(Name, Telephone, E-mail
and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section
12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of
the Act:
The number of outstanding shares of each of the issuer’s classes
of capital or common stock as of the close of the period covered by the annual report was:
This annual report contains forward-looking statements.
All statements contained in this annual report other than statements of historical fact, including statements regarding our future
results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking
statements. The words “believe,” “may,” “will,” “estimate,” “continue,”
“anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking
statements. We have based these forward-looking statements largely on our current expectations and projections about future events
and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term
business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties
and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive
and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks,
nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks,
uncertainties and assumptions, the future events and trends discussed in this annual report may not occur and actual results could
differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements
as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or
occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements
after the date of this annual report or to conform these statements to actual results or revised expectations.
PART
I
Item 1.
|
Identity of Directors, Senior Management and Advisers
|
Not applicable for annual reports on Form 20-F.
Item 2.
|
Offer Statistics and Expected Timetable
|
Not applicable for annual reports on Form 20-F.
|
A.
|
Selected financial data.
|
In the table below, we provide you with historical
selected financial data for the fiscal years ended December 31, 2015 and 2014. This information is derived from our consolidated
financial statements included elsewhere in this annual report. Historical results are not necessarily indicative of the results
that may be expected for any future period. When you read this historical selected financial data, it is important that you read
it along with the historical financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”
included elsewhere in this annual report. Our audited consolidated financial statements are prepared and presented in accordance
with Generally Accepted Accounting Principles in the United States of America, or U.S. GAAP.
(All amounts in thousands of U.S. dollars)
Statement of operations data:
|
|
For the year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenues
|
|
$
|
58,830
|
|
|
$
|
65,493
|
|
Gross profit
|
|
|
16,882
|
|
|
|
20,640
|
|
Operating expenses
|
|
|
(6,668
|
)
|
|
|
(3,466
|
)
|
Income from operations
|
|
|
10,214
|
|
|
|
17,174
|
|
Provision for Income taxes
|
|
|
(2,378
|
)
|
|
|
(2,854
|
)
|
Net income attributable to the noncontrolling interest
|
|
|
(488
|
)
|
|
|
(736
|
)
|
Net income attributable to common stockholders
|
|
$
|
8,439
|
|
|
$
|
13,981
|
|
Balance sheet data:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Working capital
|
|
$
|
49,697
|
|
|
|
43,517
|
|
Current assets
|
|
|
63,683
|
|
|
|
59,749
|
|
Total assets
|
|
|
87,075
|
|
|
|
78,709
|
|
Current liabilities
|
|
|
13,986
|
|
|
|
16,232
|
|
Total liabilities
|
|
|
13,986
|
|
|
|
16,232
|
|
Total equity
|
|
$
|
73,089
|
|
|
|
62,477
|
|
exchange rate information
Our financial information is presented in U.S.
dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions denominated in currencies
other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions.
Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of
operations as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”,
which was subsequently codified within ASC 830, “Foreign Currency Matters”. The financial information is first prepared
in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange
rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions
occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive
income (loss) in shareholders’ equity. The relevant exchange rates are listed below:
|
|
December 31, 2015
|
|
December 31, 2014
|
US$:RMB exchange rate
|
|
Period End
|
|
$
|
0.1541
|
|
|
Period End
|
|
$
|
0.1629
|
|
|
|
Average
|
|
$
|
0.1606
|
|
|
Average
|
|
$
|
0.1628
|
|
We make no representation that any RMB or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or
at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion
of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.
The following table sets forth information concerning
exchange rates between the RMB and the U.S. dollar for the periods indicated (
www.oanda.com
).
|
|
Midpoint of Buy and Sell Prices
for U.S. Dollar per RMB
|
|
Period
|
|
Period-End
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
2009
|
|
|
6.8272
|
|
|
|
6.8310
|
|
|
|
6.8483
|
|
|
|
6.8130
|
|
2010
|
|
|
6.6018
|
|
|
|
6.7696
|
|
|
|
6.8344
|
|
|
|
6.6018
|
|
2011
|
|
|
6.3585
|
|
|
|
6.4640
|
|
|
|
6.6357
|
|
|
|
6.3318
|
|
2012
|
|
|
6.3086
|
|
|
|
6.3116
|
|
|
|
6.3862
|
|
|
|
6.2289
|
|
2013
|
|
|
6.0220
|
|
|
|
6.0720
|
|
|
|
6.2195
|
|
|
|
5.9778
|
|
2014
|
|
|
6.1411
|
|
|
|
6.1463
|
|
|
|
6.1758
|
|
|
|
6.0924
|
|
2015
|
|
|
6.4917
|
|
|
|
6.2288
|
|
|
|
6.4917
|
|
|
|
6.0933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 (through April 25, 2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.6058
|
|
|
|
6.5678
|
|
|
|
6.6058
|
|
|
|
6.5022
|
|
February
|
|
|
6.5543
|
|
|
|
6.5497
|
|
|
|
6.5854
|
|
|
|
6.5169
|
|
March
|
|
|
6.4494
|
|
|
|
6.5045
|
|
|
|
6.5543
|
|
|
|
6.4494
|
|
April (through April 25, 2016)
|
|
|
6.4987
|
|
|
|
6.4760
|
|
|
|
6.5016
|
|
|
|
6.4479
|
|
Over the past several years, the Renminbi has
moved from a period of being tightly linked to the U.S. dollar, to a period of revaluation and strengthening against the dollar
and into a second period of current relative stability. Our primary sales outside China occur in Japan, South Korea,Taiwan, the
Middle East and Europe, but all such sales outside China are made in U.S. dollars. Following is a chart showing recent changes
in the exchange rates between the Renminbi and U.S. dollar.
Currency Exchange Rate – USD:RMB
|
B.
|
Capitalization and indebtedness.
|
Not applicable for annual reports on Form 20-F.
|
C.
|
Reasons for the offer and use of proceeds.
|
Not applicable for annual reports on Form 20-F.
Risks Related to Our Business and Industry
A weakening of the Chinese economy (and in particular consumer
spending) could hurt demand for our Charcoal Doctor and EDLC carbon products.
Our Charcoal Doctor products are generally considered
“household use and decorative items,” meaning that these products are used for beautification and decoration purposes
in addition to purification purposes. For example, consumers tend to purchase charcoal products for their value in absorbing odors
and tend to purchase some of our bamboo charcoal products for these purposes and also for the perceived attractiveness of our products.
We seek to design bamboo charcoal products that our customers want to display throughout their homes.
As such, we have relied on consumer spending
to drive sales in this product line. In the past, sales have been increased as Chinese consumers have had more disposable income.
Over the last five years, China’s GDP growth rate has slowed from more than 11% to less than 7%. If China’s economy
continues to slow, or if customer spending for household items decreases, demand for our products may be reduced, which would negatively
affect sales of our Charcoal Doctor products. Similarly, a reduction in spending on automobiles or public transportation could
affect the demand for the sort of supercapacitors that are likely to use our EDLC carbon, reducing the demand for products like
ours.
If we are unable to develop products that meet the demands
of our customers, sales of our products could decrease.
As a company that focuses on consumer products
in our Charcoal Doctor line of products, we rely on our ability to predict the needs and desires of customers several months before
fulfilling orders for stores. If we are unable to accurately forecast our customers’ preferences, we may lose market share
to our competitors.
Our two largest competitors are significantly larger than
our company.
Although our company is one of the largest providers
of bamboo charcoal-based products of their kind, we compete with companies that make products that have equivalent function but
that are not bamboo charcoal-based, and some of these competitors are much larger than we are. Charcoal Doctor’s two largest
such competitors are Guangzhou Blue Moon Industry Co., Ltd, which makes Blue Moon branded products (“Blue Moon”), and
Shanghai SC Johnson Wax Co., Ltd, which makes Mr. Muscle branded products (“Mr. Muscle”). Blue Moon and Mr. Muscle
are substantially larger than Charcoal Doctor. We believe that they have a much greater customer recognition level than Charcoal
Doctor. Charcoal Doctor has not historically spent substantial resources on television or print advertising. As a result, we expect
that such competitors are likely to continue efforts to improve their brand recognition, while we may be unable to do so without
changing our business plan to increase spending on such advertisements.
As a charcoal-based provider of household products, we are
subject to supply risks that some of our competitors do not face.
Some of our largest competitors in the provision
of household products such as our bamboo vinegar products rely on chemical solutions, rather than charcoal and derivatives of charcoal,
to create their products. As a result, we do not believe they are subject to business risk in the event bamboo or wood charcoal
supplies are compromised. On the other hand, if we were unable to procure bamboo or wood charcoal products or unable to procure
them on attractive terms, our product line could become substantially more expensive or our growth rate could be limited, resulting
in us becoming less competitive than others in our industry.
In summer 2012, we faced a supply shortage based
on local government initiatives to reduce the risk of fire caused by charcoal. As a result, the local government in Daxing Anlin,
where one of our main suppliers of wood-based OEM BBQ charcoal is located, restricted the production of charcoal during June, July
and August 2012. At that time, our stock of OEM BBQ charcoal was insufficient to avoid demand pressures. As a result, our revenues
declined during this period. If local governments similarly reduce production of charcoal in the future, we could be negatively
impacted by the lack of supply, either as to our ability to obtain suitable product or by our ability to obtain such product at
a reasonable price.
We lack product and business diversification. Accordingly,
our future revenues and earnings are more susceptible to fluctuations than a more diversified company.
Our primary business activities focus on bamboo-related
products. Because our focus is limited in this way, any risk affecting the bamboo industry or consumers’ desire for bamboo-
and bamboo charcoal-related products could disproportionately affect our business. Our lack of product and business diversification
could inhibit the opportunities for growth of our business, revenues and profits.
Our suppliers’ bamboo is subject to risks related to
fire, flooding, disease and pests.
While bamboo is considered a relatively hardy
plant, it remains a plant that can be burned in fires or damaged by prolonged flooding or exposure to diseases, fungus and pests.
If our suppliers’ bamboo resources were affected by such natural risks, it could be more difficult or expensive to source
the bamboo charcoal for our products.
Increases in bamboo charcoal costs may negatively affect our
operating results.
While bamboo is a renewable resource (and thus
bamboo products like bamboo charcoal may be considered renewable), the price of raw materials may be inelastic when we wish to
purchase supplies. While we have attempted to mitigate this risk by taking advantage of decreases in other expenses (due to better
transportation infrastructure reducing the cost of bringing materials to our company and from our company to our customers) and
improving efficiency, we cannot guarantee that we will be able to control our material expenses. In addition, as we are competing
based upon low price, we will risk losing customers by increasing our selling prices. To the extent our expenses increase beyond
the price we can charge our customers, our operating results could be harmed.
We may be unable to meet quality requirements for our EDLC
carbon products.
We produce our EDLC carbon to our customers’
specifications. Each order requires us to produce EDLC to different tolerances than another order might. Prior to delivering the
final product to the customer, we prepare a sample for them to test. As a relatively new producer of EDLC carbon, we had initial
challenges in preparing EDLC carbon that met our customers’ demands. While our production process has improved, we cannot
guarantee that our product will always meet the requirements of our customers. To the extent our EDLC carbon fails to pass inspection
for such customers, they may refuse delivery. In addition, if our final shipment failed inspection after delivery of the initial
sample, we could be subject to more substantial loss on such order. Any failures of our products to pass inspection could cause
our customers to use different suppliers in the future.
Our EDLC products are not well known.
We have only recently entered into the EDLC carbon
industry. At present, our product visibility is low. Although we plan to participate in industry events to improve recognition
and drive revenues, we have no guarantee that we will be able to materially increase the market recognition of our EDLC carbon
products. To the extent we are unable to increase our product visibility, we may face challenges in increasing revenues or the
profit margin for such products.
If we misjudge the viability of the EDLC market or if technological
developments in the industry are not forthcoming at the rate we expect, we may find that we have overextended our growth.
We are seeking to increase our capacity to produce
EDLC carbon. Our desire to increase capacity is based on our assumption and belief that demand for EDLC carbon will grow, based
on current and anticipate future needs. To the extent demand for EDLCs does not grow as we expect, whether because current demand
does not grow or because technology in the industry does not further increase demand for EDLCs, we may find that we have capacity
beyond our actual needs. While having excess capacity would allow us to more quickly increase production in the event future EDLC
demand increased, it would also result in increased fixed costs (as a percentage of revenues) to our company for such facilities,
reducing our profitability and tying up assets that could otherwise be used for more productive purposes.
We face competition from EDLC competitors that seek to increase
their products on the supply chain.
To date, carbon for EDLC applications have sold
at a premium compared to carbon for other purposes. Our competitors in the bamboo carbon industry may seek to enter the EDLC industry
to take advantage of these premiums, and our competitors in the EDLC industry may seek to enter the carbon industry both to reduce
their expenses and to capture profits from EDLC carbon. Either action, if successful, could reduce our revenues and profit margin
for our EDLC carbon products.
We face competition from smaller competitors that may be able
to provide similar products at lower prices.
Our charcoal briquette products are valued primarily
for their ability to burn and create heat. As result, our competitors in this line of business do not require the same high technology
as our competitors for our EDLC or Charcoal Doctor products. For this reason, our charcoal briquette business is subject to competition
from a variety of small producers, which may be able to provide similar product for a much lower price. To the extent our customers
discriminate based on price, we may find that we lose market share to such producers. Moreover, we may be required to reduce our
price in order to maintain or slow loss of market share for such products. As charcoal briquette products make up a substantial
percentage of revenues, even at a lower profit margin, the reduction of sales of such products could hurt our company.
China’s appreciating currency may make our products
more expensive to export to other countries.
While
we generate approximately 99% of our revenue from China sources, we export our products through our distributors or exports to
other countries.
Historically, we have relied on favorable exchange rates between China and other countries to receive more
orders from abroad. When Chinese currency appreciates against the U.S. dollar, Japanese yen and Euro, our products become more
expensive in countries that use these currencies, and vice versa. To the extent the Chinese RMB continues to appreciate, our products
could become more expensive and, as a result, less attractive to potential customers in other countries. See “Exchange Rate
Information.”
Outstanding bank loans may reduce our available funds.
We have approximately $8.4 million in outstanding
bank loans as of December 31, 2015. The loans are held at multiple banks, and we used our land and property as the collateral for
the debt. While our land and property is worth more than the amount of the total loan amount and we also have approximately $6.3
million in cash and approximately $57.4 million of liquid assets available to pay the debt, there can be no guarantee that we will
be able to pay all amounts when due or refinance the amounts on terms that are acceptable to us or at all. If we are unable to
make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively
affected.
While we do not believe they will impact our
liquidity, the terms of the debt agreements impose significant operating and financial restrictions on us. These restrictions could
also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting
us from engaging in certain transactions, including but not limited to: incurring or guaranteeing additional indebtedness; transferring
or selling assets currently held by us; and transferring ownership interests in certain of our subsidiaries. The failure to comply
with any of these covenants could cause a default under our other debt agreements. Any of these defaults, if not waived, could
result in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this occurs,
we may not be able to repay our debt or borrow sufficient funds to refinance it on favorable terms, if any.
If the value of our property decreases, we may not be able
to refinance our current debt.
All of our current debt is secured by mortgages
on our real and other business property. If the value of our real property decreases, we may find that banks are unwilling to loan
money to us secured by our business property. A drop in property value could also prevent us from being able to refinance that
loan when it becomes due on acceptable terms or at all.
If our expansions into new businesses
are not successful, our future results of operations and growth prospects may be materially and adversely affected.
We
intend to enter into electric vehicles manufacturing industry. On January 27, 2016, we entered into a framework agreement to acquire
Suzhou E Motors Co., Ltd. (“
Suzhou E Motors
”), a specialty electric vehicles manufacturer. Pursuant to this
Framework Agreement, we plan to acquire 100% equity interest in Suzhou E Motors with a combination of cash and restricted shares
of our common stock. Completion of the transaction is subject to the terms and conditions set forth in a definitive agreement
to be negotiated and executed between the Company and the shareholders of Suzhou E Motors.
If we enter into this
new business, we may face competition from existing leading players in this business. If we cannot successfully address the new
challenges and compete effectively against the existing leading players in the new businesses, we may not be able to develop a
sufficiently large customer and user base, recover costs incurred for investing in, developing and marketing new businesses, and
eventually achieve profitability from these businesses, and our future results of operations and growth prospects may be materially
and adversely affected.
We may require additional financing in the future and our
operations could be curtailed if we are unable to obtain required additional financing when needed.
We may need to obtain additional debt or equity
financing to fund future capital expenditures. While we do not anticipate seeking additional financing in the immediate future,
any additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing
may include conditions that would restrict our freedom to operate our business, such as conditions that:
|
·
|
limit our ability to pay dividends or require us to seek consent for the payment of dividends;
|
|
·
|
increase our vulnerability to general adverse economic and industry conditions;
|
|
·
|
require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability
of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and
|
|
·
|
limit our flexibility in planning for, or reacting to, changes in our business and our industry.
|
We cannot guarantee that we will be able to obtain
any additional financing on terms that are acceptable to us, or at all.
The loss of any of our key customers could reduce our revenues
and our profitability.
Our key customers are principally third party
distributors and retail stores in the PRC. For the year ended December 31, 2015, sales to our seven largest customers amounted
in the aggregate to approximately 54% of our total revenue. For the year ended December 31, 2014, sales to our seven largest customers
amounted in the aggregate to approximately 50% of our total revenue. There can be no assurance that we will maintain or improve
the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all.
Any failure to pay by these customers could have a material negative effect on our company’s business. In addition, having
a relatively small number of customers may cause our quarterly results to be inconsistent, depending upon when these customers
pay for outstanding invoices.
During the years ended December 31, 2015 and
2014, respectively, we had two customers that accounted for 10% or more of our revenues:
|
|
Percentage of Revenues in
|
|
Customer Name
|
|
Year ended December 31, 2015
|
|
|
Year ended December 31, 2014
|
|
Hangzhou Bai De Sheng Ou Ltd.
|
|
|
12.3
|
%
|
|
|
15.8
|
%
|
Shanghai Hengguan New Materials Co.
|
|
|
17.4
|
%
|
|
|
10.5
|
%
|
If we cannot maintain long-term relationships
with these major customers, the loss of our sales to them could have an adverse effect on our business, financial condition and
results of operations.
We rely on third-party distributors
for a substantial portion of our sales, which could affect our ability to efficiently and profitably distribute and market our
products, maintain our existing markets and expand our business into other geographic markets.
Sales of our products through distributors constituted
approximately 65%
and 70% of our total sales in the years ended 2015 and 2014, respectively. To
the extent our distributors are distracted from selling our products or do not expend sufficient efforts in managing and selling
our products, our sales will be adversely affected. Our ability to maintain our distribution network and attract additional distributors
will depend on a number of factors. Some of these factors include: (i) the level of demand for our brand and products in a particular
market; (ii) our ability to maintain current distribution relationships or establish and maintain successful relationships with
distributors in new geographic areas. These factors are partially outside our control because consumers ultimately determine what
they purchase and we cannot control the actions of our distributors. Our inability to achieve any of these factors in a geographic
distribution area will have a material adverse effect on our relationships with our third party distributors in that particular
geographic area, thus limiting our ability to maintain and expand our market, which will likely adversely affect our revenues and
financial results.
We buy our supplies from a relatively limited number of suppliers.
During the year ended December 31, 2015, three
largest suppliers accounted for approximately 61% of our total purchases. During the year ended December 31, 2014, three largest
suppliers accounted for approximately 72% of our total purchases. During years ended December 31, 2015 and 2014, we had three suppliers
that accounted for 10% or more of our purchases, respectively:
|
|
Percentage of Purchases in
|
|
Supplier Name
|
|
Year ended December
31, 2015
|
|
|
Year ended December 31,
2014
|
|
Zhejiang Longquan Zhixin Trading Co.
|
|
|
30.0
|
%
|
|
|
36.9
|
%
|
Tahe Xingzhongda Carbon Co.
|
|
|
17.9
|
%
|
|
|
24.7
|
%
|
Wenzhou Changlong Textile Science and Technology Co., Ltd.
|
|
|
12.8
|
%
|
|
|
10.6
|
%
|
Because we purchase a material amount of our
raw materials from these suppliers, the loss of any such suppliers could result in increased expenses for our company and result
in adverse impact on our business, financial condition and results of operations.
Our bank accounts are not insured or protected against loss.
We maintain our cash with various banks and trust
companies located in the PRC. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding
our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that
particular bank or trust company.
We are subject to risks relating to the banking facilities
we use to overcome cash flow issues.
We generate a large proportion of our sales revenue
through wholesale channels and distribution networks (supermarkets and chain stores) requiring us to extend net-90 day payment
terms in most cases. These payment terms are difficult to negotiate given the significant bargaining power of the counterparties
to the agreements. For this reason, we rely on banking facilities to overcome cash flow shortfalls between delivery and payment
collection. Although we engage third-party debt collection agencies when required to manage counterparty risk, we cannot guarantee
that we will receive payment in a timely fashion from our customers. To the extent we fail to receive payment in time to service
our banking facilities, our business to be materially impacted.
We are substantially dependent upon our senior management
and key research and development personnel.
We are highly dependent on our senior management
to manage our business and operations and our key research and development personnel for the development of new products and the
enhancement of our existing products and technologies. In particular, we rely substantially on our chief executive officer, Mr.
Zhengyu Wang to manage our operations. Mr. Wang has been involved in the bamboo charcoal industry for more than ten years. Due
to his experience in the industry in general and our company in particular for such a long period of time, he would be difficult
to replace. We also depend on our chief technical officer, Dr. Zaihua Chen, for the development of new technology and products.
Dr. Chen is an expert in charcoal in general and, in particular bamboo charcoal and the use of charcoal for EDLC carbon. He would
be difficult to replace in a city with the size of Lishui.
While we provide the legally required personal
insurance for the benefit of our employees, we do not maintain key man life insurance on any of our senior management or key personnel.
The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management
and our other key personnel (particularly for those who work with our EDLC products) is intense, and the pool of suitable candidates
is limited. We may be unable to quickly locate a suitable replacement for any senior management or key personnel that we lose.
In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may
compete with us for customers, business partners and other key professionals and staff members of our company. Although each of
our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his employment
with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us
and any member of our senior management or key personnel.
We compete for qualified personnel with other
technology companies and research institutions. Intense competition for these personnel could cause our compensation costs to increase,
which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will
depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified
personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
We are heavily dependent upon the services of experienced
personnel who possess skills that are valuable in our industry, and we may have to actively compete for their services.
We are heavily dependent upon our ability to
attract, retain and motivate skilled personnel (particularly those who work with our EDLC products) to serve our customers. Many
of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we
will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able
to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and
retain our personnel. Moreover, our pool of available labor in Lishui is limited, as Lishui is a relatively small city in China.
Accordingly, it may be difficult to recruit personnel to move to Lishui to work and to keep talented individuals from moving to
other employers who recruit them. There can be no assurance that we will be able to retain our current personnel, or that we will
be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel,
the development and quality of our services could be materially impaired.
Failure to manage our growth could strain our management,
operational and other resources, which could materially and adversely affect our business and prospects.
Our growth strategy includes building our brand,
increasing market penetration of our existing products, developing new products, increasing our targeting of the home respiratory
market in China, and increasing our exports. Pursuing these strategies has resulted in, and will continue to result in substantial
demands on management resources. In particular, the management of our growth will require, among other things:
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continued enhancement of our research and development capabilities;
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information technology system enhancement;
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stringent cost controls and sufficient liquidity;
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strengthening of financial and management controls and information technology systems; and
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increased marketing, sales and support activities; and hiring and training of new personnel.
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If we are not able to manage our growth successfully,
our business and prospects would be materially and adversely affected.
We have not yet implemented advanced logistical management
techniques, which may hamper our efficiency and growth.
We have not yet implemented digital logistic
management solutions and have not applied any advanced management techniques, such as enterprise resource planning or any structured
logistical system and procedures, which may result in a loss of efficiency and require investment at a later stage. We have not
yet committed to implement such systems and cannot guarantee that we will do so in the near future. To the extent we do not implement
such techniques in a timely or efficient manner, we may be at a competitive disadvantage to those of our competitors who do.
Our business may be negatively affected
by adverse publicity.
Failure or perceived
failure by us to comply with legal, regulatory and compliance requirements could result in adverse publicity. In September 2015, we
were subject to significant negative publicity resulting from reports published by a short seller of our shares. This negative
publicity resulted in significant volatility in the trading price of our shares. Such adverse publicity could result in reputational
harm, lead to increased regulatory supervision, affect our ability to attract and retain customers, affect our ability to attract
and retain key personnel, affect our ability to maintain access to the capital markets, or have other material adverse effects
on us in ways that are not predictable.
We may be affected by disruptions to our production facilities.
