital deficit led management to conclude that there is substantial doubt about the company's ability to continue as a going concern. This assessment is directly linked to the suspended production at Baoding Shengde and the offset printing and tissue paper lines, high depreciation costs on idle assets, decreased market demand, and elevated material costs.

Strategic Response and Outlook

Acknowledging the critical challenges, ITP's management has outlined a plan focused on operational stabilization and strategic adjustments. The core of the near-term outlook hinges on the expected resumption of production for offset printing paper and tissue paper products in the second half of 2025. This resumption is crucial for increasing overall capacity utilization, which in turn is expected to reduce unit manufacturing costs and potentially improve gross margins. The increased procurement of recycled paper board in Q1 2025 signals preparation for this planned expanded output.

Management's strategy to address the going concern risk involves several key pillars:

• Optimizing raw material structure and stabilizing manufacturing capacity utilization: This aims to reduce procurement costs and improve production efficiency, building on the slight improvement seen in PM6 utilization.
• Exploring new products and adjusting pricing strategies: This is intended to secure a larger market share and potentially improve average selling prices, counteracting the recent declines.
• Maintaining rigorous control over inventory, working capital, and cash flow: Essential steps to mitigate immediate financial risks and improve liquidity.
• Strategically utilizing financing quotas from the capital market: This is a direct response to the need for capital to fund operations and strategic initiatives. The recent announcement on May 13, 2025, of the pricing of a public offering expected to generate approximately $1.4 million in gross proceeds is a concrete example of this strategy in action, providing much-needed capital injection.

The company also has outstanding capital expenditure commitments of approximately $3.44 million, primarily related to the new PM10 tissue paper production line and building improvements. These investments are expected to be financed by a combination of bank loans and future operating cash flows, underscoring the importance of restoring profitability.

While specific quantitative financial guidance for future periods is not provided in the Q1 2025 filing, the stated expectation for production resumption in H2 2025 represents a key operational target. The success of management's plan to increase market acceptance, boost sales volume, achieve economies of scale, and better manage operating cash flow is paramount for the company's continued existence as a going concern.

Risks and Considerations

Investing in ITP carries significant risks, prominently highlighted by the substantial doubt about the company's ability to continue as a going concern. The successful execution of management's turnaround plan is not guaranteed and depends on favorable market conditions, effective operational improvements, and access to necessary financing.

Beyond the going concern risk, several other factors warrant close attention:

• VIE Structure Risks: The company's control over its PRC operating entities relies on contractual agreements. Uncertainties in the PRC legal system could challenge the enforceability of these agreements, potentially leading to penalties, required restructuring, or even deconsolidation of the VIEs, which represent the vast majority of the company's assets and revenue.
• Legal Proceedings: ITP is involved in legal disputes, including a US lawsuit where a default judgment on liability has been entered against the company and a PRC loan dispute involving a subsidiary. The outcomes of these proceedings are uncertain and could result in significant financial liabilities and diversion of management resources.
• Concentration Risk: Reliance on a limited number of major suppliers (two suppliers accounted for 77% and 16% of purchases in Q1 2025) creates vulnerability to disruptions in supply or changes in terms. Furthermore, the company provides a guarantee for a $4.32 million long-term loan of a major supplier, exposing it to potential liability if the supplier defaults.
• Liquidity and Financing: Despite the recent offering, the company faces a working capital deficit (excluding VAT) and negative operating cash flow. Its ability to secure additional financing or generate sufficient cash from operations to meet its obligations, including debt repayments and capital commitments, remains critical.
• Foreign Exchange Risk: As most operations are denominated in RMB while reporting is in USD, fluctuations in the RMB/USD exchange rate can impact reported financial results.
• Inflation: Rising costs of raw materials and energy, if not offset by price increases or efficiency gains, can further pressure already thin or negative margins.

Conclusion

IT Tech Packaging is at a critical juncture, grappling with operational suspensions, profitability pressures, and significant liquidity challenges that cast doubt on its ability to continue as a going concern. The Q1 2025 results underscore the severity of the situation, with revenue growth overshadowed by collapsing margins and negative cash flow.

The investment thesis for ITP currently hinges on the successful execution of its turnaround plan, particularly the expected resumption of suspended production lines in the second half of 2025. This operational restart is essential for improving efficiency, reducing costs, and potentially restoring profitability. Management's efforts to optimize operations, explore new market strategies, and secure financing, including the recent public offering, are necessary steps, but their success is far from assured.

While ITP possesses localized advantages in the North China market, it faces an uphill battle against larger, more technologically advanced global competitors. The company's ability to narrow the gap in efficiency and profitability, navigate the risks associated with its VIE structure and legal proceedings, and effectively manage its liquidity will determine its future viability. For investors, ITP represents a high-risk, potentially high-reward proposition, entirely dependent on the company's capacity to execute a challenging operational and financial turnaround in a competitive and uncertain market environment. The coming quarters, particularly the second half of 2025, will be crucial in demonstrating whether ITP can move beyond the going concern doubt and build a sustainable path forward.