Our production facilities are subject to breakdown
or failure of equipment, power supplies or processes, performance below expected levels of output or efficiency, obsolescence,
labor disputes, natural disasters and the need to comply with relevant regulatory and requirements. From time to time, we may need
to carry out planned shutdowns of our production plants for routine maintenance, statutory inspections and testing and may need
to shut down various plants for capacity expansions and equipment upgrades. Moreover, our production processes are continuously
being modified and updated. As a result of manufacturing process updates and improvements, from time to time, we may experience
shutdowns, and disruptions to the operations. The occurrence of any of the above events may cause us to stop or suspend our production
operations and we may not be able to deliver the products to our customers on a timely basis, which would have an adverse impact
on its business, financial position and profitability.
If we fail to protect our intellectual property rights, it
could harm our business and competitive position.
We rely on a combination of patent, trademark
and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own thirteen patents
in China covering our bamboo charcoal production technology.
The process of seeking patent protection can
be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents
may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also
be challenged, invalidated or circumvented.
We also rely on trade secret rights to protect
our business through non-disclosure provisions in employment agreements with employees. If our employees breach their non-disclosure
obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors.
Implementation of PRC intellectual property-related
laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties. Accordingly,
intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other
western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need
to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our
proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result
in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.
We may be exposed to intellectual property infringement and
other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial
condition and results of operations.
Our success depends, in large part, on our ability
to use and develop our technology and know-how without infringing third party intellectual property rights. If we sell our branded
products internationally, and as litigation becomes more common in China, we face a higher risk of being the subject of claims
for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our
current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies,
may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our branded products
in either China or other countries, including the United States and other countries in Asia. The validity and scope of claims relating
to patents in our industry involve complex scientific, legal and factual questions and analysis and, as a result, may be highly
uncertain. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and
administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our
technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may
become a party could cause us to:
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seek licenses from third parties;
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redesign our branded products; or
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be restricted by injunctions,
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each of which could effectively prevent us from pursuing some or
all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our branded
products, which could have a material adverse effect on our financial condition and results of operations.
We are dependent on our brand
and
trademark.
We rely on our “Charcoal Doctor”
brand in the marketing and distribution of our products. We believe that we have built significant goodwill in our brand in terms
of the quality of products and services and it is widely recognized by the industry in the PRC. We consider our “Charcoal
Doctor” brand to be vital in promoting product recognition and customer loyalty. Hence, if there are any major defects in
our products or adverse publicity on our brand, the goodwill in our brand will be adversely affected and our customers may lose
confidence in our products. This will adversely affect our sales of products, hence affecting our business and financial performance.
If we are unable to rent our commercial property, we may experience
increased expenses.
We have moved into a new facility on Cen Shan
Road in Shuige Industrial Zone of Lishui. We are seeking to rent out the property we own on Tianning Street in Lishui, which formerly
served as our headquarters. Although we have rented out part of our Tianning Street property, we have no guarantee that we will
be able to rent the rest of this property.
Our charcoal briquette products have relatively low technical
requirements; therefore, barriers to entry are minimal.
We expect to face competition for our charcoal
briquette products because competitors can create similar products at a relatively low cost because there are minimal barriers
of entry. If competitors enter our market to create similar products they may be able to do so for a much lower price. To the extent
our customers discriminate based on price, we may find that we lose market share to such producers. Moreover, we may be required
to reduce our price in order to maintain or slow loss of market share for such products. As charcoal briquette products make up
a substantial percentage of our revenues, even at a lower profit margin, the reduction of sales of such products could hurt our
company.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the
PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for
our products and materially and adversely affect our competitive position.
Substantially all of our business operations
are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic,
political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues
to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies,
and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors,
control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government
involvements have been instrumental in China’s significant growth in the past 30 years. In response to the recent global
and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China.
If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect
of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth
rate or strategy, our results of operations could be adversely affected as a result.
Labor laws in the PRC may adversely affect our results of
operations.
On June 29, 2007, the PRC government promulgated
the Labor Contract Law of the PRC, which became effective on January 1, 2008. The Labor Contract Law imposes greater liabilities
on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain
terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the
Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business
or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
Imposition of trade barriers and taxes may reduce our ability
to do business internationally, and the resulting loss of revenue could harm our profitability.
We may experience barriers to conducting business
and trade in our targeted markets, specifically South Korea, Japan and Russia, where we hope to develop demand for our EDLC carbon,
in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to substantial taxes on profits,
revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable
duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales
that we achieve in such markets, which would reduce our revenues and profits.
Under the Enterprise Income Tax Law, we may be classified
as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and
our non-PRC stockholders.
China passed the Enterprise Income Tax Law, or
the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise
established outside of China with “de facto management bodies” within China is considered a “resident enterprise,”
meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing
rules of the EIT Law define de facto management as “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of
Taxation of China, or the SAT, issued the Circular Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the SAT Notice
82, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise
or enterprise group. Pursuant to the SAT Notice 82, an enterprise incorporated in an offshore jurisdiction and controlled by a
Chinese enterprise or enterprise group will be classified as a “non-domestically incorporated resident enterprise”
if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or
personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting
books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights
or senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took
effect on September 1, 2011, to provide more guidance on the implementation of SAT Notice 82 and clarify the reporting and filing
obligations of such “non-domestically incorporated resident enterprise.” SAT Bulletin 45 provides procedures and administrative
details for the determination of resident status and administration on post-determination matters. On January 29, 2014, the SAT
issued Announcement of the State Administration of Taxation on Recognizing Resident Enterprises Based on the Criteria of de facto
Management Bodies, to further clarify the reporting and filing procedure for the offshore entities controlled by a Chinese enterprise
or enterprise group and recognized as a resident enterprise.
Because THL and USCNHK are controlled (although
indirectly) by a foreign individual, rather than by a PRC enterprise or a PRC enterprise group, we do not believe that either THL
or USCNHK is a PRC resident enterprise.
However, although both SAT Notice 82 and SAT
Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by
PRC individuals or foreign individuals, the determining criteria set forth in SAT Notice 82 and SAT Bulletin 45 may reflect the
SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident
status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or
foreign individuals. If the PRC tax authorities determine that THL or USCNHK is a PRC resident enterprise for PRC enterprise income
tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax
at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently,
we do not have any non-China source income, as we complete our sales, including export sales, in China. Second, under the EIT Law
and its implementing rules, dividends paid to us from our PRC subsidiaries would be deemed as “qualified investment income
between resident enterprises” and therefore qualify as “tax-exempt income” pursuant to the clause 26 of the EIT
Law. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification
could result in a situation in which the dividends we pay with respect to our common stock, or the gain our non-PRC stockholders
may realize from the transfer of our common stock, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC
withholding tax. The EIT Law and its implementing regulations are, however, relatively new and ambiguities exist with respect to
the interpretation and identification of PRC-sourced income, and the application and assessment of withholding taxes. If we are
required under the EIT Law and its implementing regulations to withhold PRC income tax on dividends payable to our non-PRC stockholders,
or if non-PRC stockholders are required to pay PRC income tax on gains on the transfer of their shares of common stock, our business
could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated as a “resident
enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries in which we have taxable
income, and our PRC tax may not be creditable against such other taxes.
We may be subject to a significant withholding tax should
equity transfers by our non-resident enterprises be determined to have been done without a reasonable business purpose.
In December 2009, the State Administration of Tax in China issued
a circular on strengthening the management of proceeds from equity transfers by non-resident enterprises and requires foreign entities
to report indirect sales of resident enterprises. If the existence of the overseas intermediary holding company is disregarded
due to lack of reasonable business purpose or substance, gains on such sale are subject to PRC withholding tax. Due to limited
guidance and implementation history of the circular, significant judgment is required in determining the existence of a reasonable
business purpose by considering multiple factors, such as the form and substance of the arrangement, time of establishment of the
foreign entity, relationship between each step of the arrangement, relationship between each component of the arrangement, implementation
of the arrangement and the changes in the financial position of all parties involved in the transaction. Although we believe that
our transactions during all the periods presented would be determined to have reasonable business purposes, should this not be
the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial position,
results of operations and cash flows.
We may be exposed to liabilities under the Foreign Corrupt
Practices Act and Chinese anti-corruption law.
We are subject to the U.S. Foreign Corrupt Practices
Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their
officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining
business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials.
We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in
China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our
company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program,
which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining
or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in
all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy
annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or
controlled entities are in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material
respects with the provisions of the FCPA and Chinese anti-corruption law.
However, our existing safeguards and any future
improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or
civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed
by companies in which we invest or that we acquire.
Uncertainties with respect to the PRC legal system could adversely
affect us.
We conduct all of our business through our subsidiaries
in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws
and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned
enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential
value.
Since 1979, PRC legislation and regulations have
significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed
a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities
in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.
In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on
a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies
and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
Governmental control of currency conversion may affect the
value of your investment.
The PRC government imposes controls on the convertibility
of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all
of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our
PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient
foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations.
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments
and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying
with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in
foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.
We are a holding company and we rely for funding on dividend
payments from our subsidiaries, which are subject to restrictions under PRC laws.
We are a holding company incorporated in the
British Virgin Islands, and we operate our core businesses through our subsidiaries in the PRC. Therefore, the availability of
funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from these PRC
subsidiaries. If our subsidiaries incur debt or losses, their ability to pay dividends or other distributions to us may be impaired.
As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be
paid only out of the after-tax profit of our PRC subsidiaries calculated according to PRC accounting principles, which differ in
many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established
in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution
as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiaries
may enter into in the future may also restrict the ability of our subsidiaries to pay dividends to us. These restrictions on the
availability of our funding may impact our ability to pay dividends to our Shareholders and to service our indebtedness.
Our business may be materially and adversely affected if any
of our PRC subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.
The Enterprise Bankruptcy Law of the PRC, or
the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise will be liquidated if the
enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient
to clear such debts.
Our PRC subsidiaries hold certain assets that
are important to our business operations. If any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding,
unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business,
which could materially and adversely affect our business, financial condition and results of operations.
According to the SAFE’s Notice of the State
Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment,
effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment
by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding,
prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still
need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere
formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.
Fluctuations in exchange rates could adversely affect our
business and the value of our securities.
Changes in the value of the RMB against the U.S.
dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic
conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition,
and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect
on the Renminbi amount that we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the
purpose of paying dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the RMB
would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies
may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products
of foreign manufacturers or products relying on foreign inputs.
Since July 2005, the RMB is no longer pegged
to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar
in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in
the RMB exchange rate and lessen intervention in the foreign exchange market.
Our trading business relies heavily on exchange
rate fluctuations. We seek to match suppliers and potential purchasers, which may be located in different geographic areas, and
to lock in the exchange rates in order to ensure an appropriate profit margin on such sales. To the extent we are unable to obtain
favorable exchange rates, we may find lower profits or losses than we expect.
We reflect the impact of currency translation
adjustments in our financial statements under the heading “accumulated other comprehensive income (loss).” For years
ended December 31, 2015 and 2014, we had adjustments of ($3,977,179) and ($184,951), respectively, for foreign currency translations.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have
not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies.
If we become directly subject to the recent scrutiny, criticism
and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and
resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in
our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially
all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial
commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around
financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in
some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are
not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could
be rendered worthless.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject
capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect
us.
On October 21, 2005, the SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice
75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company
for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC,
or an offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident
is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company
or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore
special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired
control of offshore special purpose companies that have made onshore investments in the PRC in the past are required to have completed
the relevant registration procedures with the local SAFE branch by March 31, 2006.
To further clarify the implementation of Circular
75, the SAFE issued Circular 19 on May 20, 2011. Under Circular 19, PRC subsidiaries of an offshore special purpose company are
required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial
owners who are PRC residents in a timely manner. However, on May 11, 2013, Circular 19 was annulled by Circular 21, issued by the
SAFE. Circular 21 has not yet given clear guidance as to how to complete the relevant registration procedures with the local SAFE
branch.
While Ms. Yefang Zhang, a citizen of the Philippines,
is not required to register with the SAFE, it is not clear, especially with the annulment of Circular 19 and the absence of replacement
guidance, whether Mr. Zhengyu Wang, a PRC resident who presently owns no shares of our company needs to register with the SAFE.
In the event Mr. Zhengyu Wang receives any shares in the future and is a PRC resident at such time, he would be required to register
with the SAFE. We cannot provide any assurances that such registration will be completed in a timely manner, or at all. As advised
by our PRC legal counsel, if any future failure by any of our shareholders who are PRC residents, to comply with relevant requirements
under this regulation could subject such shareholders and/or our PRC subsidiaries to fines and legal sanctions and may also limit
our ability to contribute additional capital into our PRC subsidiaries or to provide loans to our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute dividends to our company, or otherwise adversely affect our business.
PRC regulation of loans and direct investment by offshore
holding companies to PRC entities may delay or prevent us from using the proceeds from the offerings of any securities to make
loans or additional capital contributions to our PRC operating subsidiaries.
As an offshore holding company, our ability to
make loans or additional capital contributions to our PRC operating subsidiaries is subject to PRC regulations and approvals. These
regulations and approvals may delay or prevent us from using the proceeds we received in the past or will receive in the future
from the offerings of securities to make loans or additional capital contributions to our PRC operating subsidiaries, and impair
our ability to fund and expand our business which may adversely affect our business, financial condition and result of operations.
For example, the SAFE promulgated the Circular
on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of
Foreign Invested Enterprises, or Circular 142, on August 29, 2008. Under Circular 142, registered capital of a foreign invested
company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable
governmental authority and may not be used for equity investments in the PRC. In addition, foreign invested companies may not change
how they use such capital without the SAFE’s approval, and may not in any case use such capital to repay RMB loans if they
have not used the proceeds of such loans. Furthermore, the SAFE promulgated a circular on November 9, 2010, or Circular 59, which
requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to
be settled in the manner described in the offering documents. In addition, to strengthen Circular 142, on November 9, 2011, the
SAFE promulgated the Circular on Further Clarifying and Regulating Relevant Issues Concerning the Administration of Foreign Exchange
under Capital Account, or Circular 45, which prohibits a foreign invested company from converting its registered capital in foreign
exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying intercompany
loans, and repaying bank loans that have been transferred to a third party. Circular 142, Circular 59 and Circular 45 may significantly
limit our ability to transfer the net proceeds from offerings of our securities or any future offering to our PRC subsidiaries
and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business
in the PRC.
Risks Related to Our Corporate Structure
and Operation
We incur additional costs as a public company, which could
negatively impact our net income and liquidity.
As a public company, we incur significant legal,
accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules and regulations
implemented by the SEC and The NASDAQ Capital Market require significantly heightened corporate governance practices for public
companies. We expect that these rules and regulations to increase our legal, accounting and financial compliance costs and make
many corporate activities more time-consuming and costly.
We do not expect to incur materially greater
costs as a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and
regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market
price of our common shares could decline.
We have guaranteed the bank loan and renewable bank acceptance
notes of a related party; if this related party fails to pay the bank loan or bank acceptance notes, our property may be subject
to foreclosure.
We have guaranteed the bank loan of a related
party, Forasen Group, in the amount of RMB19.35 million on June 25, 2012 and RMB20 million on April 15, 2014. The RMB19.35 million
loan was repaid in 2014 and the RMB20 million loan was repaid in June 2015. We also guaranteed Forasen Group’s renewable
bank acceptance notes of RMB35.1 million (approximately $5.4 million) on April 8, 2014. The guaranty on the renewable bank acceptance
notes will expire in April 2017. We are currently seeking to terminate the guaranty as Forasen Group no longer needs the guaranty
to issue bank acceptance notes and we do not intend to provide further guarantee to related parties in the future.
In connection with these guarantees, we pledged
our building valued at approximately $7.6 million as collateral for Forasen Group's loans and renewable acceptance notes.
At the time we offered these guarantees, we believed
Forasen Group would be able to repay (and would in fact repay) such loans and bank acceptance notes based on the following factors:
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1.
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Forasen Group, like our Company, is controlled by Ms. Yefang Zhang and Mr. Zhengyu Wang. For this reason, we are aware that
Forasen Group has historically had a strong credit history with the banks with which it does business.
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As of December 31, 2015, we understand that Forasen Group had approximately RMB21.8 million in cash, RMB362.6 million in current
assets and RMB440.9 million in total assets, compared with approximately RMB263.0 million in current liabilities, RMB58.4 million
in loans and RMB55 million in notes payable, resulting in a current ratio of 1.38 at such date. Moreover, for the year ended December
31, 2015, Forasen Group recorded net income of RMB17.3 million on revenue of RMB1,359.6 million and gross profit of RMB28.9 million.
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Entities controlled by our employees, officers and/or directors
will control a majority of our common shares, decreasing your influence on shareholder decisions.
Entities controlled by our employees, officers
and/or directors, in the aggregate, beneficially own approximately 69.9% of our outstanding shares. As a result, our employees,
officers and directors possess substantial ability to impact our management and affairs and the outcome of matters submitted to
shareholders for approval. These shareholders, acting individually or as a group, could exert control and substantial influence
over matters such as electing directors and approving mergers or other business combination transactions. This concentration of
ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders
of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common
shares. These actions may be taken even if they are opposed by our other shareholders. See “Share Ownership.”
As a “controlled company” under the rules of the
NASDAQ Capital Market, we may exempt our company from certain corporate governance requirements that could adversely affect our
public shareholders.
Our principal shareholder beneficially owns a
majority of the voting power of our outstanding common shares. Under the Rule 4350(c) of the NASDAQ Capital Market, a company of
which more than 50% of the voting power is held by an individual, group or another company is a “controlled company”
and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors
be independent, as defined in the NASDAQ Capital Market rules, and the requirement that our compensation and nominating and corporate
governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company”
exemption under the NASDAQ Capital Market rules, we could elect to rely on this exemption in the future. If we elected to rely
on the “controlled company” exemption, a majority of the members of our board of directors might not be independent
directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors.
Accordingly, while we remain a controlled company relying on the exemption and during any transition period following a time when
we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject
to all of the NASDAQ Capital Market corporate governance requirements.
The obligation to disclose information publicly may put us
at a disadvantage to competitors that are private companies.
As a publicly listed company, we are required
to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our company
and shareholders. In some cases, we need to disclose material agreements or results of financial operations that we would not be
required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be
confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we are governed
by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance
with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect
our results of operations.
We are a “foreign private issuer,” and our disclosure
obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as
U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to
evaluate our performance and prospects.
We are a foreign private issuer and, as a result,
we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are subject to reporting obligations
that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we are required
to issue quarterly reports or proxy statements. We are not required to disclose detailed individual executive compensation information.
Furthermore, our directors and executive officers are not required to report equity holdings under Section 16 of the Exchange Act
and are not subject to the insider short-swing profit disclosure and recovery regime.
As a foreign private issuer, we will also be
exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors
are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud
and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed
on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive
the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
Our directors’ and executive officers’ other business
activities may pose conflicts of interest.
Our directors and executive officers have other
business interests outside the company that could potentially give rise to conflicts of interest. For example, our Chairman and
Chief Executive Officer, Zhengyu Wang, and his wife and our director, Yefang Zhang, collectively own all of Zhejiang Forasen Group
Co., Ltd. (“Forasen Group”). The Forasen Group’s primary business areas are investment, rubber trading, foodstuff
production, and financial management. We also have historically engaged in rubber trading. Although we have significantly reduced
our trading in rubber at Tantech to immaterial levels, both businesses were for a time trading similar products. Mr. Wang and Ms.
Zhang work with the Forasen Group’s rubber trading department and other advisors to locate opportunities that meet the Forasen
Group’s investment criteria. As Tantech has significantly reduced its rubber trading activities, they anticipate that any
rubber trading opportunities would be presented to and considered by the Forasen Group rather than by Tantech.
Although his business working time at Forasen
Group is flexible, Mr. Wang has historically devoted approximately 30% of his time to matters concerning Forasen Group and approximately
70% of his time to matters for Tantech. Ms. Zhang has historically devoted approximately 95% of her time to matters concerning
Forasen Group and approximately 5% of her time to matters for Tantech. As Mr. Wang and Ms. Zhang devote considerable time and effort
to Forasen Group, these sort of business activities could both distract them from focusing on Tantech and pose a conflict of interest
to the extent their activities at Forasen Group compete with our company in the future. Although Mr. Wang has entered into a non-competition
agreement with Tantech, this non-competition agreement contemplates that Mr. Wang will continue to be employed by Forasen Group
and that his efforts on behalf of Forasen Group will be permitted. Ms. Zhang does not have a non-competition agreement with Tantech.
In addition, Forasen Group currently occupies
approximately 500 square meters of our Tianning Street facility. We have not historically charged Forasen Group for renting this
office space, but plan to do so in the near future. Although we believe we engage in sound corporate governance practices, there
remains the risk that our company may be negatively affected by our directors’ or executive officers’ conflicts of
interest.
An insufficient amount of insurance could expose us to significant
costs and business disruption.
While we have purchased insurance to cover our
certain assets and property of our business, the amounts and scope of coverage could leave our business inadequately protected
from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents
or business interruption, our results of operations could be materially and adversely affected.
Risks Related to Ownership of Our Common
Shares
We are an “emerging growth company,” and we cannot
be certain if the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive
to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company,
we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are
not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404
of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status
sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if
the market value of our common shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which
case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find
our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive
as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies
can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have
irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, are subject
to the same new or revised accounting standards as other public companies that are not emerging growth companies.
If we are unable to implement and maintain effective internal
control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common shares may decline.
As a public company, we are required to maintain
internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning
with this annual report on Form 20-F, we are required to furnish a report by management on the effectiveness of our internal control
over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and
testing the internal control over financial reporting required to comply with this obligation, which process is time consuming,
costly, and complicated. In addition, our independent registered public accounting firm are required to attest to the effectiveness
of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are
no longer an “emerging growth company,” which may be up to five full years following the date of our initial public
offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with
the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or
if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control
over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports
and the market price of our common shares could be negatively affected, and we could become subject to investigations by the stock
exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities,
which could require additional financial and management resources.
The requirements of being a public company may strain our
resources and divert management’s attention.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act,
the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite
recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and
financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and
resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other
things, that we file annual, quarterly, and current reports with respect to our business and operating results.
As a result of disclosure of information in this
annual report and in filings required of a public company, our business and financial condition become more visible, which we believe
may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful,
our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely
affect our business, brand and reputation and results of operations.
We also expect that being a public company and
these rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult
for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation
committee, and qualified executive officers.
The market price of our common shares may be volatile or may
decline regardless of our operating performance, and you may not be able to resell your shares at or above the price you paid.
The trading prices for our common shares have
fluctuated since we first listed our common shares. Since our common shares became listed on the NASDAQ on March 24, 2015, the
trading price of our common shares has ranged from US$3.01 to US$33.97 per common share, and the last reported trading price on
April 25, 2016 was $4.68 per common share. The market price of our common shares may fluctuate significantly in response to numerous
factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates or the expectations of investors;
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announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic
partnerships, joint ventures, or capital commitments;
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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lawsuits threatened or filed against us; and
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other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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In addition, the stock markets have experienced
extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many
companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance
of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility.
If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention
of management from our business, and adversely affect our business.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable
future. As a result, you may only receive a return on your investment in our common shares if the market price of our common shares
increases.
We will incur increased costs as a result of being a public
company.
As a public company, we incur legal, accounting
and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and
U.S. auditors that we did not require as a private company, and we have annual payments for listing on NASDAQ. In addition, the
Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, have required changes in corporate governance
practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance
costs and to make certain corporate activities more time-consuming and costly. In addition, we incur additional costs associated
with our public company reporting requirements. While it is impossible to determine the amounts of such expenses, we expect that
we incur expenses of between $500,000 and $1 million per year that we did not experience as a private company.
Our classified board structure may prevent a change in our
control.
Our board of directors is divided into three
classes of directors. The current terms of the directors expire in 2016, 2017 and 2018. Directors of each class are chosen for
three-year terms upon the expiration of their current terms, and each year the shareholders elect one class of directors. The staggered
terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender
offer or change in control might be in the best interest of our shareholders. See “Item 6. Directors, Senior Management and
Employees — Board of Directors and Board Committees.”
U.S. tax authorities could treat us as a “passive foreign
investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.
A non-U.S. entity treated as a corporation for
U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or a PFIC, for any taxable
year for which either (i) at least 75% of its gross income consists of certain types of “passive income” or (ii) at
least 50% of the average value of the corporation’s assets produce, or are held for the production of, those types of passive
income. For purposes of these tests, passive income includes rents and royalties (other than rents and royalties that are received
from unrelated parties in connection with the active conduct of a trade or business) and does not include income derived from the
performance of services.
If we are treated as a PFIC, U.S. Holders would
ordinarily be able to mitigate certain of the negative tax consequences if they are able to make: (i) a timely qualified electing
fund (“QEF”) election; (ii) a protective QEF election; or (iii) a mark to market election with respect to the first
taxable year in which we are considered a PFIC during the U.S. Holder’s holding period in its shares.
We are not committing to provide our U.S. Holders
with the information required for making a QEF election or protective QEF election. If we fail to provide such information, a QEF
election with respect to such entity generally will not be available. In such event, the rules described in the next paragraph
generally will apply.
If we are treated as a PFIC, a U.S. Holder that
does not make a QEF election generally will be subject to a special tax and an interest charge upon the sale of its shares or receipt
of an “excess distribution” with respect to its shares. A U.S. Holder will be treated as receiving an “excess
distribution” if the amount of the distributions received by the U.S. Holder in any taxable year is more than 125% of the
average annual distributions paid by the Company with respect to its shares during the three preceding taxable years (or the period
in which the U.S. Holder held such shares if shorter).
In addition, a portion of any gain recognized
by a U.S. Holder upon the sale of our shares may be recharacterized as ordinary income. Further, any dividends received from the
Company, if the Company is treated as a PFIC, will not constitute qualified dividend income and will not be eligible for the reduced
20% rate of tax even if such rate would be available otherwise. If a U.S. Holder holds our shares during any taxable year in which
we are treated as PFICs, such shares will generally be treated as stock in a PFIC for all subsequent years.
We are subject to liability risks stemming from our foreign
status, which could make it more difficult for investors to sue or enforce judgments against our company.
Our operations and assets are located in the
PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets
of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the
U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
In addition, British Virgin Islands companies
may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may
result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company
organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate
wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts
in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original
actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in
nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the
courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able
to recover anything to make up for the losses suffered.
Lastly, under the law of the British Virgin Islands,
there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with
shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent
documents of the corporation, our amended and restated memorandum and articles of association. Shareholders are entitled to have
the affairs of the company conducted in accordance with the general law and the articles and memorandum.
There are common law rights for the protection
of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands
for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle,
a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders
who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However,
every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents
of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or
the provisions of the company’s memorandum and articles of association, then the courts will grant relief. Generally, the
areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized
business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the
wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and
(4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders,
which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.
Item 4.
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Information on the Company
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A.
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History and Development of the Company
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Tantech Bamboo was established in October 2002
under the trading name “Lishui Zhonglin High Tech Co., Ltd.” by its incumbent owner. Following the establishment of
the Forasen Green Energy Group, later renamed Forasen Group Ltd. (“Forasen Group”), in May 2003, 60% of THL’s
shares were acquired by the Forasen Group. A second subsidiary, Tantech Charcoal, was acquired in September 2006 to manage the
Forasen Group’s export business. In September 2008 a third subsidiary, Tantech Energy, was established to research and develop
bamboo charcoals application as a carbon component for EDLCs. Following the renaming of the Forasen Group to its current name,
95% of Tantech Bamboo’s shares were acquired by USCNHK, a Hong Kong registered company, in December 2010.
Historical Timeline
Below is a brief timeline of key dates in our
Company’s history since its formation.
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September 2001: Tantech Charcoal is established.
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October 2002: Tantech Bamboo is established as “Lishui Zhonglin High Tech Co., Ltd.” with registered capital of
RMB3.15 million.
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April 2003: Lishui Forasen Green Industry Group (“Forasen Group”, which is the former name of Forasen Group Ltd)
was established.
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May 2003: Forasen Group acquires 60% of Tantech Bamboo.
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December 2005: (1) Tantech Bamboo reorganizes its structure (a) from a limited company to a shareholder company and (b) to
increase registered capital to RMB21 million, resulting in a decrease of Forasen Group’s interest to 41.24%; (2) Tantech
Bamboo is renamed “Zhejiang Tantech Bamboo Technology Co., Ltd.”; (3) Zhengyu Wang becomes legal representative of Tantech
Bamboo.
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September 2006: Tantech Bamboo acquires Tantech Charcoal by transferring shares from Forasen Group and natural shareholders
to Tantech Bamboo. As a subsidiary, Tantech Charcoal’s business scope is exporting Forasen Group’s products to a multitude
of countries worldwide.
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September 2007: Forasen Group’s interest in Tantech Bamboo increases to 44.25%.
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January 2008: Tantech Bamboo increases its registered capital to RMB27 million, decreasing Forasen Group’s interest to
34.41%.
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July 2008 through April 2009: Several shareholders of Tantech Bamboo transfer their interests to Forasen Group, increasing
its interest in Tantech Bamboo to 51.45%.
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September 2008: Tantech Energy is established and operates as subsidiary of Tantech Bamboo.
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October 2008: USCNHK is established as “Raymond & O/B Raysucess Co., Limited”.
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October 2009: Forasen Group is renamed “Forasen Group”.
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November 2010: THL is established as “Sinoport Enterprises Limited.”
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December 2010: (1) USCNHK is renamed “USCNHK Group Limited”; (2) Tantech Bamboo increases its registered capital
to RMB80 million, increasing Forasen Group’s interest to 95%; (3) Forasen Group transfers all of its interest in Tantech
Bamboo to USCNHK.
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April 2013: THL is renamed “Tantech Holdings Ltd.”
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March 2015: THL completed an initial public offering of its common shares and listing on the NASDAQ Capital Market.
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We develop and manufacture bamboo-based charcoal
products for industrial energy applications and household cooking, heating, purification, agricultural and cleaning uses. We have
grown over the past decade to become a pioneer in charcoal products industry made from carbonized bamboo. We are a highly specialized
high-tech enterprise producing, researching and developing bamboo charcoal based products with an established domestic and international
sales and distribution network.
We provide our charcoal products in the following
areas:
We oversee a national sales network that has
a presence in 17 cities throughout China. We sell approximately 75% of our products in China, and the remaining 25% of products
are sold internationally. We sell products in Japan, South Korea, Taiwan, the Middle East and Europe.
In addition to our bamboo charcoal products,
we also derive revenues from our trading activities, which primarily relate to industrial purchases and sales of charcoal.
We are headquartered in the bamboo rich southwest
of Zhejiang Province, in the city of Lishui. Zhejiang province, located in southeastern coastal China, is China’s tenth largest
province in population, with 54.5 million residents, and eighth in terms of population density. The first province in China without
any counties in the poverty-county list of the central government, Zhejiang has become one of the wealthiest and most commercial
provinces in China. Its province-wide GDP of approximately RMB3.5 trillion in 2012 places it as the fourth highest in China in
absolute amount and sixth per capita.
Lishui is a prefecture-level city located in
southwest Zhejiang province. Approximately 2.5 million residents live in the city, and city-wide GDP is approximately RMB50.6 billion.
Lishui’s primary industries include wood and bamboo production, ore smelting, textile, clothes making, construction materials,
pharmaceutical chemistry, electronic machinery and food processing. As to wood and bamboo production, approximately 69% of Lishui
prefecture is covered with forest, giving it the nickname “The Foliage Ocean of Zhejiang.”
Zhejiang Province
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City of Lishui
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We have relocated all of our production, research
and development (“R&D”) and management facilities a newly built production facility in the Shuige Industrial Zone,
20 kilometers from downtown Lishui. The facility covers a land area of 37,248 square meters (9.7 acres) and includes two dormitories,
a large office and R&D building, two buildings housing Charcoal Doctor production and storage facilities, a five story building
for charcoal briquette production, four buildings housing a complete EDLC carbon production line and one inventory warehouse for
EDLC carbon raw materials. Facilities boast an array of sophisticated and automated production machinery and a water treatment
plant. Gross floor area stands at 51,419 square meters (12.7 acres).
We rely on a combination of patent, trademark
and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own ten patents
in China covering our bamboo charcoal production technology. We have applied for one additional patent related to methods to process
bamboo and bamboo charcoal.
During the years ended December 31, 2015 and
2014, our three largest suppliers accounted for approximately 61% and 72% of our total purchases, respectively. Because we purchase
a material amount of our raw materials from these suppliers, the loss of any such suppliers could result in increased expenses
for our company and result in adverse impact on our business, financial condition and results of operations.
Bamboo and Bamboo Charcoal
As a company focused on bamboo charcoal, our
business is in a sub-part of China’s bamboo industry. Government policies that encourage the use of bamboo also benefit the
bamboo charcoal industry. Accordingly, we provide a brief overview of bamboo and those elements of China’s bamboo industry,
insofar as they have an effect on the bamboo charcoal industry in general and our company in particular.
Bamboo
Bamboo plants are some of the fastest growing
plants in the world, with some varieties growing more than three feet per day. Moreover, Bamboo can be re-grown quickly following
harvesting, ensuring high frequency utilization without shortages. Unlike trees, individual bamboo culms emerge from the ground
at their full diameter and grow to their full height in a single growing season of three to four months. Over the next 2–5
years, fungus begins to form on the outside of the culm, which eventually penetrates and overcomes the culm. Eventually the fungal
growths cause the culm to collapse and decay. As a result, bamboo culms generally have life cycles of up to ten years, at which
point they must be cut down in order to preserve the environment of the surrounding forest. Optimal quality bamboo culms for carbonization
are cut at five years of age. Additional bamboo can be grown in the same area where previous culms grew.
Bamboo is considered environmentally friendly
because it takes in substantial amounts of carbon dioxide and gives off oxygen as it grows. Indeed, bamboo sequesters more carbon
dioxide than an equivalent region of plantation trees. Moreover, harvesting of bamboo is considered more environmentally friendly
than allowing it to live through the full life cycle, as such harvesting maximizes the amount of carbon dioxide the bamboo can
sequester because of the effects of fungus noted above.
A 2013 report notes that the Chinese bamboo industry’s
output value reached $19.5 billion. It employs 7.75 million people and has become a pillar industry of development of economic
society of China’s bamboo main producing area and major income source of peasants’ families. Given bamboo’s importance
in China, we believe that favorable government policies and regulations encouraging the advancement of bamboo technology in China
generally will create an environment favorable to our increased production of bamboo-based charcoal products. The Chinese government
is also working to develop its bamboo industry to meet its goals in environmental protection and green economic development, as
planting bamboo is both profitable and environmentally-friendly, according to the International Network for Bamboo and Rattan (“INBAR”).
Moreover, given the central government’s goal to reduce carbon dioxide emissions per unit of GDP by 40 to 45 percent by 2020
compared to 2005, we expect the bamboo technology industry to continue to be important to the country’s long-term planning.
China now produces approximately 80% of the world’s
bamboo and consumes approximately 60% of that production. According to statistics from INBAR, China has more than 6 million hectares
for bamboo production and over 500 bamboo species. In 2012, the domestic industry was worth $19.5 billion and employed more than
7.75 million people.
During a period of rampant deforestation, China
put in place restrictions on harvesting of natural wood and encouraged the country to make more use of bamboo. Under the National
Forest Protection Program (“NFPP”), China implemented natural forest logging bans that covered 17 provinces in China.
These bands required consumers of charcoal to look to other sources for creation of charcoal than the natural trees they were most
familiar with using. During this time, bamboo charcoal became a viable alternative in the country.
Bamboo has many desirable characteristics compared
to timber based products:
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Culms are ideally allowed to reach 5 – 7 years of maturity prior to full capacity harvesting. The clearing
out or thinning of culms, particularly older decaying culms, helps to ensure adequate light and resources for new growth.
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Commercial growers can annually harvest between one-quarter and one-third of a bamboo grove that is at least three years old.
Harvesting at such rates allows continuous, sustainable harvesting.
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Bamboo will re-grow from same rootstalk (rhizome);
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Plant tends to be drought tolerant
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Bamboo minimizes carbon dioxide gases and generates up to 35% more oxygen than an equivalent area of trees. One hectare of
bamboo can sequester 62 tons of CO
2
/year, while one hectare of young forest can sequester 15 tons of CO
2
/year.
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The physical and environmental properties of
bamboo make it an exceptional economic resource for a wide range of uses. It grows quickly and can be harvested annually without
depletion of the parent plant and without causing harvesting damage or deterioration in soil quality; in addition bamboo is very
versatile and has many uses in the construction, culinary, furniture, pulp, pharmaceutical, and textiles industries. New uses for
bamboo are being developed as we understand its biological, chemical and physical characteristics.
According to the United Nations’ Food and
Agriculture Organization the bamboo industry affects the lives of about 1.5 billion people around the world. About 2.5 billion
people in the world depend economically on bamboo, and the international trade in bamboo amounts to between $5 and $10 billion.
The growth of the global bamboo market is expected to reach up to USD 15 – 20 Billion/year in 2017.
There are about 39 genera of bamboo and more
than 590 species in China with 5.38 million hectares of pure bamboo forest, which accounts for 25% of the bamboo area in the world.
With 5.38 million hectares of bamboo plantations and an annual increase of 100,000 hectares, China is leading the world’s
bamboo industry in its number of varieties, amount of bamboo reserves, as well as production output, said Zehui Jiang, co-chair
of INBAR’s board of trustees.
Zhejiang province is situated on the shore of
the East China Sea, and has about thirty genera and four hundred varieties of bamboo. Bamboo products made there are sold all around
the world, with an annual output of RMB 28 billion Yuan ($4.5 billion) in 2010. Zhejiang province has almost one fifth of the whole
bamboo forest area in China. Moreover, approximately 69% of Lishui prefecture is covered with forest, giving it the nickname “The
Foliage Ocean of Zhejiang.”
Bamboo Charcoal
Bamboo charcoal has been documented in China
as early as 1486 AD during the Ming Dynasty in China. Bamboo charcoal has traditionally been used as a heating source, in replacement
of wood, coal or wood charcoal. As a source of heat, bamboo charcoal has a calorific value approximately half that of an equivalent
weight of oil, and similar to the calorific value of wood. In addition to being an efficient source of heat, bamboo charcoal is
considered less polluting than wood charcoal, because it burns more cleanly due to a lower percentage of volatile matter. Smoke
and pollution in charcoal burning relate largely to moisture content and volatile matter. While careful processing can control
the moisture content, the ratio of volatile matter is affected by the source of charcoal. Traditional wood charcoals may range
between 5 – 40% volatile matter free of moisture, depending on the type of wood and the temperature at which it
is carbonized. Bamboo heating charcoal tends to be between 13 – 17% volatile matter free of moisture.
Because of the relatively higher pollution levels
in wood charcoal, it is estimated that the burning of wood fuel claims the lives of an estimated 2 million people every year who
inhale the smoke. Moreover, it takes between seven and ten tons of wood to produce one ton of wood charcoal, compared with four
tons of bamboo to produce one ton of bamboo charcoal.
In addition to use as a heating source, bamboo
charcoal has applications as an adsorbent, deodorizer, dehumidifier, purifier and electrical conductor. Nonactivated bamboo charcoal
is a versatile mineral matter with great porosity and consequently high absorption ability. Bamboo charcoal’s porous surface
area makes it an ideal air and water purifying agent, odor absorbent, additive, dehumidifier and electromagnetic wave absorber
(electromagnetic waves from computers, mobile telephones and other electronics can be conducted through bamboo charcoal to dissipate
their energy in the charcoal pores). While wood charcoal’s surface area may be as low as 20 m
2
/g, bamboo charcoal
generally ranges from 200 – 600 m
2
/g, and our company’s EDLC carbon has achieved 2,200 m
2
/g.
While bamboo charcoal has a high absorptive capacity
after carbonization, it becomes even more effective after activation. Activated bamboo carbon is bamboo charcoal that has been
taken through an extra step greatly increasing its absorptive abilities. Activated bamboo charcoal can be used for cleaning the
environment, absorbing excess moisture and producing medicines.
The carbonization process occurs in the absence
of oxygen and produces a brown-black liquid containing more than 200 organic compounds known as bamboo vinegar, or pyroligneous
acid. Following sedimentation two distinct layers appear: a light yellow-brown liquid (clarified bamboo vinegar) which can be refined
to produce acetic acid, propionic acid, butyric acid, carbinol and organic solvents, and a viscid oily liquid (bamboo tar) containing
large amounts of phenol substances. Bamboo vinegar is found in sanitary and health products as well as a range of horticultural
fertilizers and organic solutions.
EDLC Carbon
Bamboo charcoal is beginning to be used for applications
in hi-tech industries. Due to the range of possible uses, there are a variety of essential qualities of bamboo charcoal required
among various hi-tech industries. Bamboo charcoal is used in related research and to develop items such as baseboard material for
supercapacitor research, high-capacity battery manufacturing, fiber synthesis mixed with bamboo charcoal in textiles, special coatings
manufacture, enzyme fixing in biochemical technology, porous carbon materials manufacturing, nano-carbon tube research in biomedical
sciences.
Supercapacitors refer to high capacitance electrochemical
batteries or capacitors. These devices can store more energy (energy density) than a traditional capacitor (but less than a battery)
and more power (power density) than a battery bringing significant benefits to both “peak-assist” and “power-assist”
applications. Some of the advantages of supercapacitors include:
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They can be used in conjunction with batteries to increase voltage and energy.
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There is no chemical reaction, which increases total lifespan and decreases risk of overcharging.
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They have very low per-cycle costs.
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Unit costs have decreased significantly in recent years, with 3,000 Farad supercapacitor that cost $5,000 in 2000 decreasing
to $50 by 2011.
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While existing supercapacitors have energy densities
that are approximately 10% of a conventional battery, their power density is generally 10 to 100 times greater. As a result, supercapacitors
are used in applications that require significant amounts of power, both in quick bursts and also for sustained periods.
Compared to traditional batteries, EDLCs can
be charged and discharged many hundreds of thousands of times without any degradation or damage. This is due to the absence of
chemical reactions. Additionally, EDLCs have much shorter charge/discharge times and can operate in a much wider temperature range.
These qualities are made possible by the absorption/desorption processes that govern EDLCs as opposed to chemical reactions. EDLCs
are constructed from a number of components, namely electrodes, electrolytes, separators, collection fluid, lead and packaging
materials. The electrode, electrolyte and membrane composition are critical in the performance and quality and will influence the
basic properties of the final product.
Electrode charcoal is a porous and amorphous
carbon material. This special charcoal has a very highly developed and complex pore structure and a large surface area making it
an ideal electrode fuel cell material for EDLCs.
The main uses of supercapacitors include:
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Electric/Hybrid electric vehicle power supply (including cars, motorcycles and golf carts);
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Immediate high power supply; high power energy storage, electric pulse power supply;
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Renewable (solar/wind) energy storage buffer systems;
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Utility meters: Electric meter, water meter, gas meter auxiliary power supply;
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Uninterruptable power supply (“UPS”) systems, mainly for vital-use machines;
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Backup power supply systems;
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Direct current (“DC”) control power transformer and distribution stations and DC panels;
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Military maintenance systems; and
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Electric toys, electric tools, automatic flashlights and other types of power systems.
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Due to perceived favorable prospects in the industry,
more than 50 domestic manufacturers are engaged in research and development of large and super capacity capacitors. However, only
approximately 10 manufacturers are capable of mass production and have reach the utilization level. We believe the supercapacitors
for vehicle use developed by Shanghai Aowei Technology Co., Ltd. are leading the industry in terms of technology. Through comparison
with products made by foreign manufacturers, the electrical performance and physical performance of Aowei are equivalent to similar
products made by foreign companies.
At present, domestic manufacturers mainly produce
electric double-layer capacitors. The main companies include Jinzhou Kam Company, Beijing Supreme Power Systems Co., Ltd., Shanghai
Aowei Technology Co., Ltd. and etc. Jinzhou Kam Company is the largest supercapacitor manufacturer in China. Domestically made
supercapacitors are believed to occupy 60 – 70% of China’s supercapacitor market share.
In addition, there are also several other domestic
supercapacitor suppliers, such as Haerbin Jurong Newpower Co., Ltd., and Chaoyang Liyuan New Energy Co., Ltd. Meanwhile, provinces
and cities like Jiangxi, Jiangsu, Henan, Shanxi and Tianjin have also launched relevant policies to support enterprises in their
own territory to march into the newly-emerging energy storage component market of supercapacitor. For instance, Jiangxi Xinda Electronics
Company, one of the top 100 electronic components companies in China, is seeking to cooperate with partners to produce supercapacitors.
In 2011, the industry realized a total scale of $3.122 billion, an annual increase of 50% over 2010.
Japan is the main producer of carbon for EDLCs
and has led the industry for 30 years. The main manufacturing companies include Calgon Mitsubishi Chemical Corporation, Futamura
Chemical Co., Ltd., Kuraray Chemical, Japan Enviro Chemicals. Ltd., Takeda Pharmaceutical Company Limited, Osaka Gas Co., Ltd., Kansai
Coke and Chemicals Co., Ltd., Kureha Chemical and Nippon Oil. Such companies take biomass such as coconut shells, or chemical raw
materials such as phenolic resin or petroleum as raw material, and use water vapor or alkali to activate the carbon.
South Korea is also a leader in terms of supercapacitor
production and research. In July 2008, GS Caltex from South Korea and Nippon Oil founded the joint venture Power Carbon Technology,
which is engaged in production of activated supercapacitor carbon. The joint venture’s factory is predicted to reach 900
tons annual capacity by 2015, making it the largest manufacturer of activated supercapacitor carbon. Suntel Co., Ltd. was founded
in 2001; it is a subsidiary under Heung-A Suntel. In 2008, it started to produce active carbon for supercapacitor; in 2010, the
annual productivity reached 30 tons, making it the second largest manufacturer of activated supercapacitor carbon in South Korea.
The main domestic manufacturers of active carbon
for supercapacitor include our company, Chaoyang Senyuan Activated Carbon Co., Ltd., Henan Huaxian Active Carbon Factory, Nanjing
Zhengsen Environment Protection Technology Co., Ltd., Nanjing Linda Active Carbon Co., Ltd., Daying Juneng Technology and Development
Co., Ltd., Fujian Xinsen Carbon Industry Co., Ltd. and Shanghai Heda Carbon Material Co., Ltd. At a current annual capacity of
500 tons, our company has more than twice the annual production capacity of the closest of these domestic competitors.
Bamboo Charcoal Production Process
The process of making bamboo charcoal consists
of the following steps, which we and/or our suppliers perform, as indicated:
1.
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Suppliers Prepare Raw Materials
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Our suppliers select bamboo culms that are between
5 and 8 years old, which we consider the optimal range for our needs. They then prepare the raw bamboo for pyrolysis, heating organic
material in the absence of oxygen to cause them to decompose. The absence of oxygen causes bamboo to convert into charcoal rather
than to catch on fire. At this stage, our suppliers shape the bamboo culm into the appropriate shape, depending upon the ultimate
use of the charcoal product. Because the density, cavity structure and tissue composition of bamboo culms differ from top to bottom,
and based on the age, soil and climate conditions in which the bamboo is grown, it is common to divide bamboo accordingly. The
cut bamboo is typically air or smoke dried until moisture content is between 15 to 20%.
2.
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Suppliers Carbonize the Bamboo into Bamboo Charcoal
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The carbonization process consists of first loading
the mechanical furnace with the prepared bamboo. Bamboo is then dried, to the extent it is not already dry, by heating at 120 to
150°C until the desired moisture content is reached. Pre-carbonization (150 – 280°C) then follows, paying
attention to keep the temperature below the autoignition point of bamboo. The carbonization phase (280 – 450°C)
is brief and exceeds the flash point of bamboo, releasing heat in an exothermic reaction. As the bamboo carbonizes, bamboo vinegar
and tar pyrolyze and flow out of the bamboo. The specific amount of bamboo vinegar that recovered depends on carefully coordinating
the temperature and rate of temperature increase.
Next, high-temperature refining occurs between
600 and 1,100°C. During this stage, volatile matter discharges due to the high temperature, and the fixed carbon content in
the charcoal increases as a result. The characteristics of the bamboo charcoal depend on choices made at this stage. For instance,
electrical resistance decreases as carbonization temperature increases, while density increases. Techniques matter even in non-EDLC
bamboo charcoal: bamboo carbonized at 500°C excels at filtering ammonia, while bamboo carbonized at 1,000°C is better at
filtering benzene and toluene.
Finally, at the completion of refining, the bamboo
charcoal naturally cools. Once the temperature in the furnace is below 60°C, the charcoal may be unloaded.
3.
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Suppliers and our Company Process the Bamboo Charcoal
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After the carbonization process is completed,
our suppliers sort the bamboo charcoal according to grade and type. They then complete their processing, check the quality and
deliver it to our company for further processing. The amount of processing performed by the suppliers will vary depending on the
product. For example, we purchase some wood-based OEM BBQ charcoal in essentially finished form and then prepare it for resale
domestically. On the other hand, for our self-produced BBQ charcoal, we purchase pre-briquette charcoal and complete the steps
needed to form briquettes, described below.
As to briquette charcoal, the process for finishing
involves disintegrating the charcoal into an appropriate size, combining the charcoal with a binding agent and pressing the charcoal
into the desired briquette shape. As noted, for our OEM BBQ charcoal, our suppliers perform all of these steps. For our self-produced
BBQ charcoal, we receive small pieces and complete the disintegration, combination, binding and pressing steps on our production
line.
As to charcoal to be used for ornamental purposes,
the charcoal may be left whole or ground to an appropriate size for the desired purpose. Our suppliers deliver such bamboo charcoal
to us per our specifications as to size of charcoal pieces, and we complete final processing and packaging in order to prepare
such charcoal for sale. Among other steps, we prepare and fill our charcoal bags and mix any formulas specific to given products
such as our silver ion nano products.
We first activate charcoal to be used for EDLC
carbon purposes and then crush it to an appropriate size for the desired applications. We perform all of these steps in-house on
un-activated bamboo charcoal delivered to us. The specific size and characteristics of the charcoal, including porosity, depends
on the use intended by the EDLC manufacturer. To produce activated bamboo carbon, we subject carbonized bamboo to a further process
involving granulation and high pressure steam injection, which further exposes pores. The surface area to mass ratio of the bamboo
charcoal can more than double after activation, and we have achieved a surface area to mass ratio of 2,200 m
2
/g for
our EDLC carbon.
Our Processing Workflow
We develop and manufacture our bamboo charcoal
products using the following processing workflow:
Our Products
We produce and sell three categories of products,
all of which are produced from bamboo charcoal and bamboo charcoal byproducts. Because of the lifespan and fast growth rate of
bamboo, our products are considered environmentally friendly. Moreover, our facilities have received ISO 14001:2004 certification,
which reflects our focus on measuring and managing our environmental impact.
BBQ Products
We sell pressed and formed charcoal briquettes
for use in grills, incense burners, and other applications for which the primary purpose of the charcoal is burning for heat or
fuel. These products are sold in China and internationally under the Algold brand.
Our charcoal briquettes are processed from carbonized
bamboo (as to our self-produced BBQ charcoal) and wood (as to our OEM BBQ charcoal) into charcoal and pressed into shapes appropriate
for our customers’ preferred use. These products include barbecue grill briquettes, disposable all-in-one barbecue grills
(including charcoal), and fuel for incense and tobacco burners.
We expect revenues generated from our charcoal
briquette products will stabilize as we continue to focus on higher margin EDLC and Charcoal Doctor branded products. We expect
a decline in comparison to these other segments, but no decline in absolute terms. We currently have annual production capacity
of 10,000 tons from three fully automated mold and furnace production lines. The major markets for our briquette products are Europe,
the Middle East and the US.
Charcoal Doctor Products
Our primary consumer
brand is Charcoal Doctor (“
”,
“Tan Boshi” or “Dr. Tan” in Chinese). In processing our charcoal products, the primary byproducts are
solid charcoal and charcoal vinegar. We make use of both the solid and liquid byproducts in our Charcoal Doctor products.
Our Charcoal Doctor brand products have been
the primary source of our revenue over the last few years. Charcoal Doctor products are sold throughout China and stocked by many
supermarkets and specialty shops in Zhejiang Province and other provinces. We seek to protect and grow our market share pricing
our products aggressively, often as much as 10 – 15% below our competitors’ prices. Our Charcoal Doctor gross
profit margins average 35%, largely due to our industrialized and automated production processes. We plan to expand product lines
in the coming years to take advantage of the many uses of bamboo charcoal and vinegar. Charcoal Doctor products can be categorized
according to their physical state: liquid or solid:
Our solid charcoal products are primarily used
for purification and deodorization. These consumer products are made from dry distilled carbonized bamboo, and have the ability
to absorb harmful substances and foul odors from the air, including benzene, toluene, ammonia and carbon tetrachloride. The primary
ingredient of these products, activated charcoal, is an adsorbent. Our solid Charcoal Doctor products generally fit within three
categories: (1) charcoal bags, primarily used as air purifiers and humidifiers, (2) charcoal deodorants and (3) toilet cleaning
disks. Our primary Charcoal Doctor solid products include the following:
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Air purifiers and humidifiers
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Automotive accessories for air purification
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Underfloor humidity control
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Mouse pads and wrist mats
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Charcoal toilet cleaner disks
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Liquid charcoal cleaner
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Decorative charcoal gifts
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Samples of the range of solid Charcoal Doctor
products are pictured below.
In addition to providing solid charcoal, the
carbonization process also results in a liquid byproduct called bamboo vinegar. Bamboo vinegar is used in disinfectants, detergents,
lotions, specialized soaps, toilet cleaners and fertilizers. We have also adapted our bamboo vinegar for use in a variety of agricultural
applications:
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Fruit, vegetable, and other plant fertilizers
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Soil conditioners and sweeteners
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Toilet cleaning liquid detergent and solid disks
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Hand washing sanitation
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Samples of the range of liquid Charcoal Doctor
products are pictured below.
We believe liquid products are crucial to maintaining
close ties with the agricultural industry, which we expect will be a key area for growth in the coming years. We plan to expand
in this area by adding production lines for daily health products, such as toilet-cleaning products, hand washing products, as
well as other everyday household items based on silver ion anti-bacterial nano technology.
We use this silver ion nano technology for sterilization
to improve the effectiveness of our sanitation and purification products. We purchase silver ion nano powder from third parties
to add into our products. We use our own formulas for the purification and sanitation products that incorporate such powder.
We have developed two kinds of products that
use our silver ion nano technology. Our detergent products are based on bamboo vinegar and are supplemented by the introduction
of silver ion nano powder. These products are used for washing clothes and are in the trial stage. We began trial sales of our
silver nano detergent products in Yantai (Shangdong Province), Lishui (Zhejiang Province), Chengdu (Sichuan Province) and Zhengzhou
(Henan Province) in November 2012. We have concluded our trial sales in Lishui and Chengdu (and plan to conclude sales in Yantai
upon the exhaustion of current trial sales inventory), and our preliminary conclusions are that customers liked the product but
were less enthusiastic about the packaging. As a result, we adjusted our packaging in preparation for full-scale sales. Given the
investment required to improve brand awareness for our silver ion nano detergent, we will focus first on Zhengzhou before beginning
to plan either the expansion plan or the timeline for such expansion into other cities in China. At the same time as we are selling
such products under our Charcoal Doctor brand name in China, we are also in discussions to sell such products to one distributor
in Dubai, who would then re-brand the products for resale in local markets in Africa and the Middle East.
Our silver ion bamboo charcoal bag products are
used for odor absorption and air purification. We combine our charcoal powder products with silver ion nano powder to achieve a
charcoal bag that may be stored in a wider variety of locations. If our traditional bags are stored in conditions that are too
damp and warm, mold or mildew may grow. Our silver ion nano products are able to fight the growth of mold and mildew, allowing
them to be used in damp conditions without problem. We have begun to promote and sell limited numbers of such bags in connection
with our sales of traditional charcoal bags. We are promoting these bags in anticipation of adding such products to our portfolio
of products for sale in supermarkets and other stores. Our customer stores typically invite us to apply in June or July to update
the products we will offer for sale in their stores, and we are required to pay a fee for shelf space at such time. Accordingly
we plan to increase demand for our silver ion nano products in anticipation for adding them to the list of products we sell this
year. As we will make these silver ion nano charcoal bags available everywhere we offer our traditional charcoal bags, we will
leverage our existing sales and distribution channels to introduce these products to the market.
EDLC Carbon
We have recently begun to produce bamboo carbon
for use in EDLCs. Our product serves as the industrial carbon compound for the EDLC and is responsible for conducting electricity
in the battery. Activated charcoal is extremely porous and has a high specific surface area, so it provides a useful electrode
material. Because the surface area of such a material is many times greater than a traditional material like aluminum, many more
charge carriers (ions or radicals from the electrolyte) can be stored in a given volume, allowing for a higher energy density.
Because this is an area of growing focus for
our Company, we have invested heavily in R&D efforts in recent years to improve our production process and increase our capacity
and efficiency. We only began developing EDLC carbon in 2008 with initial samples being sent to customers in May 2010; it was not
until November 2011 that our products were ready for public sale. Thus far our EDLC products have had limited exposure in a market
dominated by imports. Our EDLC penetration strategy is based on service and price. We seek to maintain our prices are at a discount
of up to 20% from import prices for products of at least equivalent quality. We currently develop three activated carbon compounds:
Raw Materials
Our primary raw material is bamboo charcoal.
Each year, we purchase bamboo charcoal that has been prepared to our specifications from between 15 and 20 suppliers located in
and around Lishui. The majority of such purchases comes from approximately five suppliers. As the technical demands of preparing
such bamboo into bamboo charcoal are relatively low, we do not anticipate any difficulties in obtaining raw materials to produce
our bamboo charcoal products.
In addition to bamboo charcoal, we also purchase
bamboo charcoal powder for use in our EDLC carbon products. The suppliers for bamboo charcoal powder are more limited in number,
and the technical requirements of producing such powder are higher, than those for producing bamboo charcoal. We rely on three
suppliers for bamboo charcoal powder, one of which is also a major supplier of bamboo charcoal. Because of the technical demands
of producing bamboo charcoal powder for use in our EDLC carbon products, we expect that in the event of unavailability, we would
experience difficulty in replacing bamboo charcoal powder suppliers. While we expect that we could instruct existing bamboo charcoal
providers to produce bamboo charcoal powder, we could experience temporary lack of availability until such suppliers are able to
produce to our specifications.
We also purchase bamboo vinegar for use in our
liquid products. Our bamboo vinegar suppliers in some but not all cases are the same as our bamboo charcoal suppliers. As the supply
of bamboo vinegar is directly related to the supply of bamboo charcoal, we believe we have a steady supply of bamboo vinegar given
the prevalence of bamboo in the Lishui area. Accordingly, we do not anticipate any lack of availability of bamboo vinegar for our
liquid products.
We purchase wood charcoal briquettes from a supplier
in Heilongjiang province for use in our OEM BBQ charcoal products. As such products have low technical requirements and are typically
used for heating and cooking purposes, we have found that competing on price makes purchasing wood-based charcoal for such purposes
suit our customers’ requirements. Our primary source for wood charcoal briquettes, which we rebrand under our Algold brand
for sale in China, is Tahe Xingzhongda Carbon Co. in Daxing Anling, Heilongjiang province. We experienced a temporary lack of availability
of wood charcoal briquettes between June and August 2012 due to a local government moratorium on charcoal production as a result
to fire danger concerns. While we have adjusted our purchasing strategies to require this supplier to prepare briquettes further
in advance in order to reduce the likelihood of negative impact from adverse government actions, we cannot guarantee that we will
avoid future periods of unavailability.
In addition to our primary raw materials, we
also purchase small amounts of other raw materials, such as silver ion nano powder, fabric for charcoal bags, packaging materials,
and coconut charcoal. We do not anticipate any difficulty in replacing the suppliers of any of such minor raw materials.
The prices of our primary raw materials have
not historically been volatile. We have generally experienced differences in price of less than 5% over the course of a year for
our primary raw materials.
Distribution Channels and Methods of Competition
International Markets and Customers
Products from all three categories of our products
(although not all of our products) are sold directly or indirectly through distributors to international markets. Such exported
products include bamboo vinegar, bamboo charcoal purification products, and EDLC carbon. The majority of export items are for non-energy
use. We plan to increase our exports globally, particularly for our EDLC carbon. Target markets for EDLC carbon include the United
States, Japan, South Korea and Europe, as these markets are more mature with regards to EDLC items. Less than 2% of our direct
sales are currently international. Including business conducted with domestic distributors, however, we estimate that the percentage
of goods sold for export is approximately 15%, with the majority destined for Japan, South Korea and Taiwan.
The following is a list of selected international
customers, their respective nations and products sold:
Country
|
|
Company
|
|
Product
|
|
|
|
|
|
Japan
|
|
IBR Ltd.
Hyonen Kogyo Co., Ltd.
|
|
Air Purification Charcoal Pieces
Bamboo Charcoal Powder;
Bamboo Charcoal Pieces;
Bamboo Charcoal Granules
|
|
|
|
|
|
|
|
Takeda Corporation Co., Ltd.
Hokushin Shoji Co., Ltd.
Fuji Chikusan Co., Ltd.
|
|
Ceramic Balls, Eye patches
Fertilizer; Wood Vinegar
EDLC Carbon
|
|
|
|
|
|
South Korea
|
|
SeoKwang Labware Sales Co.
BF Korea Co., Ltd.
|
|
EDLC Carbon
BBQ Charcoal;
Disposable BBQ Charcoal
|
|
|
|
|
|
Taiwan
|
|
Longyuan Co., Ltd.
Mang Ga Industrial Corp.
Fay-Li Enterprises Co., Ltd.
|
|
Deodorant Granules
Bamboo Charcoal
Charcoal Keyboard Mats;
Bamboo Charcoal Pieces;
EDLC Carbon
|
|
|
|
|
|
Hong Kong
|
|
Active Trading Company Co., Ltd.
|
|
Disposable BBQ Charcoal
|
|
|
|
|
|
Germany
|
|
Alaa El Din Waterpipes & More
|
|
BBQ Charcoal;
Shisha Tobacco Charcoal
|
|
|
|
|
|
Israel
|
|
Intersun, Ltd.
|
|
BBQ Charcoal
|
Domestic Markets and Customers
Currently, household products are sold via our
sales and distribution networks located in 17 cities (Changchun, Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou, Harbin,
Jinan, Lanzhou, Lishui, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou). We do not own or lease locations in Changsha,
Fuzhou, Lanzhou, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai or Zhengzhou. . In addition, we have a logistics center in Lishui
and relationships with third-party warehousing companies in Hangzhou, Jinan, Shanghai and Zhengzhou. Starting from 2016, we intend
to sell our products mainly through distributors instead of operating logistics and warehousing facilities internally.
Our Charcoal Doctor brand has been successful
in the domestic market, and is sold through many specialty stores and large chain stores and supermarkets.
The following is a list of selected stores and
shops that stock our products in China:
Store name
|
|
Total
Stores
|
|
|
Estimated Number
of Stores
Carrying Product
|
|
Hongqi Chain
|
|
|
1,200
|
|
|
|
800
|
|
Carrefour
|
|
|
280
|
|
|
|
280
|
|
Tesco Supermarket
|
|
|
136
|
|
|
|
136
|
|
CR Vanguard
|
|
|
120
|
|
|
|
120
|
|
RT-Mart (HuaDong)
|
|
|
151
|
|
|
|
151
|
|
Fujian Yonghui Supermarket
|
|
|
98
|
|
|
|
25
|
|
Hangzhou Lianhua
|
|
|
105
|
|
|
|
105
|
|
Zhengzhou Dennis
|
|
|
42
|
|
|
|
42
|
|
Shandong Jiajiayue Group
|
|
|
60
|
|
|
|
60
|
|
RT-Mart (Jinan)
|
|
|
43
|
|
|
|
43
|
|
Lotus
|
|
|
25
|
|
|
|
25
|
|
CenturyMart
|
|
|
25
|
|
|
|
25
|
|
WuMart
|
|
|
22
|
|
|
|
22
|
|
Total
|
|
|
2,307
|
|
|
|
1,834
|
|
We are in the process of expanding our product
line to include toilet cleaning and kitchen cleaning products, among others. We believe there will be a high demand for these types
of products because of growing awareness of cleanliness and environmental protection, as well as antibacterial products and disinfectants.
These products will help lead us into developing and marketing other consumer products and will help increase our market share
of carbon products in China.
Geographic Distribution of Revenues
Following is a summary of our total revenues
by category of activity and geographic market for each of our last three fiscal years. As all of our sales are completed in China,
with title transferring to our customers in the country, the below tables reflect our understanding of where our customers are
ultimately reselling our products. All such figures are presented in thousands of U.S. dollars.
BBQ Charcoal
We sell our BBQ charcoal both domestically and
in a variety of international locations.
|
|
China
|
|
|
Japan
|
|
|
Middle
East
|
|
|
Germany
|
|
|
Taiwan
|
|
|
South
Korea
|
|
|
Czech
Republic
|
|
|
Russia
|
|
|
Other
|
|
2015
|
|
$
|
8,353
|
|
|
$
|
334
|
|
|
$
|
145
|
|
|
$
|
63
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2014
|
|
$
|
13,299
|
|
|
$
|
348
|
|
|
$
|
273
|
|
|
$
|
86
|
|
|
$
|
93
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2013
|
|
$
|
13,272
|
|
|
$
|
187
|
|
|
$
|
212
|
|
|
$
|
68
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charcoal Doctor
We sell our Charcoal Doctor products both domestically
and in a variety of international locations.
|
|
China
|
|
|
Japan
|
|
|
Middle
East
|
|
|
Germany
|
|
|
Taiwan
|
|
|
South
Korea
|
|
|
Other
|
|
2015
|
|
$
|
35,306
|
|
|
$
|
1,353
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
689
|
|
|
$
|
1,114
|
|
|
$
|
—
|
|
2014
|
|
$
|
39,086
|
|
|
$
|
1,508
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
702
|
|
|
$
|
1,456
|
|
|
$
|
—
|
|
2013
|
|
$
|
28,188
|
|
|
$
|
1,594
|
|
|
$
|
99
|
|
|
$
|
—
|
|
|
$
|
666
|
|
|
$
|
1,499
|
|
|
$
|
—
|
|
EDLC Carbon
We sell substantially all of our EDLC carbon
products in China and South Korea.
|
|
China
|
|
|
South
Korea
|
|
2015
|
|
$
|
2,332
|
|
|
$
|
9,055
|
|
2014
|
|
$
|
2,462
|
|
|
$
|
6,168
|
|
2013
|
|
$
|
1,328
|
|
|
$
|
6,861
|
|
Rubber
Although we have no plans to trade rubber products
in the immediate future, we have historically sold all such products in China.
|
|
China
|
|
2015
|
|
$
|
—
|
|
2014
|
|
$
|
—
|
|
2013
|
|
$
|
7,155
|
|
Methods of Competition
The primary market for our Charcoal Doctor line
of products is household hygiene use. Our air purification, deodorizing, and other health promoting products such as our charcoal
pillow, cater to a niche but growing market of health-conscious customers. Customers in this sector have a particular affinity
to brands. Notwithstanding this loyalty, product-switching costs are low, so manufacturers must compete on price.
We conducted a marketing survey in Guangzhou
in October 2013 for our charcoal bag products. According to the survey, we found that a decrease in package weight of 10% or an
increase in price of 5% resulted in a loss of sales of less than 1%, showing that the market could absorb minor changes. By contrast,
when the price increase reached 10% or the package weight decrease reached 15%, we saw that 30% of respondents were willing to
choose alternate brands or forego a purchase. We further found that for cleaning and purification products, 85% of respondents
cared about design attractiveness and approximately 65% made purchasing decisions based on attractiveness, causing us to conclude
that demand for our products is more heavily influenced by such products than by minor (but not major) economic fluctuations.
Because the household hygiene sector has enjoyed
relatively strong growth in the last few years as a result of increases in disposable urban income and an increased awareness of
healthy lifestyle products, we have focused on growing our market share in this industry. In order to do this, compete by pricing
our products aggressively, often at a discount of 10 – 20% below our competitors. In addition, we pride ourselves
on providing a high quality product, so that our customers believe they have received value for the price they pay.
With regards to household carbonized bamboo products,
the Charcoal Doctor brand is one of the largest and most famous. Our Charcoal Doctor brand name has been recognized as a “China
Well-known Brand” by the China Brand Strategy Management Association, and our products have been recognized as a “Zhejiang
Famous Forest Product” by the Zhejiang Famous Forest Product Affirmation Committee and have been awarded “The Fifth
China Yiwu International Forestry Product Expo Gold Award” by the Fifth China Yiwu International Forestry Product Expo Committee.
Moreover, the 2014 – 2018 China Bamboo Charcoal Products Market Research and Corporate Strategy Analysis Report
notes high brand recognition for Charcoal Doctor products in China.
The industry is geographically concentrated in
the South East of China in the provinces of Anhui, Zhejiang and Fujian where bamboo is more prominent, the bamboo charcoal industry
is also fragmented since it is subject to relatively low barriers of entry; low initial capital expenditure, low technical requirements
(excluding high end EDLC carbon compounds), highly homogenous products and few substitutes.
We face competition from a number of companies
operating in the vicinity. Many of these companies have similar profiles in terms of size, number of employees and product ranges.
One of the largest competitors is Zhejiang Maitanweng Ecology Development Co. Ltd., a local company also from Zhejiang Province.
Zhejiang Maitanweng has the largest franchise
in the industry with a presence in over 100 cities in China. Like our Company, Zhejiang Maitanweng has an extensive product portfolio
of 200 household, automotive and health related bamboo charcoal-based products.
Jie Jie Gao Charcoal is another company with
a similar product portfolio. Also located in the Lishui vicinity, it also holds many awards, and its products are stocked by Walmart,
Hualian, Century Mart and other supermarkets like our products are. Jie Jie Gao is also one of the founding members of INBAR —
International Network for Bamboo and Rattan.
Due to product homogeneity and low barriers to
entry branding is an important differentiator in the industry. We are not aware of any foreign competitors in this specific segment.
Awards and Recognition
The Company is fully ISO 9000 and ISO 14000 certified
and has received a number of national, provincial and local honors, awards and certifications for its quality products and scientific
research efforts:
2004
|
•
|
Lishui High-Tech Product Company Certification for its Bamboo Vinegar
|
2005
|
•
|
Zhejiang Province High Tech Product Award for its Bamboo Vinegar
|
|
•
|
Zhejiang Science and Technology Award (Third Class) for R&D of a continuous distillation process during the bamboo carbonization
process
|
2006
|
•
|
Zhejiang Science and Technology Award (Third Class) for its Liquid Bamboo Vinegar Products
|
|
•
|
Forestry Industry Award for Excellence in Forestry — Liquid Bamboo Vinegar Products (6
th
Anniversary)
|
|
•
|
Lishui City Forestry Industry Key Enterprise in Forestry Award
|
|
•
|
Liandu District High Tech Prize (Second Class) for R&D in Carbonization of Bamboo
|
2007
|
•
|
Zhejiang New Forestry High Tech Company Industrialization Project Award for R&D efforts in super capacitors using bamboo
charcoal
|
|
•
|
Zhejiang Provincial-Level Key Enterprise in Forestry Award
|
|
•
|
Lishui Science and Technology Award (First Class) for its Liquid Bamboo Vinegar Products
|
2008
|
•
|
Official China High Tech Industry Enterprise Certificate (this award entitles the company to preferential enterprise income
tax rates of 15% rather than 25%)
|
2009
|
•
|
National Torch Plan Project Certificate for Liquid Bamboo Products
|
|
•
|
National Science and Technology Progress Award (Second Class) for Bamboo Carbonization
|
2011
|
•
|
Zhejiang Science and Technology Award (Second Class) for its Activated Carbon Production Technology and Equipment Research
|
|
•
|
Garden Unit Recognition for beautification and ecological efforts
|
2012
|
•
|
Lishui City Recognition for Patent Grants
|
2013
|
•
|
Zhejiang Province High Technology Enterprise Recognition
|
2014
|
•
|
Lishui City Doctoral Working Station
|
Research and Development
We are committed to researching and developing
applications of bamboo charcoal and activated bamboo charcoal. We believe scientific and technological innovations will help our
Company achieve its long-term strategic objectives. R&D is an integral part of our operations and the crux of its competitive
advantage and differentiation strategy.
Led by our Chief Technical Officer, Dr. Zhaihua
Chen, our R&D team is well educated and has far-reaching research capabilities. Dr. Chen is a graduate of Chiba University
in Japan and is one of China’s one-thousand talent plan experts, with particular expertise in carbon for supercapacitors.
The R&D team has 13 dedicated researchers
and analysts focusing Charcoal Doctor product development and applications as well as EDLC formulations. Quality control is an
important aspect of the teams work and ensuring quality at every stage of the process has been a key driver in maintaining and
developing brand value for the Company.
We regularly collaborate with a number of top
domestic universities and institutions for the advancement of bamboo charcoal research and process technology. Current efforts
and collaborations cover a wide range of areas including but not limited to: bamboo vinegar applications, bamboo yield and quality
improvements, bamboo’s natural characteristics, bamboo carbonization process optimization and engineering initiatives to
optimize and integrate production processes. It is through these collaborations that the company has managed to secure important
breakthroughs resulting in proprietary knowledge and patents. Research has been carried out in cooperation with the following notable
institutions:
|
•
|
China National Bamboo Research and Development Center
|
|
|
|
|
•
|
Zhejiang University of Agriculture and Forestry
|
|
|
|
|
•
|
Zhejiang Academy of Forestry & Zhejiang Forestry Institute
|
Our Research Projects
We have led or participated in numerous scientific
projects that have led to important technological breakthroughs and advances.
Project Description
|
|
Time Period
|
|
Project Level
|
|
|
|
|
|
Technological innovations to achieve productive annual capacity of 3,000 metric tons of EDLC carbon
|
|
12/08 – present
|
|
Central Government funded high-tech industrial project
|
|
|
|
|
|
Bamboo carbonization technology R&D for tobacco product manufacturing
|
|
12/07 – 6/10
|
|
Zhejiang Provincial Government funded scientific agricultural project
|
|
|
|
|
|
Development of dry distillation of bamboo wood
|
|
6/07 – 5/09
|
|
Central government funded high-tech agricultural project
|
|
|
|
|
|
Technological innovations to be able to produce bamboo vinegar in a continuous process
|
|
4/06 – 4/08
|
|
Zhejiang Provincial Government funded scientific agricultural project
|
|
|
|
|
|
Technological innovations to achieve productive annual capacity of 300 metric tons of EDLC carbon
|
|
1/06 – 12/07
|
|
Central Government funded high-tech industrial project
|
|
|
|
|
|
Bamboo vinegar spontaneous combustion automation production technology
|
|
8/04 – 12/06
|
|
Central Government funded high-tech agricultural project
|
|
|
|
|
|
Bamboo R&D for lithium-ion battery anodes
|
|
8/04 – 2/06
|
|
Zhejiang Provincial Government funded scientific project
|
|
|
|
|
|
The research and demonstration for technology of agricultural waste carbonization and low ignition point molding charcoal fuel preparation
|
|
01/16-12/18
|
|
Zhejiang Provincial Government directly funded scientific project
|
|
|
|
|
|
Demonstration and promotion of green combustible carbon manufacturing technology using epicarps residue
|
|
15/08-17/12
|
|
Central Government funded
forestry technology promotion project
|
During the years ended December 31, 2015 and
2014, we spent $1,084,867 and $745,636, respectively, on R&D. R&D expenditures in each year were for the following purposes:
|
|
Year Ended December 31,
|
|
Purpose
|
|
2015
|
|
|
2014
|
|
Salaries
|
|
$
|
115,219
|
|
|
$
|
116,969
|
|
Materials
|
|
|
418,203
|
|
|
|
500,912
|
|
Other
|
|
|
551,445
|
[a]
|
|
|
127,755
|
|
Total
|
|
$
|
1,084,867
|
|
|
$
|
745,636
|
|
[a] Included in the amount were expenses of $481,800 related to
a sponsored research and development project.
In addition to the continuing R&D efforts in the Charcoal Doctor products, we will also focus on the
R&D of super capacitor batteries, lithium-ion batteries and special new energy vehicles. In 2016, we expect to invest approximately
$1.5 million in R&D projects, including the research of super capacitor batteries, auto power batteries which are extended
products of EDLC carbon, as well as the product upgrading of Suzhou E Motors, a newly acquired new energy vehicle factory. This
investment is expected to integrate the upstream and downstream of the business chain of EDLC carbon and increase the added
value of the product. We expect to become an industry leader in the segment of special new energy vehicles through R&D in auto
power batteries and special new energy vehicles, especially logistics vehicles.
The increase in planned R&D expenses is related
to the following initiatives:
Purpose
|
|
Anticipated
Amount
|
|
New R&D projects and expansion of R&D team, including new hires and testing expenses
|
|
$
|
700,000
|
|
Purchase of new testing equipment
|
|
|
300,000
|
|
Other expenses
|
|
|
500,000
|
|
Total
|
|
$
|
1,500,000
|
|
Our Patents
We rely on our
technology patents to protect our domestic business interests and ensure our position as a bamboo carbon technology pioneer in
our industry. We have placed a high priority on the management of our intellectual property. Some products that are material to
our operating results incorporate patented technology. Patented technology is critical to the continued success of our products.
However, we do not believe that our business, as a whole, is dependent on, or that its profitability would be materially affected
by the revocation, termination, expiration or infringement upon any particular patent. We currently hold thirteen issued patents
as of April 25, 2016.:
Patent Description
|
|
Holder
|
|
Patent Type
|
|
Approval
|
|
Expiration
|
|
Patent Number
|
Methods and equipment for combustion and distillation
|
|
Tantech Bamboo
|
|
Invention
|
|
Mar. 22, 2006
|
|
Aug. 25, 2024
|
|
ZL 200410075047.0
|
Methods for water and bamboo vinegar refining
|
|
Tantech Bamboo
|
|
Invention
|
|
Mar. 7, 2007
|
|
Apr. 15, 2023
|
|
200310116248.6
|
Biomass acaricide with gasified tar for organic pesticides
|
|
Tantech Bamboo
|
|
Invention
|
|
Nov. 18, 2009
|
|
Jan. 24, 2026
|
|
ZL 200610049234.0
|
A door with air treatment function
|
|
Tantech Bamboo
|
|
Invention
|
|
June 15, 2011
|
|
Sep. 4, 2028
|
|
2008101204443
|
Method of using biomass as raw materials in manufacturing organic
carbon electrodes
|
|
Tantech Charcoal
|
|
Invention
|
|
May 30, 2012
|
|
Oct. 20, 2028
|
|
200810121556.0
|
Titanium dioxide manufacturing method
|
|
Tantech Charcoal
|
|
Invention
|
|
July 18, 2012
|
|
Dec. 11, 2028
|
|
200810162826.2
|
Aqueous solution EDLC electrode materials performance measurement
methodology
|
|
Tantech Energy
|
|
Invention
|
|
Dec. 5, 2012
|
|
Aug. 20, 2029
|
|
200910101640.0
|
Supercapacitor electric car batteries
|
|
Tantech Energy
|
|
Utility Model
|
|
Dec. 31, 2008
|
|
Nov. 21, 2017
|
|
ZL 200720191201.X
|
Aqueous solution EDLC electrode materials performance measurement
unit apparatus
|
|
Tantech Energy
|
|
Utility model
|
|
May 19, 2010
|
|
Aug. 20, 2019
|
|
200920191752.5
|
Method for washing electrode active carbon
|
|
Tantech Energy
|
|
Invention
|
|
Sept. 25, 2013
|
|
Sept. 24, 2033
|
|
200810121706.8
|
An equipment of exhaust continuous treatment by activated alkali
to manufacture activated charcoal
|
|
Tantech Bamboo, Tantech Energy
|
|
Utility Model
|
|
June 04, 2014
|
|
Dec. 08, 2023
|
|
ZL2013208001106.2
|
Methods for
destructive
distillation and carbonization of
bamboo and wood
|
|
Tantech Bamboo
|
|
Invention
|
|
May 17, 2006
|
|
April 12, 2023
|
|
ZL03122806.2
|
A multi-step continuous activation roller type tunnel furnace
|
|
Tantech Energy
|
|
Utility Model
|
|
Jan. 31, 2016
|
|
May 30, 2025
|
|
ZL 2015.20365744.3
|
Regulations
We are subject to a variety of PRC and foreign
laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules
and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside
of the PRC include intellectual property, competition, taxation, anti-money laundering and anti-corruption.
Investment Direction Regulations
On March 27, 2011, the National Development
and Reform Commission (“NDRC”) has issued the Guidance Catalogue for Industrial Structure Adjustments (2011 edition),
which was amended on February 16, 2013. This Guidance Catalogue is an important basis for the government to guide investment direction,
promote technology innovation and industrial upgrading. Pursuant to relevant laws and regulations, in line with the promotion
of energy conservation and green industry initiatives, the approval authorities will strictly control energy-intensive, polluting
and natural resources industries, such as projects in low-end, capacity-redundant and over-expansion projects. Environmental protection
departments and other departments with jurisdiction will also review such projects for compliance with applicable criteria.
The Catalogue divides industries into three
categories: “encouraged,” “restricted,” and “eliminated” for investment. Industries not listed
in the Catalogue are generally deemed as falling into a fourth category, “permitted.”
According
to the Guidance Catalogue, development of bamboo byproducts (
)
like our products falls in the encouraged category while activated carbon production using raw material of woods or chopped roots
(
)
(as opposed to our methods, which use neither) falls in the eliminated category. As a result, government initiatives favor our
carbon production methods over methods using wood and wood products.
Given the Chinese government’s move
toward more environmentally friendly initiatives, we believe the bamboo industry, and in particular, the bamboo charcoal industry,
are poised to grow, both for heating and cooking purposes and also for use as carbon in super capacitors.
Intellectual Property Rights Regulations
Patents in the PRC are principally protected
under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of application, depending
on the type of patent right.
Registered trademarks are protected under
the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC.
Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered
or given preliminary examination and approval for use on the same or similar commodities or services, the application for registration
of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Regulations on Tax
Our business operations are governed primarily
by tax laws in the PRC. A description of the material tax consequences applicable to holders of our common shares may be found
in the section titled “Item 10. Additional Information.-E. Taxation.” For more information regarding the impact of
the PRC Enterprise Income Tax Law, see “Risk Factors — Under the Enterprise Income Tax Law, we may be classified
as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us
and our non-PRC stockholders.”
Foreign Exchange Regulation
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments
of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made
in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval
from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency
is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular
on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency
Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign
currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular
45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the
RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes
within the business scope approved by the applicable government authority and may not be used for equity investments within the
PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered
capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such
RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
In November 2012, SAFE promulgated the Circular
of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially
amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose
foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts,
the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by
a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple
capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE
promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment
by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches
over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign
exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its
branches.
We typically do not need to use our offshore
foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of
SAFE and other PRC government authorities as necessary.
SAFE Circular 37
In July 2014, SAFE issued SAFE Circular
37, which supersedes SAFE Circular 75, and requires that PRC citizens or residents must register with the relevant local SAFE
branch before making capital contribution to any offshore entity directly established or indirectly controlled by that PRC citizen
or resident for the purpose of investment or financing and with onshore or offshore assets or equity interests legally owned by
that PRC citizen or resident. In addition, the SAFE registrations are required to be updated with local SAFE branch with respect
to that offshore special purpose company in connection with the change of its basic information, such as its company name, business
term, shareholding by individual PRC citizens or residents, merger, or division and, with respect to the individual PRC citizens
or residents in case of any increases or decreases of capital in that offshore special purpose company, or share transfers or
swaps by the individual PRC citizens or residents
Share Option Rules
Under the Administration Measures on Individual
Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership
plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. In addition,
under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive
Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who
are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to
(i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas
listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures
with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters
in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We will make
efforts to comply with these requirements.
Regulation of Dividend Distribution
The principal laws, rules and regulations
governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly
Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation regulations.
Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit,
if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign
owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative
amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until
any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with
distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC
Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local
minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and
other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social
Insurance Law, employers in China must provide employees with welfare schemes covering pension insurance, unemployment insurance,
maternity insurance, work-related injury insurance, medical insurance and housing funds.
|
C.
|
Organizational structure
|
Below is a chart representing our current
corporate structure:
In the above chart, we provide the Chinese
names of our corporate entities. As to THL and USCNHK, both the English and Chinese names are legal corporate names. As to Tantech
Bamboo, Tantech Charcoal, Tantech Energy, Tanbo Tech., Tantech Babiku and Lishui Zhongzhu, only our Chinese names are legal corporate
names, and the English translations are provided as courtesy translations.
Our registered agent in the British Virgin
Islands is Offshore Incorporations Limited. Our registered office and our registered agent’s office in the British Virgin
Islands are both located at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
THL
THL was incorporated on November 9, 2010
under the BVI Companies Act, 2004 as a company limited by shares under the name “Sinoport Enterprises Limited.” On
April 15, 2013, Sinoport Enterprises Limited changed its name to “Tantech Holdings Ltd.” At the time of its formation,
THL was authorized to issue 50,000 common shares with a par value of $1.00 per share. On November 19, 2010, THL issued 50,000
shares to its sole shareholder, Forasen Energy Co., Ltd, now named “Tanbsok Group Limited.”
On November 25, 2014, in contemplation of
the initial public offering of its common shares, THL effected a simultaneous (a) 1,000-for-1 split of its common shares and (b)
pro-rata redemption for par value and cancellation of 600 of such shares (30,000,000 in total). This transaction was accomplished
in this way for several business reasons: (1) we wanted to maintain $50,000 in aggregate share capital; (2) in anticipation of
the offering, we desired to increase the total number of common shares and reduce their per-share price to a level consistent
with the targeted offering price in the offering; and (3) prior to completion of the recapitalization, we had issued all of the
shares we were authorized to issue and needed to create authorized but unissued shares by repurchasing a portion of such authorized
and outstanding shares.
Upon completion of these transactions, THL
was authorized to issue 50,000,000 common shares, $0.001 per share, of which 20,000,000 are issued and outstanding. At formation,
THL had one director, Dehong Zhang, a citizen of the Philippines. On June 21, 2013, Yefang Zhang, a citizen of the Philippines,
was also appointed as a director of THL. In June 2014, THL appointed three independent directors, all citizens of the PRC: Hongdao
Qian, Shudong Wang and Wencai Pan.
On March 24, 2015, THL completed an initial
public offering of 1,600,000 common shares.
USCNHK
USCNHK was formed on October 17, 2008 under
the Companies Ordinance (Chapter 32) of Hong Kong under the name “Raymond & O/B Raysucess Co., Limited.” On December
2, 2010, Raymond & O/B Raysucess Co., Limited changed its name to “USCNHK Group Limited.” USCNHK’s authorized
share capital is HKD10,000, and the company has issued 10,000 shares, par value HKD1.00 per share, to its sole shareholder, THL.
USCNHK has one director, Dehong Zhang, a citizen of the Philippines. On June 21, 2013, Yefang Zhang, a citizen of the Philippines,
was also appointed as a director of USCNHK.
Tantech Bamboo
Tantech Bamboo
was formed on October 23, 2002 under the name “Lishui Zhonglin High-Tech Co., Ltd.” (Chinese:
). On December 31, 2005, Tantech Bamboo changed its name to “Zhejiang Tantech
Bamboo Technology Co., Ltd.” Tantech Bamboo’s authorized share capital is RMB80 million, of which USCNHK owns 95%
and five individual PRC residents own the remaining 5%. Tantech Bamboo is organized and qualified as a Sino-foreign joint venture
enterprise under PRC law. Tantech Bamboo has five directors, Zhengyu Wang, Yefang Zhang, Dexian Zhang (Yefang Zhang’s brother),
Xiaolin Chen and Yaqing Ye, all of whom are PRC citizens other than Yefang Zhang, who is a citizen of the Philippines.
Tantech Charcoal
Tantech Charcoal was formed on September
5, 2002. Tantech Charcoal’s authorized share capital is RMB 3.5 million, of which Tantech Bamboo owns 100%. Tantech Charcoal
is organized as a limited liability company under PRC law. Tantech Charcoal has one director, Zhengyu Wang, who is a PRC citizen.
Tantech Energy
Tantech Energy was formed on September 24,
2008. Tantech Energy’s authorized share capital is RMB 30 million, of which Tantech Bamboo owns 100%. Tantech Energy is
organized as a limited liability company under PRC law. Tantech Energy has one director, Zhengyu Wang, who is a PRC citizen.
Tantech Babiku
Tantech Babiku was formed on October 20,2015.
Tantech Babiku’s authorized share capital is RMB 10 million, of which Tantech Bamboo owns 100%. Tantech Babiku is organized
as a limited liability company under PRC law. Tantech Babiku has one director, Zhengyu Wang, who is a PRC citizen.
Lishui Zhongzhu
Lishui Zhongzhu was formed on November 18,
2015. Lishui Zhongzhu’s authorized share capital is RMB 10 million, of which Tantech Bamboo owns 100%. Lishui Zhongzhu is
organized as a limited liability company under PRC law. Lishui Zhongzhu has one director, Zhengyu Wang, who is a PRC citizen.
Tanbo Tech.
Tanbo Tech. was formed on December 8, 2015.
Tanbo Tech.’s authorized share capital is RMB 10 million, of which Tantech Bamboo owns 100%. Tanbo Tech. is organized as
a limited liability company under PRC law. Tanbo Tech has one director, Zhengyu Wang, who is a PRC citizen.
Lishui Tantech
Lishui Tantech was formed on April 7, 2016.
Lishui Tantech’s authorized share capital is RMB 200 million, of which USCNHK owns 100%. Lishui Tantech is organized as
a limited liability company under PRC law. Lishui Tantech has one director, Zhengyu Wang, who is a PRC citizen.
|
D.
|
Property,
Plants and Equipment
|
There is no private land ownership in China.
Individuals and entities are permitted to acquire land use rights for specific purposes. We were granted land use rights for our
facilities in Lishui City, which extend until between 2051 and 2058. Following is a list of our properties:
Property
|
|
Land Use Expiration
|
|
Space
|
|
Ground
Floor
Area
|
No. 10 Cen Shan Road,
Shuige Industrial Zone, Lishui City, Zhejiang Province 323000, People’s Republic of China (headquarters)
|
|
September 23, 2058
|
|
51,419m
2
|
|
37,248m
2
|
No. 508 Wen San Road,
Room 1106, Hangzhou City, Zhejiang Province, People’s Republic of China
|
|
June 7, 2051
|
|
357m
2
|
|
118m
2
|
No. 888 Tianning Street,
Lishui City, Zhejiang Province, People’s Republic of China
|
|
December 18, 2052
|
|
15,208m
2
|
|
13,755m
2
|
Total
|
|
|
|
66,984m
2
|
|
51,120m
2
|
Currently, household products are sold via
our sales and distribution networks located in 17 cities (Changchun, Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou,
Harbin, Jinan, Lanzhou, Lishui, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou). We do not own or lease locations
in Shenyang, Tianjin, Yantai, Taiyuan, Zhengzhou, Changsha, Fuzhou or Lanzhou. In addition, we have logistics centers in Lishui
and relationships with third-party warehousing companies in Hangzhou, Jinan, Shanghai and Zhengzhou.
The following is a list of our sales and
distribution networks and logistic center locations.
Location
|
|
Lease Expiration
|
|
Area
|
Jinan
1-1-2304, District 1, Shangpinqinghe, 18# Luoan Rd. Tianqiaoqu, Jinan
|
|
October 2016
|
|
78m
2
|
Hangzhou
11F, T3 West, Ruihe Technology Park, No 475 Changhe Rd. Bingjiangqu, Hangzhou
|
|
December 2017
|
|
300m
2
|
Lishui
No 888, Tianning St., Lianduqu, Lishui
|
|
Company-owned
property
described above
|
|
|
|
|
|
|
|
Logistics Centers
|
|
|
|
|
|
|
|
|
|
Lishui
No 888, Tianning St., Lianduqu, Lishui
|
|
Company-owned
property
described above
|
|
|
Fixed assets at our properties consist
of office equipment at all of our locations and, at our Lishui properties, equipment for the carbonization and processing of charcoal,
both for our household goods products and for our EDLC carbon. This equipment includes furnaces, boilers, mixers, kilns/ovens,
jet mills, pulverizers, chemical analytic equipment, generators, briquette hydraulic powder molding machines, carbon activation
and pickling tanks, belt dryers, air compressors, bamboo vinegar refining equipment, container production lines, hot acid/water
washing equipment and automatic packing machines.
All of our real property and fixed assets
are encumbered by secured loans from our creditors. Tantech Bamboo granted the encumbrances on our properties at the Tianning
Industrial Zone facility. Tantech Energy granted the encumbrances on our land use right at our Shuige Industrial Zone facility.
We have relocated our facilities from our facility on Tianning Street to a new, larger facility on Cen Shan Road. Forasen Group
currently occupies approximately 500 square meters of our Tianning Street facility as its office. We have not historically charged
Forasen Group for renting this office space. We have referred the matter to our corporate governance committee to determine an
appropriate rental fee for this office space. We will base the rental fee on comparable rental spaces in the Lishui area. We have
rented approximately 4,922 square meters of our Tianning Street property, leaving 10,769 square meters vacant and available for
rental. As of the date hereof, we have contracted rents of approximately $142,274 (RMB 885,888) per year. Although we estimate
that current contracted rents will be sufficient to cover the costs to maintain the Tianning property (approximately $19,433 (RMB
121,000)
per year), we have no guarantee at this point that we will be able rent the remainder of the property.
None of our property is affected by any
environmental issues that may affect our use of the property. At present, our plans to further develop, expand or improve these
properties are funded through proceeds from our initial public offering and through our operating cash flows.
Images of our facilities are presented below:
Productive Capacity
We currently produce all of our products
at our Shuige Industrial Zone facility in Lishui. Our facilities in Hangzhou and our Tianning facility in Lishui are used for
general office and administration purposes.
Shuige Industrial Zone facility
The following is a map of our Shuige Industrial
Zone facility, which displays the building numbers referred to in the below tables describing the productive uses of such facility.
Non-production properties:
Functional uses and location
|
|
Area
(m
2
)
|
|
|
Actual
used
area (m
2
)
|
|
|
Reserved
area (m
2
)
|
|
|
Space
utilization
|
|
|
Reserved purpose
|
Office administration, training, product display
and so on (First through fourth floors of building No. 1)
|
|
|
4,478
|
|
|
|
3,359
|
|
|
|
1,120
|
|
|
|
75
|
%
|
|
Additional offices
|
Research and development center
(Fifth and sixth floors
of building No. 1 and building 11)
|
|
|
4,027
|
|
|
|
1,120
|
|
|
|
2,907
|
|
|
|
27.8
|
%
|
|
New product
development team,
EDLC research and
development center
|
Employee dorms (Building No. 9, 10)
|
|
|
7,182
|
|
|
|
7,182
|
|
|
|
None
|
|
|
|
100
|
%
|
|
N/A
|
Other (boiler room, guard room, waste water processing
and so on)
(Building No. 13 through 16)
|
|
|
218
|
|
|
|
218
|
|
|
|
None
|
|
|
|
100
|
%
|
|
N/A
|
We currently reserve 4,478 m
2
for
office administration, training and product display purposes, of which 3,359 m
2
are currently used. We have reserved
1,120 m
2
for additional office space.
Our research and development center consists
of 4,027 m
2
, of which we use 1,120 m
2
at present. We plan to use the additional space on the sixth
floor of our Shuige Industrial Zone facility for our new product development team when our needs exceed the space provided on
the fifth floor, but we do not have a specific time or plan in place for expanding such team. We plan to use the balance of space
devoted to this purpose to implement an EDLC research and development center.
We use 218 m
2
for general
facility purposes, including our boiler room, guard room and other similar purposes.
Our employee dorms cover 7,182 m
2
,
all of which is in use.
Production properties:
Functional uses and
location
|
|
Area
(m
2
)
|
|
|
Actual
used
area
(m
2
)
|
|
|
Reserved
area
(m
2
)
|
|
|
Space
utilization
|
|
|
Current
capacity
(metric
tons)
(1)
|
|
|
2013 actual
productivity
(metric
tons)
|
|
|
Capacity utilization
|
|
|
Reserved
purpose
|
Barbecue
charcoal production line (Building No. 2)
|
|
|
11,854
|
|
|
|
5,927
|
|
|
|
5,927
|
|
|
|
50
|
%
|
|
|
1,000
|
|
|
|
309
|
|
|
|
30.9
|
%
|
|
Installation of equipment for production expansion
|
Solid deodorant and purification
product production line (Building No. 3, half of building No. 4)
|
|
|
10,984
|
|
|
|
10,984
|
|
|
|
0
|
|
|
|
100
|
%
|
|
|
20,000
|
|
|
|
20,949
|
|
|
|
104.7
|
%(2)
|
|
N/A
|
Liquid household hygiene product
and bamboo vinegar product production line (Half of building No. 4)
|
|
|
3,440
|
|
|
|
1,720
|
|
|
|
1,720
|
|
|
|
50
|
%
|
|
|
5,000
|
|
|
|
4,091
|
|
|
|
82.0
|
%
|
|
Installation of a new production line
|
EDLC carbon production line
(Building No. 5, 6, 7, 8, 9)
|
|
|
9,098
|
|
|
|
3,473
|
|
|
|
5,625
|
|
|
|
38.2
|
%
|
|
|
500
|
|
|
|
304
|
|
|
|
60.8
|
%
|
|
Build a production line for 1,000 additional tons of EDLC carbon
capacity
|
(1)
|
All of our production capacity rates assume 250 working days per year, 8 hours per day.
We believe we can increase the number of days worked per year or number of hours worked per day to increase our production
capacities if we choose to do so in the future.
|
|
|
(2)
|
We exceeded 100% utilization rate by operating this production line in excess of the assumed
capacity rates.
|
We have reserved 11,854 m
2
of
our Shuige Industrial Zone facility for our barbecue charcoal production line, and currently use 5,927 m
2
of this
area. The remaining 5,927 m
2
is reserved for a future production line. In our existing barbecue charcoal production
line, we have a current capacity of approximately 1,000 tons per year, and we produced 340 tons of BBQ charcoal in 2015, a capacity
utilization rate of 34%.
We have reserved 10,984 m
2
of
our Shuige Industrial Zone facility for our solid deodorant and purification product production line. We currently use all of
the space. In our existing Charcoal Doctor solid product production line, we have a current capacity of approximately 20,000 tons
per year, and we produced 21,500 tons of Charcoal Doctor solid product in 2015, a capacity utilization rate of 107.5%. We exceeded
100% utilization by operating this production line in excess of the assumed capacity rates. If we choose to increase our production
capacity in the future, we would need to replace existing production lines with more efficient lines or to expand our space, as
we have not reserved space for additional production lines.
We have reserved 3,440 m
2
of
our Shuige Industrial Zone facility for our liquid household hygiene product and bamboo vinegar product production line, of which
we currently use 1,720 m
2
. The remaining 1,720 m
2
is reserved for installation of a new production
line. In the existing production line, we have a current capacity of approximately 5 million units per year, and we produced 3.6
million units of our liquid products in 2015, a capacity utilization rate of 72%.
We have reserved 9,098 m
2
of
our Shuige Industrial Zone facility for an EDLC carbon production line, of which we currently use 3,473 m
2
. The remaining
5,625 m
2
is reserved for building another production line to increase capacity by 1,000 tons of EDLC carbon per
year. In our existing EDLC carbon production line, we have a current capacity of approximately 500 tons per year, and we produced
367 tons of EDLC carbon product in 2015, a capacity utilization rate of 73.4%.
Item 4A.
Unresolved Staff Comments
None.
Item 5. Operating
and Financial Review and Prospects
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with our consolidated financial statements
and related notes included elsewhere in this annual report on Form 20-F. In addition to historical consolidated financial information,
the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results
could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this annual report on Form 20-F, particularly in “Risk Factors.”
Overview of Company
We are a specialized manufacturer of bamboo
charcoal based products with primary business focus in household products, EDLC carbon as well as low emission BBQ charcoal. We
conduct our operations in China through our wholly owned subsidiary, USCNHK in Hong Kong and its majority-owned Chinese subsidiary,
Tantech Bamboo. Tantech Bamboo is engaged in the production and distribution of household products. Through Tantech Bamboo’s
wholly-owned Chinese subsidiary, Tantech Charcoal, we conduct trading business, including the export of charcoal products; through
Tantech Bamboo’s wholly-owned Chinese subsidiary, Tantech Energy, we manufacture EDLC carbon; through Tantech Bamboo’s
wholly-owned Chinese subsidiary, Tantech Babiku, we manufacture low emission BBQ charcoal.
In the fourth quarter of 2015, we registered
two new companies, Lishui Zhongzhu Charcoal Co., Ltd. (“Lishui Zhongzhu” or “Zhongzhu”) and Hangzhou Tanbo
Tech Co., Ltd. (“Tanbo Tech” or “Tanbo”). Lishui Zhongzhu will be engaged in the production and sales
of active charcoal and other products. We plan to use Tanbo Tech to explore business opportunities outside Lishui area.
Our household products include purification
and deodorization products, cleaning products and barbecue charcoals designed for domestic market. Purification and deodorization
products and cleaning products are sold under the brand name “Charcoal Doctor”. Purification and deodorization products
include air purification products, deodorizer and bamboo vinegar. Cleaning products include kitchen and bathroom cleaning products,
personal care products and liquid detergents. Household products accounted for 73.5% and 81.0% of total revenue for the years
ended December 31, 2015 and 2014, respectively.
The largest category of our household products
is purification and deodorization products. Made from dry distilled carbonized bamboo, our purification and deodorization products
have the ability to absorb harmful substances and air-borne odors, including benzene, formaldehyde, ammonia and carbon tetrachloride.
These products also come in many shapes and varieties for a multitude of purposes including pillows, cushion insoles, wrist pads,
clothes hangers and other products. Bamboo vinegar is an additive that can be used in food processing, medical and hygiene products
and fertilizer. Although it currently only accounts for a small portion of our revenue, bamboo vinegar products are crucial for
us to maintain close ties with the agricultural industry which we believe will be a key area for growth in the coming years. Cleaning
products, including disinfectants, detergents, lotions, specialized soaps and toilet cleaners are relatively new in our household
products but provide us another opportunity for growth. Purchased from third parties and sold through our distribution channel,
barbecue charcoals designed for China’s domestic market have also been a key source of revenue for us in recent years.
Currently, household products are sold via
our sales and distribution networks located in 17 cities (Changchun, Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou,
Harbin, Jinan, Lanzhou, Lishui, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou). We do not own or lease locations
in Changsha, Fuzhou, Lanzhou, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai or Zhengzhou. In addition, we have a logistics centers
in Lishui and relationships with third-party warehousing companies in Hangzhou, Jinan, Shanghai and Zhengzhou.
As of March 2016, Charcoal Doctor products
are stocked in over 1,800 supermarkets, department, specialty and convenience stores throughout China. We also own and operate
two Charcoal Doctor branded retail stores in Lishui. We plan to expand product lines in the coming years to take advantage of
the various uses of bamboo charcoal and bamboo vinegar.
EDLC carbon and BBQ charcoal for international
market accounted for 20.4% and 14.4% of revenue for the years ended December 31, 2015 and 2014, respectively. We have annual production
capacity of 1,000 tons of BBQ charcoal products for international markets and the production lines are fully automated. Major
markets for these products are Japan, Europe and the Middle East.
An area of growing focus for us in the coming
years is EDLC carbon. We have invested heavily in research and development efforts in recent years to improve the production process
and increase capacity and efficiency, establishing a platform for significant growth potential in the coming years. Our EDLC carbon
is mainly sold in China, but we also have plans to increase international exposure by focusing efforts in markets such as the
U.S., Japan and South Korea which have large demand for EDLC product and EDLC carbon. To increase our international exposure we
plan to attend EDLC product exhibitions such as Canton Fair, China (Shanghai) International Super-Capacitor Industry Fair, China
International Battery Fair, and Battery Japan; attend various industry seminars such as Japan Battery Seminar, China Power Energy
Storage Technology and Materials Seminar; visit EDLCs and EDLC batteries manufacturers in Russia and South Korea; and enhance
our e-commerce marketing through our work with Chinese e-commerce websites such as
www.hc360.com
and
www.1688.com
,
and
www.globalsources.com
, an online marketplace that facilitates trade with China. Generally our penetration strategy
to the potential market is based on service and price advantage.
Our trading business accounted for 6.1%
and 4.6% of revenue for the year ended December 31, 2015 and 2014, respectively. Our trading business was mainly related to the
export of charcoal products.. We established Tantech Charcoal as a trading company for the export of our charcoal products in
order to avoid mixing our export sales and our production businesses. Production businesses that are combined with export businesses
typically have a higher tax rate than we pay by separating these businesses. By separating the trading business from the production
business, we enjoy tax incentives and more streamlined operations. Because of our experience in trading charcoal and in order
to improve our cash flows, we also engaged in rubber trading through this entity until September 2013. The profit of our trading
business has been relatively low, and as of September 2013, we started reduce our trades of rubber. While we may have sporadic
trades of rubber in the future and while we are still authorized to engage in rubber trading, it will not be a focus of our Company.
We expect our sales of household products
will continue to grow in the coming years with the increased brand awareness and growing demand for our bamboo charcoal products.
As EDLC devices are increasingly used in the mass transportation and automobile industries, we expect our sales of EDLC carbon
will increase. We are otherwise unaware of any specific known trends, uncertainties or events that are reasonably likely to have
a material effect on our sales or revenue of household products and EDLC carbon. Our revenue from our trading segment is unlikely
to increase significantly in future years. If we cannot increase our household products and EDLC carbon revenues or find new business
opportunities to continue the growth, our total revenue is likely to decrease.
Factors Affecting Our Results of Operations
Government Policy May Impact our Business and Operating
Results
We have not seen any impact of unfavorable
government policy upon our business in recent years. However, our business and operating results will be affected by China’s
overall economic growth and government policy. Unfavorable changes in government policies could affect the demand for our products
and could materially and adversely affect our results of operations. Our bamboo charcoal based consumer products are currently
not subject to the government restrictions, however, any future changes in the government’s policy upon bamboo charcoal
industry may have a negative effect on the supply of our raw materials. As current demand for our EDLC carbon is mainly from the
transportation sector in China, any future changes in the government policy affecting the transportation industry may impact our
revenue generated from sales of EDLC carbon.
Price Inelasticity of Raw Materials May Reduce Our Profit
As a specialized manufacturer of bamboo
charcoal based products, we rely on the continuous and stable supply of bamboo charcoal to ensure our operation and expansion.
Although bamboo (and as a result bamboo charcoal) is a renewable supply, price inelasticity at any given time may increase the
likelihood of bidding wars, resulting in an increase in raw material prices and thus reduce our profit. In addition, as we are
competing based upon low price, we will risk losing customers by increasing our selling prices.
Competition in Consumer Product and Energy Segment
Our products face competition from other
producers. In our household product segment, we face competition from a number of companies that have similar product portfolios.
Many of such competitors’ products are not bamboo-based; instead, we compete based on our products’ functional use.
Many such competitors are able to provide functionally similar products without relying on bamboo or bamboo charcoal components.
Although our Charcoal Doctor brand is one
of the largest and most famous in the charcoal bag and bamboo charcoal market, the bamboo charcoal based consumer product industry
is relatively fragmented and subject to relatively low barriers of entry.
Our Charcoal Doctor air purification products
compete with products from charcoal-based competitors such as Zhejiang Maitanweng Ecological Development Co., Ltd., Zhejiang Jiejiegao
Charcoal Industry Co., Ltd., and Quzhou Modern Charcoal Industry, Co., Ltd.
Our Charcoal Doctor toilet cleaner competitors
include non-charcoal-based competitors such as SC Johnson & Son (Shanghai) Inc. (which makes the Mr. Muscle brand in China),
Blue Moon Chinese Co., Ltd., Shanghai White Cat Group Ltd., Beijing Green Umbrella Chemical Co., Ltd. and Weilai (Guangzhou) Household
Products Co., Ltd.
Our BBQ charcoals also face competition
from similar products that are not made of bamboo-based charcoal. For example, our Algold grand shisha charcoal competes with
Shaxian Jinlu Charcoal Factory. While our shisha charcoal is a popular bamboo-charcoal based product, the competitor product is
more popular but not bamboo-charcoal based. Our other key international competitors in this area include Haiwan International
Trading Co., Ltd., Nanxiong Guizhu Charcoal Co., Ltd. and Shaoguan Libao Daily Sundry Co., Ltd. In addition to these companies,
we compete domestically with Fujian Zhuhai Charcoal Co., Ltd., Jiangshan Green Charcoal Co., Ltd., Pujiang Fuli Bamboo & Wood
Co., Ltd. and Sanhe Senyuan Charcoal Co., Ltd.
There are several manufacturers of EDLC
carbon in China and two main international companies competing in the market, although to our knowledge none of them use bamboo
as the carbon material. We only started commercial production a short time ago and may not have the resources and marketing strategy
to compete in the market. Thus our revenue and profit from EDLC carbon may not be sustainable.
Delays in third party developments in the EDLC industry
or weaker-than-expected demand for EDLC products may negatively affect demand for our EDLC carbon.
Awareness and applications of EDLC technology
in the PRC may not mature or become fully commercialized as rapidly as we expect. As a result, the demand and wide application
of the carbon component used in EDLC are still facing lots of uncertainties. Although we expect the EDLC industry will grow significantly
in the coming years and this will provide us great opportunity to gain market share, the development of new technology may also
put more pressure on our research efforts.
Some of our Products are Subject to Cyclical Sales.
Our BBQ charcoal products and solid bamboo
charcoal products are subject to cyclical sales. We typically see our highest sales of BBQ charcoal products in April and May
and then again between August and October. The first peak marks our customers’ preparation for the summer outdoor barbeque
season, and the second peak is related to their purchase of our BBQ charcoal products for heating and cooking indoors in the colder
months.
The peak season for our solid bamboo charcoal
products is between October and November, and sales are lowest in February and March as a result of Chinese New Year, as consumers
tend to purchase such products prior to the holiday, rather than after.
While we have seen higher sales near the
end of the year for our liquid products, we believe our sales volume for such products is too low to consider such fluctuations
cyclical. As such products are primarily for export, demand for our liquid products is most likely to be affected by seasonal
and other fluctuations in the purchasing country rather than in China.
Demand for our EDLC carbon (also too new
a product line for us to draw conclusions as to cyclical sales) is subject to fluctuation based on economic conditions, primarily
government economic policies that provide subsidies to encourage the use of mass transportation and low-pollution vehicles, which
rely on EDLCs, which in turn drive demand for EDLC carbon. As such, while we believe EDLC carbon sales may be affected by general
economic conditions, such sales have been more affected by governmental policies.
Notwithstanding the effects of seasonality,
we believe the key drivers for us to maintain a competitive position in the market and positive financial performance continue
to be brand recognition, product innovation and the application of new technology.
Results of Operation
Years Ended December 31, 2015 and 2014
The following table summarizes the results
of our operation during the fiscal years ended December 31, 2015 and 2014, respectively, and provides information regarding the
dollar and percentage increase or (decrease) during such years.
(All amounts, other than percentages, in
thousands of U.S. dollars)
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
Dollars in
thousands
|
|
|
As a
percentage
of sales
revenue
|
|
|
Dollars in
thousands
|
|
|
As a
percentage
of sales
revenue
|
|
|
Dollar
($)
Increase
(Decrease)
|
|
|
Percentage
Increase
(Decrease)
|
|
Revenues
|
|
$
|
58,830
|
|
|
|
100.0
|
%
|
|
$
|
65,493
|
|
|
|
100.0
|
%
|
|
$
|
(6,663
|
)
|
|
|
-10.2
|
%
|
Cost of revenues
|
|
|
41,948
|
|
|
|
71.3
|
%
|
|
|
44,853
|
|
|
|
68.5
|
%
|
|
|
(2,905
|
)
|
|
|
-6.5
|
%
|
Gross profit
|
|
|
16,882
|
|
|
|
28.7
|
%
|
|
|
20,640
|
|
|
|
31.5
|
%
|
|
|
(3,758
|
)
|
|
|
-18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
859
|
|
|
|
1.5
|
%
|
|
|
1,081
|
|
|
|
1.7
|
%
|
|
|
(222
|
)
|
|
|
-20.5
|
%
|
General and administrative expenses
|
|
|
4,724
|
|
|
|
8.0
|
%
|
|
|
1,639
|
|
|
|
2.5
|
%
|
|
|
3,085
|
|
|
|
188.2
|
%
|
Research and development expenses
|
|
|
1,085
|
|
|
|
1.8
|
%
|
|
|
746
|
|
|
|
1.1
|
%
|
|
|
339
|
|
|
|
45.4
|
%
|
Total operating expenses
|
|
|
6,668
|
|
|
|
11.3
|
%
|
|
|
3,466
|
|
|
|
5.3
|
%
|
|
|
3,202
|
|
|
|
92.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,214
|
|
|
|
17.4
|
%
|
|
|
17,174
|
|
|
|
26.2
|
%
|
|
|
(6,960
|
)
|
|
|
-40.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
83
|
|
|
|
0.1
|
%
|
|
|
162
|
|
|
|
0.2
|
%
|
|
|
(79
|
)
|
|
|
-48.8
|
%
|
Interest expense
|
|
|
(412
|
)
|
|
|
-0.7
|
%
|
|
|
(548
|
)
|
|
|
-0.8
|
%
|
|
|
136
|
|
|
|
-24.8
|
%
|
Government subsidy income
|
|
|
326
|
|
|
|
0.6
|
%
|
|
|
62
|
|
|
|
0.1
|
%
|
|
|
264
|
|
|
|
425.8
|
%
|
Other income
|
|
|
1,093
|
|
|
|
1.9
|
%
|
|
|
721
|
|
|
|
1.1
|
%
|
|
|
372
|
|
|
|
51.6
|
%
|
Total other income
|
|
|
1,090
|
|
|
|
1.9
|
%
|
|
|
397
|
|
|
|
0.6
|
%
|
|
|
693
|
|
|
|
174.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11,304
|
|
|
|
19.2
|
%
|
|
|
17,571
|
|
|
|
26.8
|
%
|
|
|
(6,267
|
)
|
|
|
-35.7
|
%
|
Provision for income taxes
|
|
|
(2,377
|
)
|
|
|
-4.0
|
%
|
|
|
(2,854
|
)
|
|
|
-4.4
|
%
|
|
|
477
|
|
|
|
-16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8,927
|
|
|
|
15.2
|
%
|
|
|
14,717
|
|
|
|
22.5
|
%
|
|
|
(5,790
|
)
|
|
|
-39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the noncontrolling interest
|
|
|
(488
|
)
|
|
|
-0.8
|
%
|
|
|
(736
|
)
|
|
|
-1.1
|
%
|
|
|
248
|
|
|
|
-33.7
|
%
|
Net income attributable to common stockholders
|
|
$
|
8,439
|
|
|
|
14.3
|
%
|
|
$
|
13,981
|
|
|
|
21.3
|
%
|
|
|
(5,542
|
)
|
|
|
-39.6
|
%
|
Revenues.
Revenues decreased
approximately $6.7 million, or 10.2%, to approximately $58.8 million in 2015 from approximately $65.5 million in 2014. The decrease
was primarily attributable to the decreased sales from our consumer product segment which were partially offset by the increased
sales from our energy segment and trading segment.
In our consumer product segment, the revenue
decreased to approximately $43.2 million in 2015 from approximately $53.1million in 2014. The decrease was primarily attributable
to the decreased sales of barbecue charcoal designed for domestic market and lower sales of deodorizer and bamboo vinegar in 2015.
In particular, the revenue from barbecue charcoal for domestic market decreased by approximately $4.9 million in 2015 compared
to 2014. The decrease was primarily attributable to the temporary disruption in supply of barbecue charcoal in the last two months
of 2015. The environmental policies in certain localities has been tightened in Daxinganling Region. Charcoal kilns are gradually
shutting down by the government. From 2016, we are no longer able to purchase from our second largest supplier TaheXinzhongda Carbon
Co. The loss of one of the main suppliers could force us to look for alternative suppliers at higher costs and thus increase our
production costs in the coming years. In 2015, the overall household products sector experienced general slowdown due to weak economy
condition in China. Given the nature of our Charcoal Doctor line of products, people are increasingly buying these household products
online with unknown brands in order to save money. Therefore, orders from our major customers, which are third party distributors
and retail stores, have decreased considerably. We are expecting lower sale volume from our major customers in the coming years
until the economy condition has improved. In particular, the revenue from bamboo vinegar products decreased by approximately $2.8
million in 2015 compared to 2014.We sold approximately 0.6 million items of bamboo vinegar products in 2015 compared to approximately
1.6 million items sold in 2014.The revenue from deodorizer products decreased by $1.5 million in 2015 compared to 2014.We sold
approximately 4.4 million pieces of air purification products and 7.7 million pieces of deodorizer products in 2015 compared to
approximately 4.9 million pieces and 7.9 million pieces sold in 2014. The average selling price of air purification products increased
by 11.9% while the average selling price of deodorizer decreased by 6.7% due to the change in product mix.
In our trading segment, the revenue was
approximately $3.6 million in 2015, an increase of 19.4% compared to approximately $3.0 million in 2014. The increase was primarily
attributable to a few seasonal orders from one of our largest customers.
In our energy segment, we realized sales
of approximately $12.0 million in 2015, an increase of 27.3% from approximately $9.4 million in 2014. The increase in sales revenue
was primarily attributable to the increased sales of EDLC carbon in 2015. We sold 367 tons of EDLC carbon in 2015 compared to
280 tons sold in 2014. The average selling price of our EDLC carbon was approximately $31,028 per ton, little changed from approximately
$30,860 per ton in 2014.
Cost of revenues.
Our
cost of revenues decreased by approximately $2.9 million or 6.5% to approximately $41.9 million in 2015 from approximately $44.9
million in 2014. As a percentage of revenues, the cost of revenue increased by 2.8% to 71.3% in 2015 from 68.5% in 2014. The increase
in cost of revenues as a percentage of revenues in 2015 was primarily attributable to the increased material costs of our air
purification and deodorizer products. In addition, cost of revenues in our energy segment increased 39.1% compared to 2014. Such
increase was due to higher raw material costs as the purchasing price of bamboo charcoal used in our production of consumer products
and EDLC carbon both increased in 2015.
Gross profit.
Our gross
profit decreased by approximately $3.8 million, or 18.2% to approximately $16.9 million in 2015 from approximately $20.6 million
in 2014. Gross profit margin was 28.7% in 2015, as compared to 31.5% in 2014. The decrease of 2.8 percentage points was primarily
attributable to the lower gross profit in our energy segment in 2015.
Selling expenses.
Selling expenses
decreased by approximately $222,000 to approximately $859,000 in 2015compared to approximately $1.1 million in 2014. As a percentage
of sales, our selling expenses decreased to 1.5% of revenues in 2015, as compared to 1.7% of revenues in 2014. The decrease in
selling expenses was primarily attributable to the decreased promotion expenses, decreased expenses related to export and lower
shipping and handling expenses in 2015.Due to the slowdown of our bamboo-based household products, the company has removed our
product billboards in several locations in Zhejiang Province. In addition, due to the decreasing sale and direct export volume
of our products, in 2015, promotion expenses, export expenses as well as shipping and handling expenses have decreased by approximately
72%, 49%, and 33%, respectively, as compared to 2014.
General and administrative expenses.
Our
general and administrative expenses increased by approximately $3.1 million or 188.2%, to approximately $4.7 million in 2015 from
approximately $1.6 million in 2014. As a percentage of revenues, general and administrative expenses increased 5.5% to 8.0% in
2015, compared to 2.5% in 2014. The increase was primarily attributable to the following factors:
(a) an increase in bad debt expenses related
to our accounts receivable of approximately $2.3 million in 2015. Based on results of aging analysis performed in 2015, we set
aside approximately $1.0 million as allowance for potentially uncollectable accounts receivable balances. Approximately $106,000
of the accounts receivable balances that we had recorded allowances in prior years were collected in 2015. We reversed the allowance
by the same amount and increased bad debt expenses related to accounts receivable of approximately $928,000. As a result, our
bad debt expenses related to accounts receivable increased by approximately $2.3 million in 2015, compared to a bad debt expenses
reversal related to accounts receivable of approximately $1.3 million in 2014.
As a percentage of accounts receivable,
our reserve balance increased 2.2% to 2.9% as of December 31, 2015 from 0.7% as of December 31, 2014; and
(b) a decrease in bad debt expenses related
to our advance to suppliers of approximately $206,000 in 2015. Based on results of our aging analysis and consideration of specific
information related to each individual account, we recorded approximately $35,000 in bad debt expenses related to our advances
to suppliers in 2015. While approximately $46,000 of advance payments that we previously recorded allowances were either utilized
by receiving delivery from our vendors or returned to us, we reversed the allowance by the same amount and recorded a net decrease
in bad debt expenses related to our advances to suppliers of approximately $11,000 in 2015. As a result, our bad debt expenses
related to advances to suppliers decreased $206,000 in 2015, compared to a net increase in bad debt expenses related to advances
to suppliers of approximately $195,000 in 2014.
As a percentage of advances to suppliers,
our reserve balance decreased to 1.9% as of December 31, 2015 from 3.0% as of December 31, 2014. The decrease in reserve balance
as a percentage of advances to suppliers in 2015 was primarily attributable to the increased advance payments we made in 2015;
and
(c) an increase in insurance expense of
approximately $200,000, legal expenses of approximately $171,600, professional and investor relationship expenses of approximately
$189,000 and other expenses related to being a public company of approximately $289,000 after the completion of our initial public
offering in March 2015.
Research and development expenses
. Our
research and development expenses increased approximately $339,000 to approximately $1.1 million in 2015 compared to approximately
$746,000 in 2014. The increase was primarily attributable to the expenditure of approximately $472,000 related to our sponsored
R&D project in 2015.
Interest expenses.
Our
interest expenses decreased by approximately $136,000, or 24.8% to approximately $412,000 in 2015, from approximately $548,000
in 2014. As we discounted fewer bank acceptance notes, we incurred lower discounting expenses in 2015.
Government subsidy income.
Our
government subsidy income was approximately $326,000 in 2015 compared to approximately $62,000 in 2014. Our government subsidy
income in 2015 and 2014 were all granted by local governments in recognizing our achievements in different areas. All subsidies
we received in 2015 and 2014 were one-time grants and may not occur again in the future. We cannot predict the likelihood or amount
of any future subsidies.
In 2015, we received discretionary subsidies
from various agencies within Lishui City. We received $326,018 in the aggregate in grants in 2015. Our 2015 subsidies consisted
of the following grants:
Recipient
|
|
|
Tantech Bamboo
|
|
Date of grant
|
|
|
6/2/15
|
|
|
|
6/11/15
|
|
Amount (USD)
|
|
|
$240,900
|
|
|
|
$80,300
|
|
Government entity
making the grant
|
|
|
Lishui
City Economy Development Committee
|
|
|
|
Lishui
City Economy Development Committee
|
|
Reason for grant
|
|
|
Grant
for IPO
|
|
|
|
Subsidy
for export
|
|
Recipient
|
|
|
Tantech Energy
|
|
Date of grant
|
|
|
7/2/15
|
|
|
|
12/23/15
|
|
Amount (USD)
|
|
|
$3,212
|
|
|
|
$1,606
|
|
Government entity
making the grant
|
|
|
Lishui
Economic Development Zone
|
|
|
|
Lishui
Economic Development Zone
|
|
Reason for grant
|
|
|
Grant
for growth in business
|
|
|
|
Subsidy
for reducing emission
|
|
In 2014, we received discretionary subsidies
from various agencies within Lishui City and Liandu District of Lishui. We received $62,137 in the aggregate in grants in 2014.
Our 2014 subsidies consisted of the following grants:
Recipient
|
|
|
Tantech Bamboo
|
|
Date of grant
|
|
|
7/8/14
|
|
|
|
12/22/14
|
|
Amount
(USD)
|
|
|
$16,279
|
|
|
|
$24,419
|
|
Government entity
making the grant
|
|
|
Lishui
Industry & Commerce Bureau
|
|
|
|
Lishui
Science & Technology Bureau
|
|
Reason for grant
|
|
|
Grant
for business development
|
|
|
|
Grant
for EDLC coating Technique
(1)
|
|
|
(1)
|
Grant was related to Tantech Energy’s research
project but was paid to Tantech Bamboo by Lishui Science & Technology Bureau.
|
Recipient
|
|
|
Tantech Charcoal
|
|
Date of grant
|
|
|
2/26/14
|
|
|
|
11/17/14
|
|
|
|
12/15/14
|
|
Amount (USD)
|
|
|
$
1,628
|
|
|
|
$
2,637
|
|
|
|
$
17,174
|
|
Government entity making the grant
|
|
|
Lishui Science & Technology Bureau
|
|
|
|
Lishui Science & Technology Bureau
|
|
|
|
Lishui Science
& Technology Bureau
|
|
Reason for grant
|
|
|
Subsidy for receipt of patents.
|
|
|
|
Subsidy for export oriented company
|
|
|
|
Grant for sustainability in foreign trade
|
|
Other Income.
Other income
was approximately $1.1 million and $721,000 in 2015 and 2014, respectively. Other income was primarily related to the consulting
fee that we charged to a third party company using our patent in its production of doors with air treatment functionality.
Income before income taxes.
Our
income before income taxes was approximately $11.3 million in 2015, a decrease of approximately $6.3 million compared to approximately
$17.6 million in 2014. The decrease was primarily attributable to a decrease of approximately $3.8 million in gross profit and
an increase of approximately $3.2 million in operating expense in 2015 compared to 2014.
Provision for income taxes.
Our
provision for income taxes was approximately $2.4 million in 2015, a decrease of approximately $477,000 or 16.7% from approximately
$2.8 million in 2014. The decrease in provision for income taxes was primarily attributable to lower income before income taxes,
which was partially offset by a higher effective income tax rate in 2015 compared to 2014.
Net income attributable to common stockholders.
Our
net income attributable to common stockholders was approximately $8.4 million in 2015, a decrease of approximately $5.6 million
from approximately $14.0 million in 2014. The decrease was attributable to the factors described above.
Segment Information
The following tables set forth sales information
about our product mix in the years ended December 31, 2015 and 2014, respectively.
(All amounts, other than percentages, in
thousands of U.S. dollars)
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Revenue
|
|
|
Percentage of
Net Revenue
|
|
|
Revenue
|
|
|
Percentage of
Net Revenue
|
|
Consumer Product
|
|
$
|
43,235
|
|
|
|
73.5
|
%
|
|
$
|
53,052
|
|
|
|
81.0
|
%
|
Trading
|
|
|
3,580
|
|
|
|
6.1
|
%
|
|
|
2,999
|
|
|
|
4.6
|
%
|
Energy
|
|
|
12,015
|
|
|
|
20.4
|
%
|
|
|
9,442
|
|
|
|
14.4
|
%
|
|
|
$
|
58,830
|
|
|
|
100.0
|
%
|
|
$
|
65,493
|
|
|
|
100.0
|
%
|
Consumer Product Segment
Our consumer product segment is the largest
among our three segments. Revenue from the consumer product segment was approximately $43.2 million and $53.1 million in the year
ended December 31, 2015 and 2014, respectively. Our revenue from consumer products was primarily generated through the sales of
our purification and deodorization products and cleaning products under “Charcoal Doctor” brand and barbecue charcoals
designed for the domestic market. Revenue decreased approximately $9.9 million in 2015 compared to 2014. Our consumer products
are considered to be environmentally friendly not only because of the lifespan and fast growth rate of bamboo, but also the minimum
waste in the process of producing our products. In addition, our products feature a high raw material utilization rate and have
met the standards set for designation of “environmentally friendly” enterprises by the Chinese Society for Environmental
Sciences. Moreover, our facilities have received ISO 14001:2004 certification, which reflects our focus on measuring and managing
our environmental impact.
A study conducted in Shanghai’s Lianhua
Supermarket found that, given equivalent products, 85% of the consumers preferred environmentally friendly products and were willing
to pay prices up to 5% higher than traditional products. We anticipate that growing consumer preferences for environmentally friendly
products over traditional household cleaning products and increasing consumer awareness of our brand as an “environmentally
friendly” enterprise will drive revenue from our consumer products in the coming years.
Cost of revenue for consumer product decreased
approximately $6.2 million to approximately $28.6 million in 2015 compared to $34.8 million in 2014. Gross profit decreased approximately
$3.6 million to approximately $14.6 million in 2015 from approximately $18.2 million in 2014. Gross profit margin was 33.8% in
2015 compared to 34.4% in 2014. The decrease in gross profit margin was primarily attributable to the decreased gross profit in
our air purification and deodorizer products as material costs increased in 2015.
Profit for our consumer product segment
decreased approximately $3.6 million to approximately $10.2 million in 2015 compared to $13.8 million in 2014. The decrease in
segment profit was primarily attributable to a decrease in gross profit of approximately $3.6 million, an increase in general
and administrative expenses of approximately $708,000 and an increase in research and development expenses of approximately $464,000,
which were partially offset by an increase in government grant income of approximately $289,000, an increase in other income of
approximately $418,000 and a decrease in income tax expenses of $425,000 in 2015.
Trading Segment
Our trading segment generated approximately
$3.6 million sales revenue in 2015 compared to approximately $3.0 million in 2014. The revenue from this segment was primarily
related to the export and wholesale of charcoal products.
Cost of revenue was approximately $3.5 million
in 2015 compared to approximately $2.9 million in 2014. Gross profit was approximately $116,000 in 2015 compared to approximately
$63,000 in 2014. Gross profit margin was 3.2% in 2015 and 2.1% in 2014, respectively. The increase in gross profit margin was
primarily attributable to higher profit in our wholesale of charcoal products to a large customer in 2015.
The loss for our trading segment was approximately
$734,000 in 2015, compared to a profit of approximately $179,000 in 2014. The decrease in segment profit was primarily attributable
to an increase of approximately $1.2 million in general and administrative expenses as we recorded a decrease of bad debt expenses
of approximately $976,000 in 2014.
Energy Segment
Our energy segment consists of BBQ charcoal
for the international market and EDLC carbon. The revenue from BBQ charcoal was approximately $628,000 in 2015 compared to approximately
$812,000 in 2014. Our self-produced BBQ charcoal was mainly sold in overseas markets where the demand for our products was lower
in 2015. The cost for BBQ charcoal for international markets was approximately $850,000 in 2015 compared to approximately $690,000
in 2014, which resulted in a loss of approximately $222,000 in 2015 and a profit of approximately $122,000 in 2014.
We invested heavily in the production of
EDLC carbon, which has wide applications and higher gross margin. Our sales revenue of EDLC carbon was approximately $11.4 million
in 2015, an increase of approximately $2.8 million or 31.9% compared to sales revenue of approximately $8.6 million in 2014. The
gross profit was approximately $2.4 million in 2015 compared to approximately $2.2 million in 2014. The increase in gross profit
in 2015 was primarily attributable to the higher sales volume in 2015.
We have developed two technology improvements
in our production process of EDLC carbon. One of these improvements allows us to improve voltage resistance in one of our EDLC
carbon products from 2.5 – 2.6V to more than 2.85V, which allows a supercapacitor to increase its energy density
by 20%. The technique has been well received by our customers in trial runs.
We have also developed a coating technique
for our EDLC carbon. In the past, most EDLC production lines and techniques in China relied on EDLC carbon from Japan. As a result,
technical production parameters have been based on Japanese companies’ models, especially the coating technique, one of
the fundamental aspects of producing EDLC. In cooperation with the Harbin Institute of Technology, we developed a coating technique
that suits our products and allows us to provide both products and technical support for our EDLC products. Pursuant to our cooperation
with Harbin Institute of Technology, we own the intellectual property rights to the coating technique.
With the development of these technologies
used in the production process, we believe our EDLC carbon products will enhance our competitive advantage over other producers.
While continuing to improve the production process and increase the direct sales of EDLC carbon, we are also exploring opportunities
to expand the utilization of our EDLC carbon in battery industry.
We recorded a profit of approximately $257,000
in 2015 compared to a profit of approximately $779,000 in 2014 in our energy segment. The decrease in segment profit was primarily
attributable to lower gross profit and an increase in general and administrative expenses of approximately $355,000 in 2015.
In October 2015, we established another
wholly-owned subsidiary, Tantech Babiku to manage our BBQ products business. We are transferring our self-produced BBQ products
business from Energy to Babiku. The new corporate structure, with improved focus and accountability, is expected to allow us to
manage our businesses more effectively. For reporting and comparison purposes, the operating results of Tantech Babiku was included
in Energy segment in 2015.
Liquidity and Capital Resources
We are a holding company incorporated in
the British Virgin Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity
requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required
to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total
amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax
profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable
as cash dividends.
We have relied on direct payments of expenses
by our subsidiaries (which generate revenues), to meet our obligations to date. To the extent payments are due in US Dollars,
we used to pay such amounts in RMB to an entity controlled by our management capable of paying such amounts in US dollars before
the IPO. Such transactions have been made at prevailing exchange rates and have resulted in immaterial losses or gains on currency
exchange but no other profit.
As of December 31, 2015, Tantech Bamboo
has incurred debt of approximately $3.1 million in a loan from Bank of China Ltd. Lishui Branch. To secure this debt, Tantech
Bamboo has granted a mortgage on property and land use rights valued at approximately $2.9 million. Tantech Bamboo also incurred
debt of approximately $3.1 million in a loan from Shanghai Pudong Development Bank, Lishui Branch. Tantech Charcoal incurred debt
of approximately $2.3 million in a loan from Bank of China Ltd. Lishui Branch.
Further, although instruments governing the
current debts incurred by our PRC subsidiaries do not have restrictions on their abilities to pay dividend or make other payments
to us, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on
earnings from our PRC subsidiaries and its ability to pay dividends out of its earnings. We cannot assure you that our PRC subsidiaries
will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to
enable us to meet our obligations, pay interest and expenses or declare dividends.
Years Ended December 31, 2015 and 2014
As of December 31, 2015, we had cash and
cash equivalents of approximately $6.3 million. . Our current assets were approximately $63.7 million and our current liabilities
were approximately $14.0 million, which resulted in a current ratio of 4.55:1. Total shareholders’ equity as of December,
31 2015 was approximately $69.6 million. The following table sets forth summary of our cash flows for the periods indicated:
(All amounts in thousands of U.S. dollars)
|
|
2015
|
|
|
2014
|
|
Net cash provided by operating activities
|
|
$
|
4,451
|
|
|
$
|
2,460
|
|
Net cash provided by (used in) investing activities
|
|
|
(7,154
|
)
|
|
|
533
|
|
Net cash provided by (used in) financing activities
|
|
|
8,841
|
|
|
|
(4,228
|
)
|
Effect of exchange rate changes on cash
|
|
|
(280
|
)
|
|
|
(9
|
)
|
Net increase (decrease) in cash
|
|
|
5,858
|
|
|
|
(1,244
|
)
|
Cash, beginning of year
|
|
|
415
|
|
|
|
1,659
|
|
Cash, end of year
|
|
$
|
6,273
|
|
|
$
|
415
|
|
Operating Activities
Net cash provided by operating activities
was approximately $4.5 million in 2015, compared to cash provided by operating activities of approximately $2.5 million in 2014.
The increase in net cash provided by operating activities was primarily attributable to the following factors:
|
·
|
Accounts receivable decreased by approximately $213,000 in 2015 compared to an increase of approximately $13.9 million in 2014.
In 2015, our sales of consumer products to supermarket chains stabilized and we did not experience a significant increase in accounts
receivable balances at the year end. We anticipate our accounts receivable balance will mainly stay at the current level in the
coming years;
|
|
·
|
Net increase in allowances for accounts receivable of approximately $973,000 in 2015 compared to a net decrease of approximately
$1.3 million in 2014.
|
The increase in net cash provided by operating
activities was partially offset by:
|
·
|
The decrease in net income of approximately by approximately $5.8 million in 2015 compared to 2014;
|
|
·
|
Advances to suppliers increased by approximately $5.8 million in 2015 compared to a decrease of approximately $515,000 in 2014.
The increase in 2015 was primarily attributable to our increased prepayments made to two of our main suppliers in order to secure
stable supply of bamboo charcoal.
|
|
·
|
Taxes payable decreased by approximately $1.5 million in 2015 compared to an increase of approximately $431,000 in 2014.
|
Investing Activities
Net cash used in investing activities was
approximately $7.2 million in 2015, compared to net cash provided by investing activities of approximately $533,000 in 2014. The
increase in net cash used in investing activities was primarily attributable to a deposit of approximately $8.0 million made to
Suzhou E Motors’ shareholder to secure the acquisition.
Financing Activities
Net cash provided by financing activities
was approximately $8.8 million in 2015, compared to net cash used in financing activities of approximately $4.2 million in 2014.
The increase in net cash provided by financing activities in 2015 was primarily attributable to the net increase of bank borrowings
of approximately $10.8 million, the proceeds received from our initial public offering of approximately $5.7 million in 2015 and
the decrease in restricted cash of approximately $3.5 million. The increase was partially offset by a decrease in net borrowings
from bank acceptance notes of approximately $7.1 million. .
Our primary source of cash is currently
generated from the sales of our products and bank borrowings. In the coming years, we will be looking to other sources, such as
raising additional capital by issuing shares of stock to meet our cash needs. While facing uncertainties in regards to the size
and timing of capital raise, we
expect to be able to meet our working
capital and capital expenditure requirements by using our cash on hand, cash flows from operations and bank borrowings in the next
twelve months.
Loan Facilities
We repaid approximately $5.3 million and
borrowed approximately $12.0 million in bank loans for our working capital needs during the year ended December 31, 2015. We also
repaid approximately $9.3 million of bank acceptance notes payable and secured approximately $2.2 million of bank acceptance notes
payable in 2015. As a result, the balance of all our bank loans as of December 31, 2015 was approximately $8.4 million. We did
not have bank acceptance notes payable balance outstanding as of December 31, 2015.
As of December 31, 2015, the details of all
our short-term bank loans are as follow:
(All amounts are in U.S. dollars)
No
|
|
Type
|
|
Contracting Party
|
|
Valid Date
|
|
Duration
|
|
Amount
|
|
1
|
|
Short-term bank loan
|
|
Bank of China
|
|
2015-05-13 to 2016-05-12
|
|
1 year
|
|
$
|
2,280,680
|
|
2
|
|
Short-term bank loan
|
|
Shanghai Pudong Development Bank
|
|
2015-08-17 to 2016-08-16
|
|
1 year
|
|
$
|
3,082,000
|
|
3
|
|
Short-term bank loan
|
|
Bank of China
|
|
2015-12-16 to 2016-06-17
|
|
6 months
|
|
$
|
3,082,000
|
|
Although we currently do not have any material
unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, we believe that our currently
available working capital should be adequate to sustain our operations at our current levels through at least for the next twelve
months. We will consider additional borrowing or public offering based on our working capital needs and capital expenditure requirements.
There is no seasonality of our borrowing activities.
Obligations Under Material Contracts
Below is a table setting forth all of our
contractual obligations as of December 31, 2015, which consists of our short-term and long-term loan agreements, loans from third
parties and due to related parties:
|
|
Payment Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3
years
|
|
|
3 – 5
years
|
|
|
More than
5 years
|
|
Short-term debt obligations
|
|
$
|
8,444,680
|
|
|
$
|
8,444,680
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Bank acceptance notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital lease obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other long-term liabilities reflected on the registrant’s balance sheet under GAAP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loans from third parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Due to related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
8,444,680
|
|
|
$
|
8,444,680
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Statutory Reserves
Under PRC regulations, all our subsidiaries
in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition,
these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory
reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable
in the form of cash dividends to the Company and can be used to make up cumulative prior year losses.
Restrictions on net assets also include the
conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain
State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have these restrictions
on our net assets as of December 31, 2015 and December 31, 2014. We are also party to certain debt agreements that are secured
with mortgages on our real property, but such debt agreements do not restrict our net assets and instead only impose restrictions
on the mortgaged property. To the extent we wish to transfer mortgaged property, we are able to do so subject to the obligation
that we settle or transfer such mortgage in connection with such transfer; accordingly, we deduct the amount of such mortgage from
the value of the underlying property and reflect the balance in our net assets.
The following table provides the amount of
our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as
a percentage of consolidated net assets, as of December 31, 2015 and December 31, 2014.
|
|
As of
December 31,
2015
|
|
|
As of
December 31,
2014
|
|
Statutory Reserves
|
|
$
|
6,401,235
|
|
|
$
|
5,377,637
|
|
Total Restricted Net Assets
|
|
$
|
6,401,235
|
|
|
$
|
5,377,637
|
|
Consolidated Net Assets
|
|
$
|
73,089,485
|
|
|
$
|
62,476,789
|
|
Restricted Net Assets as Percentage of Consolidated Net Assets
|
|
|
8.8
|
%
|
|
|
8.6
|
%
|
Total restricted net assets accounted for
approximately 8.8% of our consolidated net assets as of December 31, 2015. As our subsidiaries usually set aside only 10% of after-tax
net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses,
we believe the potential impact of such restricted net assets on our liquidity is limited.
Capital Expenditures
We had capital expenditures of approximately
$243,000 and $1.6 million for the years ended December 31, 2015 and 2014, respectively for the addition and renovation of our workshops
and office buildings; purchasing of equipment in connection with our business activities.
In 2016 and 2017, our capital expenditures
are expected to be approximately $20 million and $25 million, respectively, and will be primarily related to the acquisition of
Suzhou E Motors Co., Ltd. (“Suzhou E Motors”) and the establishment of a R&D center to develop new energy vehicles.
We expect that our capital expenditures will
increase in the future as our business continues to develop and expand. We have used cash generated from our subsidiaries’
operations to fund our capital commitments in the past and anticipate using such funds and proceeds received from our initial public
offering, our secondary offering and other sources to fund capital expenditure commitments in the future.
Off-balance Sheet Commitments and Arrangements
We provided a guaranty on behalf of
Forasen Group’s bank loan of RMB 20 million (approximately $3.1 million) on April 15, 2014 and renewable bank
acceptance notes of RMB 35.1 million (approximately $5.4 million) on April 8, 2014 by pledging our building with a net book
value of approximately $7.6 million as the collateral for the loan and notes. The guaranty on the loan expired in June 2015
and the guaranty on the renewable bank acceptance notes will expire on April 8, 2017. We are currently seeking to terminate
the guaranty as Forasen Group no longer needs the guaranty to issue bank acceptance notes.
Except for the above-mentioned guaranty,
we have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third
parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s
equity, or that are not reflected in our consolidated financial statements.
Critical Accounting Policies
We prepare our financial statements in conformity
with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to make
judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any
related disclosures. Although there was no material changes made to the accounting estimates and assumptions in the past three
years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical
experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is
an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes
in our estimates.
We believe that the following accounting
policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting
estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated
financial condition and results of operations.
Revenue recognition
Our revenue is generated from the sale of
our products to wholesalers and retailers. We recognize revenue when all of the following have occurred: (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable,
and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of delivery for sales,
which is the point when risk of loss and title passes to the customer.
We sell our products either under free on
board (“FOB”) warehouse term or under FOB destination term. For sales under free on board (“FOB”) warehouse
term, we recognize revenue when product leaves our warehouse or production facility. Product delivery is evidenced by warehouse
shipping log as well as signed shipping bills from the shipping company. For sales under FOB destination term, we recognize revenue
when product is delivered and accepted by customer. Product delivery is evidenced by signed receipt document upon delivery.
Revenue recognized under FOB destination
term accounted for approximately 68% and 70% of our total revenue for the years ended December 31, 2015 and 2014, respectively.
Revenue is reported net of all value added
taxes. We do not routinely permit customers to return products and historically, customer returns have been immaterial.
Allowance for accounts receivable and advance to suppliers
We establish an allowance for doubtful accounts
based on management’s assessment of the collectability of accounts receivable and advance to suppliers. A considerable amount
of judgment is required in assessing the amount of the allowance.
We consider the historical level of credit
losses and apply percentages to aged receivable categories when we decide the allowance for accounts receivable. Additional specific
provision is made against accounts receivable to the extent which they are considered to be doubtful. Bad debts are written off
when identified and we do not accrue interest on trade receivables. Collectability conditions are assessed on individual receivable
accounts when we determine an allowance is necessary.
As a significant portion of our accounts
receivable balances as of December 31, 2015 were from a few large customers who have good payment records and credit history with
us, we evaluated the collectability of these accounts and determined whether the allowance was reasonable based on the analysis
of these individual accounts.
Although we typically do not grant
special payment terms to many of our customers, some of our customers, who are large retailers and wholesale chains, tend to
require longer payment terms that are over six months but unlikely to default. As of December 31, 2015, only approximately 2%
of our outstanding receivable amounts were over one year. Our most recent review of collection information indicated that
$27.7 million has been collected by September 30, 2016, which represented 66% of the accounts receivable balance as of
December 31, 2015. The instances of slow payments and long-aging receivables may have negative impact on our short-term
operating cash flow but we have not experienced any significant defaults on those long-aging receivable. We periodically
review our accounts receivable and allowance level in order to ensure our methodology used to determine allowances is
reasonable and accrued additional allowances if necessary.
According to our analysis of day’s
sales outstanding for years of 2014 and 2015, the two-year average outstanding days for Account Receivable is 244 days, which are
represented as following:
|
|
|
Receivable at year-end
|
|
|
Average Daily Sale
|
|
|
Outstanding Days
|
|
|
2
014
|
|
|
$
|
43,567,769
|
|
|
$
|
181,925
|
|
|
|
239 days
|
|
|
2015
|
|
|
$
|
40,484,871
|
|
|
$
|
163,416
|
|
|
|
248 days
|
|
The allowance for advances to suppliers represents
prepayment to our supplier(s) that are deemed partially or wholly unrecoverable based on management’s evaluation of the credibility
of the supplier. Our decision on whether to set aside allowance and the percentage of allowance is based on our evaluation of the
credit worthiness, financial information and payment history of individual supplier. We generally apply the result of aging analysis
to the determination of allowance for advances to suppliers. We usually set aside 50% of the balance of advances with an aging
greater than six months but within one year as the allowance and 100% of the balance of advances with an aging greater than one
year as the allowance based on our past experience and analysis on the collection history. In addition to the general allowance
policy, we also consider specific information related to each individual supplier and utilize regular evaluation performed by our
purchasing department to determine whether to record an allowance for an individual supplier. If an advance deemed uncollectable
is returned to us or goods are delivered later, we record a reversal of the allowance.
Our advances to suppliers balances increased
in 2015 as we increased raw materials purchases from several of our largest suppliers. Our allowance for advances to suppliers
decreased slightly in 2015 based on our evaluation of the credit worthiness of a few small suppliers.
We monitor our advances to suppliers
account and the allowance level periodically in order to ensure our methodology used to determine the related allowance is
reasonable. Our most recent review of utilization information of our advances to suppliers account indicated that
approximately $13.4 million (or 84%) of the advance balances as of December 31, 2015 have been subsequently credited through
the receipt of raw materials as of September 30, 2016. Based on the result of the review; we believe that our allowance for
advances to suppliers as of December 31, 2015 is reasonable.
While our credit losses have historically
been insignificant, we may experience higher credit loss rates in the future than we had in the past. Our accounts receivable are
concentrated in relatively few customers, with two customers accounting for approximately 30% of our total accounts receivable,
net as of December 31, 2015 and one customer accounting for approximately 12% of our total accounts receivable, net as of December
31, 2014. A significant change in the liquidity or financial position of our significant customer would require us to increase
our allowance for doubtful accounts and negatively affect our working capital.
Income Tax
We account for income taxes in accordance
with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting
for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax
benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or future deductibility is uncertain.
Our subsidiaries in China are subject to
the income tax laws of the PRC. We believe that our tax return positions are fully supported, but tax authorities in China may
challenge certain positions. Therefore, the amount ultimately paid could be materially different from the amounts previously included
in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.
Recently Issued Accounting Pronouncements
In February 2015, the Financial Accounting
Standards Board (“FASB”) issued new guidance for evaluating whether a reporting organization should consolidate certain
legal entities. This guidance is effective for annual and interim periods beginning after December 15, 2015, and early adoption
is permitted. The guidance should be applied either using a modified retrospective approach or retrospectively. We adopted this
standard on January 1, 2016, and we are currently assessing which implementation method we will apply and the impact its adoption
will have on our financial position and results of operations.
In June 2015, the FASB issued Accounting
Standards Updates (“ASU”) 2015-10, “Technical Corrections and Improvements.” This ASU corrects for differences
between original guidance and the Accounting Standards Codification (“ASC”) and makes minor improvements affecting
several topics. We are currently in the process of evaluating this standard, but do not expect its adoption to have a material
impact on our consolidated financial statements. The amendments in this Update will apply to all reporting entities within the
scope of the affected accounting guidance.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 330) - Simplifying the Measurement of Inventory.” The amendments in this Update do not apply to inventory
that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which
includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within
the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments
in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial
Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. We are currently in the process of evaluating this
standard, but do not expect its adoption to have a material impact on our consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of
the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), until the interim and annual reporting periods
beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning after December
15, 2016. We are evaluating the effect of this standard on our consolidated financial position, results of operations and cash
flows.
In August 2015, the FASB has issued ASU 2015-15,
Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated
with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This
ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the
presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Given the absence of
authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not
object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance
costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the
line-of-credit arrangement. We do not expect this update will have a material impact on our consolidated financial position, results
of operations and cash flows.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement
to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening balance sheet.
Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition
date for adjustments to provisional amounts. This guidance is effective for fiscal years beginning after December 15, 2015, including
interim periods within fiscal years. We do not expect this update will have a material impact on our consolidated financial position,
results of operations and cash flows.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes intended to improve how deferred taxes are classified
on companies' balance sheets. ASU 2015-17 eliminates the current requirement for companies to present deferred tax liabilities
and assets as current and non-current in a classified balance sheet. Instead, companies will be required to classify all deferred
tax assets and liabilities as non-current. The amendments apply to all organizations that present a classified balance sheet. For
public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15,
2016, and interim periods within those annual periods. We do not expect this update will have a material impact on our consolidated
financial position.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
The new guidance is intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted
improvements to existing U.S. GAAP by: (1) Requiring equity investments to be measured at fair value with changes in fair value
recognized in net income; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category
and form of financial asset on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization
to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting
from a change in the instrument-specific credit risk. The new guidance is effective for public companies for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. We do not expect this update will have a material
impact on the presentation of our consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02,
"Leases (Topic 842)" to increase the transparency and comparability about leases among entities. The new guidance requires
lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional
disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018,
and requires a modified retrospective approach to adoption. Early adoption is permitted. We are currently evaluating the impact
of this new standard on our consolidated financial statements and related disclosures.
Our management believes that other accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a
material impact on our consolidated financial statements upon adoption.
|
Item
6.
|
Directors, senior management and employees
|
|
A.
|
Directors and Senior Management
|
The following table provides information
regarding our executive officers and directors as of April 25, 2016:
Name
|
|
Age
|
|
Position(s)
|
|
|
|
|
|
Zhengyu Wang
|
|
47
|
|
Chairman of Board of Directors and Chief Executive Officer
|
|
|
|
|
|
Zaihua Chen
|
|
51
|
|
Chief Technical Officer
|
|
|
|
|
|
Jianming Wu
|
|
47
|
|
Chief Operating Officer
|
|
|
|
|
|
Qingsong Dong
|
|
41
|
|
Acting Chief Financial Officer / Treasurer
|
|
|
|
|
|
Yefang Zhang
|
|
49
|
|
Director
|
|
|
|
|
|
Wencai Pan
|
|
38
|
|
Director (Independent)
|
|
|
|
|
|
Hongdao Qian
|
|
51
|
|
Director (Independent)
|
|
|
|
|
|
Shudong Wang
|
|
65
|
|
Director (Independent)
|
Zhengyu Wang
is a seasoned
veteran in business and high-tech agricultural products. He founded Tantech Bamboo in October 2002 (then known as Lishui Zhonglin
High Tech Co., Ltd.) and he has served as Chairman and CEO ever since. From November 1998 until April 2003, he was General Manager
of Lishui Forasen Foodstuff Co., Ltd. Prior to that, from 1994 to 1997, he served as General Manager of Lishui Jingning Huali,
Co., Ltd. From 1990 to 1994, he served as a board member of the Lishui Farmer’s Economic Committee. In addition to his efforts
with our Company, Mr. Wang also manages the business operations of Forasen Group, a company he owns with his wife and our director,
Ms. Yefang Zhang. Forasen Group is a PRC company with several subsidiaries that are engaged in a variety of businesses, including
without limitation rubber trading, mushroom sales, biomass power generation, and marketing. He earned his Bachelor’s Degree
in Biology from Zhejiang University in Hangzhou, China in June 1990. He has been appointed as a director because, as our founder,
he has significant experience in leading and advising our Company and understands our industry.
Zaihua Chen
is an academic
in the field of general science, physics and chemistry, and has spent almost two decades in Japan. He joined Tantech Bamboo in
August 2008 where he has served as Technology Director and CTO. From 2006 to 2008, he served as Technology Director at Japan KANAC
Co., Ltd, also in Takamatsu, Japan. From April 2001 to March 2006, he served as leader of R&D in Research Institute for Solvothermal
Technology at the Japan Research Institute in Takamatsu, Japan. He graduated in 1985 from Fuzhou University with a degree in Chemistry,
in Fuzhou, Fujian Province. In March 1994, he earned his Master’s Degree from Chiba University (Japan), in Education. He
earned his Ph.D. at Chiba University in Natural Science Research in March 2000 from the Graduate School of Science and Technology,
and extended his experience with Postdoctoral research at Yokohama National University in 2001 in Yokohama, Japan, focusing on
Eco-Technology.
Jianming Wu
joined Tantech
Bamboo in February 2011 and has since served as our Chief Operating Officer. From June 2005 to February 2011, he worked in the
Zhejiang WeiKang Pharmaceutical Co., Ltd. as General Manager. Prior to that, he was a Deputy Manager during June 2003 to May 2005.
He worked for Zhejiang Ruixin Pharmaceutical Co., Ltd. as a Manager of Technical Department and Quality Control Department during
March 2000 and May 2003. From September 1990 to February 2000, he served for Zhenan Pharmaceutical Co., Ltd. as a technician and
manager. He graduated from Hangzhou University in June 1998 in Hangzhou, Zhejiang Province with a Bachelor’s Degree in Biology.
He joined an Executive MBA program in China People’s University during 2006 and 2008, and once joined a Pharmaceutical DBA
program in Beijing University during 2009 and 2011.
Qingsong Dong
joined Tantech
Bamboo in March 2010 and has since served as Company Treasurer. He also served as the Company’s Acting Chief Financial Officer
from February 2016. From September 2003 to February 2010, Mr. Dong worked in the Kangchao Group Guangzhou Motorcycle Manufacturing
Co., Ltd. as an Accountant and Finance Manager. From February 2003 to September, he worked for Zhejiang Kangli Metal Products Co.,
Ltd., a subsidiary of Kangchao Group, as an accountant in Hangzhou. From 1998 to 2002, he worked as Assistant Accountant at Dexing
Credit Union, in Dexing City, Jiangxi Province. He graduated from the Jiangxi Academy of Finance in June 1998 in Nanchang, Jiangxi
Province with a Bachelor’s Degree in Accounting.
Yefang Zhang
has been
in leadership roles for over a dozen years. She then helped to found Zhejiang Forasen Group Co., Ltd in October 2002 and has served
as a Board Member since then. From 1997 until 2002, she worked as General Manager at Zhejiang Forasen Food and Stuff Co., Ltd.
From 1994 to 1997, she served as Vice GM of Lishui Jingning Huali Co., Ltd. From 1991 to 1994, she was a teacher at Wenzhou Huangtan
Middle School. From 1990 to 1994, she served on the board of Lishui Farmer’s Economic Committee. In addition to her efforts
with our Company, Ms. Zhang also manages the business operations of Forasen Group, a company she owns with her husband and our
director and Chief Executive Officer, Mr. Zhengyu Wang. Forasen Group is a PRC company with several subsidiaries that are engaged
in a variety of businesses, including without limitation rubber trading, mushroom sales, biomass power generation, and marketing.
She earned her Bachelor’s Degree in Geography from Wenzhou Teacher’s College in July 1991. We have appointed Ms. Zhang
to be a director due to her strong understanding of our industry and business.
Wencai Pan
has served
as the CFO of Shandong Xiangrui Pharmacy Co. Ltd., which was listed in the US under SMSA Treemont Acquisition Corp. from 2011 through
present. From 2007 through 2010, Mr. Pan was the China controller for Aramex Express Logistics Services (Shanghai) Co. Ltd., a
global logistics and transportation company from 2007 to 2010, as controller for its China operations and was based out of Shanghai.
During 2006, Mr. Pan had been employed as a consultant by the Centergate Securities Bankruptcy Committee, which was set up by the
China Securities Regulatory Commission, where he assisted on bankruptcy audits on Centergate Securities Ltd. Co. Previously, Mr.
Pan served as the finance manager for Shera International Limited, a technology product development, production and distribution
company, from 2004 until the end of 2005 and was based out of Shanghai. Mr. Pan was employed as an internal auditor by Valley National
Bank, located in Wayne, New Jersey, U.S., from 2003 to 2004. None of Mr. Pan’s previous employers is a parent, subsidiary
or other affiliate of the Company. Mr. Pan obtained a Masters in Professional Accountancy from The University of Utah, in 2003.
In 1998, Mr. Pan received a bachelor’s degree in Economics from The University of International Business & Economics,
Beijing, China. Mr. Pan passed the Chinese CPA exams in 1997 and passed the Uniform CPA exams in the United States in 2002. We
have chosen Mr. Pan to serve as a director because of his experience with US GAAP and with United States compliance issues.
Hongdao Qian
has been
a Professor on the faculty of the Guanghua Law School at Zhejiang University since September 2005. His research, writing and teaching
focuses on corporate governance, economic analysis of law and Western jurisprudence. Prior to joining Guanghua Law School, Mr.
Qian was a Professor at the Institute of Law, China Academy of Social Sciences; a Lecturer in Economics at Peking University and
a Prosecutor in the People’s Procuratorate of Zhejiang Province. Mr. Qian has been a visiting scholar at Waseda University
in Japan, Stanford University in California and both Oxford and Cambridge Universities in England. He currently serves as Vice
Chairman of the Chinese Society of Comparative Law, Executive Subeditor of the China Academic Yearbook and President of the China
Rule of Law Research Institute, where he has organized a team of scholars to create China’s first Rule of Law index using
empirical methods. Mr. Qian earned his bachelor of law from Jilin University in 1986, his master of law from North-West University
of Politics and Law in 1994 and his doctor of law from Peking University in 1997. We have chosen Mr. Qian to serve on our Board
of Directors because of his expertise in economics and law.
Shudong Wang
was the department
director at the China National Bamboo Research Center from 1996 through his retirement in 2012. He earned his bachelor’s
degree in forestry from Northeast Forestry University in Heilongjiang in 1976. He once served as deputy director of Bamboo Branch
of the Academic Committee of China Forestry. He has also served as executive director of South-South Cooperation Association and
the Center of China International Exchange. He is a science advisor to the State Forestry Bureau. We selected Mr. Wang to serve
on our Board of Directors because of his expertise in the bamboo industry in China.
Executive
Compensation
Our compensation committee approves our salary
and benefit policies. Before our initial public offering, our board of directors determined the compensation to be paid to our
executive officers based on our financial and operating performance and prospects, and contributions made by the officers’
to our success. Each of the named officers are measured by a series of performance criteria by the board of directors, or the compensation
committee on a yearly basis. Such criteria are set forth based on certain objective parameters such as job characteristics, required
professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our board of directors has not adopted or
established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The board of
directors will make an independent evaluation of appropriate compensation to key employees, with input from management. The board
of directors has oversight of executive compensation plans, policies and programs.
Summary Compensation Table
The following table presents summary information
regarding the total compensation awarded to, earned by, or paid to each of the named executive officers for services rendered to
us for the years ended December 31, 2015 and 2014.
|
|
Fiscal
Year
|
|
Salary
($)
|
|
|
Bonus
($)
(1)
|
|
|
All Other
Compensation
($)
(2)
|
|
|
Total
($)
|
|
Zhengyu Wang
|
|
2015
|
|
|
38,544
|
|
|
|
—
|
|
|
|
1,301
|
|
|
|
39,845
|
|
Chief Executive Officer
|
|
2014
|
|
|
48,837
|
|
|
|
—
|
|
|
|
1,319
|
|
|
|
50,156
|
|
Jianming Wu
|
|
2015
|
|
|
28,908
|
|
|
|
—
|
|
|
|
1,301
|
|
|
|
30,209
|
|
Chief Operating Officer
|
|
2014
|
|
|
29,302
|
|
|
|
—
|
|
|
|
1,319
|
|
|
|
30,621
|
|
Ningfang Liang
(3)
|
|
2015
|
|
|
55,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,000
|
|
Chief Financial Officer
|
|
2014
|
|
|
48,837
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,837
|
|
Zaihua Chen
()
|
|
2015
|
|
|
28,908
|
|
|
|
—
|
|
|
|
1,301
|
|
|
|
30,209
|
|
Chief Technical Officer
|
|
2014
|
|
|
29,709
|
|
|
|
6,105
|
|
|
|
1,319
|
|
|
|
37,133
|
|
Qingsong Dong
|
|
2015
|
|
|
19,272
|
|
|
|
—
|
|
|
|
1,301
|
|
|
|
20,573
|
|
Acting Chief Financial Officer & Treasurer
|
|
2014
|
|
|
19,535
|
|
|
|
—
|
|
|
|
1,319
|
|
|
|
20,854
|
|
(1)
|
No officer received a bonus in 2015 or 2014 other than Mr. Zaihua Chen.
|
(2)
|
Consists of social security payments required under Chinese law. Although we also reimburse the referenced individuals for reasonable expenses, such reimbursements do not, in the aggregate, exceed $10,000 for any individual in any year presented and are not considered perquisites because they are integrally and directly related to the performance of such recipients’ jobs.
|
(3)
|
Mr. Liang resigned on February 1, 2016.
|
Director Compensation
The following section presents information
regarding the compensation paid during fiscal 2015 to members of our Board of Directors who are not also our employees (referred
to herein as “Non-Employee Directors”). As of December 31, 2015, we had four such director, Ms. Yefang Zhang, Mr. Wencai
Pan, Mr. Shudong Wang and Mr. Hongdao Qian.
We may also provide stock, option or other
equity-based incentives to our directors for their service. We also plan to reimburse our directors for any out-of-pocket expenses
incurred by them in connection with their services provided in such capacity.
The following table presents information
regarding the compensation of our non-employee directors for fiscal 2015. Compensation for our Chief Executive Officer, Mr. Zhengyu
Wang, is reflected above in the Summary Compensation Table rather than below.
Name
|
|
Fees earned
or paid
in cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-equity
Incentive
Plan Compensation
($)
|
|
|
Changes in Pension
Value and
Nonqualified
Deferred
Compensation
($)
|
|
|
All other
Compensation
($)
|
|
|
Total
($)
|
|
Yefang Zhang
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Wencai Pan
|
|
$
|
12,334
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,301
|
|
|
$
|
13,635
|
|
Shudong Wang
|
|
$
|
9,636
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,301
|
|
|
$
|
10,937
|
|
Hongdao Qian
|
|
$
|
9,636
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,301
|
|
|
$
|
10,937
|
|
See information provided in response to Item
6.A. above as to the current directors.
Election of Officers
Our executive officers are elected by, and
serve at the discretion of, our board of directors. Our CEO and chairman of the Board of Directors, Zhengyu Wang is married to
one of our other directors, Yefang Zhang. Other than this relationship, there are no familial relationships among any members of
the Board of Directors.
Board of Directors and Board Committees
Our board of directors currently consists
of five (5) directors. A majority of our Board of Directors is independent, as such term is defined by The NASDAQ Capital Market.
The directors are divided into three classes,
as nearly equal in number as the then total number of directors permits. Class I directors shall face re-election at our annual
general meeting of shareholders in 2015 and every three years thereafter. Class II directors shall face re-election at our annual
general meeting of shareholders in 2016 and every three years thereafter. Class III directors shall face re-election at our annual
general meeting of shareholders in 2017 and every three years thereafter.
If the number of directors changes, any increase
or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible.
Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term
that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent
director. These board provisions could make it more difficult for third parties to gain control of our company by making it difficult
to replace members of the Board of Directors.
A director may vote in respect of any contract
or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract
or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure
to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof
of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary
to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect
of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.
Mr. Zhengyu Wang currently holds both the
positions of Chief Executive Officer and Chair of the Board. These two positions have not been consolidated into one position;
Mr. Wang simply holds both positions at this time. We do not have a lead independent director, and we do not anticipate having
a lead independent director because we will encourage our independent directors to freely voice their opinions on a relatively
small company board. We believe this leadership structure is appropriate because we are a relatively small company in the process
of listing on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Wang as both our
principal executive officer and Chair of the Board. Our Board of Directors plays a key role in our risk oversight. The Board of
Directors makes all relevant Company decisions. As a smaller company with a small board of directors, we believe it is appropriate
to have the involvement and input of all of our directors in risk oversight matters.
Board Committees
In connection with our initial public offering,
we have established three standing committees under the board: the audit committee, the compensation committee and the nominating
committee. The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and
audits of the financial statements of our company, including the appointment, compensation and oversight of the work of our independent
auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based
plans (but our board will retain the authority to interpret those plans). The nominating committee of the board of directors is
responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect
to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion
and experience when nominating directors.
Wencai Pan qualifies as an audit committee
financial expert and is the chair of the audit committee. Shudang Wang is the chair of the compensation committee. Hongdao Qian
is the chair of the nominating committee. Wencai Pan, Shudong Wang and Hongdao Qian serve on all three committees, and each is
an independent director.
Duties of Directors
Under British Virgin Islands law, our directors
have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the
care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty
of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. We have
the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of
directors include, among others:
|
•
|
appointing officers and determining the term of office of the officers;
|
|
•
|
authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
|
|
•
|
exercising the borrowing powers of the company and mortgaging the property of the company;
|
|
•
|
executing checks, promissory notes and other negotiable instruments on behalf of the company; and
|
|
•
|
maintaining or registering a register of mortgages, charges or other encumbrances of the company.
|
Interested Transactions
A director may vote, attend a board meeting
or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. We require directors
to promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction
we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of
a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer
or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will
be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular
transaction.
Remuneration and Borrowing
The directors may receive such remuneration
as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel
and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees
of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director.
The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our
board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property
or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any
debt, liability or obligation of the company or of any third party.
Qualification
There are no membership qualifications for
directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There
are no other arrangements or understandings pursuant to which our directors are selected or nominated.
Director Compensation
All directors hold office until the next
annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been
duly elected and qualified. Our CEO, Zhengyu Wang is married to our Director, Yefang Zhang. Officers are elected by and serve at
the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors
will be entitled to receive up to $30,000 per year for serving as directors and may receive incentive security grants from our
company. In addition, non-employee directors will be entitled to receive reimbursement of their actual travel expenses for each
Board of Directors meeting attended.
Limitation of Director and Officer Liability
Under British Virgin Islands law, each of
our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our
best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide
for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands
courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing
a crime.
Under our memorandum and articles of association,
we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments,
fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative
proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or
liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best
interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct
was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or
rescission. These provisions will not limit the liability of directors under United States federal securities laws.
We may indemnify any of our directors or
anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments,
fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings.
We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the
case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision
of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as
to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient
for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment,
order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly
and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct
was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director
is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in
settlement and reasonably incurred by the director or officer in connection with the proceedings.
We may purchase and maintain insurance in
relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the
directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers
against the liability as provided in our amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the foregoing
provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our
directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has
any been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws,
or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement.
Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been
involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the
rules and regulations of the SEC.
Our
Employees
As of April 30, 2016, we employ a total
of 163 full-time employees in the following functions:
|
|
Number of Employees
|
|
Department
|
|
April 30
2016
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
December 31,
2013
|
|
Senior Management
|
|
|
5
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Human Resource & Administration
|
|
|
23
|
|
|
|
23
|
|
|
|
22
|
|
|
|
23
|
|
Finance
|
|
|
15
|
|
|
|
12
|
|
|
|
13
|
|
|
|
15
|
|
Research & Development
|
|
|
14
|
|
|
|
14
|
|
|
|
15
|
|
|
|
10
|
|
Production & Procurement
|
|
|
77
|
|
|
|
83
|
|
|
|
76
|
|
|
|
99
|
|
Sales & Marketing
|
|
|
29
|
|
|
|
29
|
|
|
|
47
|
|
|
|
29
|
|
Total
|
|
|
163
|
|
|
|
167
|
|
|
|
179
|
|
|
|
182
|
|
Our employees are not represented by a labor
organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
We are required under PRC law to make contributions
to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees
in China with various types of social insurance. In 2015 and 2014, we contributed approximately $121,000 and $122,000 to the employee
benefit plans and social insurance. The effect on our liquidity by the payments for these contributions is immaterial. We believe
that we are in material compliance with the relevant PRC employment laws.
Employment Agreements
Each employee is required to enter into an
employment agreement. Accordingly, all of our employees, including management, have executed their employment agreements. Our employment
agreements with our executives provide the amount of each executive officer’s salary and establish their eligibility to receive
a bonus.
Our employment agreements with our executive
officers generally provide for a salary to be paid monthly. The agreements also provide that executive officers are to work full
time for our company and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations
and our internal work policies. The employment agreements also provide that we will pay for all mandatory social security programs
for our executive officers in accordance with PRC regulations. Our executive officers are subject to keep trade secrets confidential.
In addition, our employment agreements with our executive officers prevent them from rendering services for our competitors for
so long as they are employed.
Other than the salary, bonuses, equity grants
and necessary social benefits required by the government, which are defined in the employment agreements, we currently do not provide
other benefits to the officers. Our executive officers are not entitled to severance payments upon the termination of their employment
agreement or following a change in control.
We have not provided retirement benefits
(other than a state pension scheme in which all of our employees in China participate) or severance or change of control benefits
to our named executive officers.
Under Chinese law, we may terminate an employment
agreement without penalty by providing the employee thirty days’ prior written notice or one month’s wages in lieu
of notice if the employee is incompetent or remains incompetent after training or adjustment of the employee’s position in
other limited cases. If we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the
employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate an employee
for cause without penalty to our company, where the employee has committed a crime or the employee’s actions or inactions
have resulted in a material adverse effect to us.
Zhengyu Wang
We entered into an employment agreement with
our chief executive officer, Mr. Zhengyu Wang, effective January 1, 2011. Under the terms of Mr. Wang’s employment, Mr. Wang
is entitled to the following:
|
•
|
Base compensation of approximately RMB250,000 per year.
|
|
•
|
Reimbursement of reasonable expenses incurred by Mr. Wang.
|
Mr. Wang’s employment has no expiration
date but may be terminated at any time by either party upon presentation of 30 days’ prior notice or immediately for cause.
Zaihua Chen
We entered into an employment agreement with
Mr. Zaihua Chen on July 1, 2013 that is valid through June 30, 2018, pursuant to which he serves as our Chief Technology Officer.
Under the terms of that employment agreement, Mr. Chen is entitled to the following:
|
•
|
Base annual salary of RMB150,000, paid monthly, subject to a 5% annual salary increase.
|
|
•
|
Payment equal to 3% of the net profits attributable to the Company’s EDLC carbons, which is made as a bonus at the end of each year.
|
|
•
|
The ability to distribute up to 2% of the net profits attributable to the Company’s EDLC carbons to members of Mr. Chen’s team responsible for such operations.
|
Mr. Chen’s employment agreement may
be terminated with 30 days’ advance written notice for cause. In the event either party terminates without cause and without
mutual agreement, the agreement provides for liquidated damages of RMB2 million to be paid by the terminating party as compensation.
Jianming Wu
We entered into an employment agreement with
our chief operating officer, Mr. Jianming Wu, effective February 25, 2011, as extended on February 25, 2014. Under the terms of
that employment agreement, Mr. Wu is entitled to the following:
|
•
|
Base compensation of approximately RMB15,000 per month, with increases to be implemented according to applicable law.
|
|
•
|
Reimbursement of reasonable expenses incurred by Mr. Wu.
|
Mr. Wu’s employment agreement is scheduled
to expire on February 24, 2017. Mr. Wu’s agreement may be terminated at any time by either party upon presentation of 30
days’ prior notice or immediately for cause.
Qingsong Dong
We entered into an employment agreement with
our treasurer, Mr. Qingsong Dong, effective February 28, 2013. Under the terms of that employment agreement, Mr. Dong is entitled
to the following:
|
•
|
Base compensation of approximately RMB80,000 per year with increases to be implemented according to company policies.
|
|
•
|
Reimbursement of reasonable expenses incurred by Mr. Dong.
|
Mr. Dong’s employment agreement is
scheduled to expire on February 27, 2019. Mr. Dong’s agreement may be terminated at any time by either party upon presentation
of 30 days’ prior notice or immediately for cause.
Ningfang Liang
We entered into an employment agreement with
our former chief financial officer, Mr. Ningfang Liang, effective March 7, 2013 and terminated on February 1, 2016. Under the terms
of that employment agreement, Mr. Liang was entitled to the following:
|
•
|
Base compensation of $60,000, payable in 12 equal monthly installments of $5,000 each. After our initial public offering, Mr. Liang’s salary increased to $90,000 per year, and he will be granted an as-yet-undetermined number of options to purchase shares of our company.
|
|
•
|
Reimbursement of reasonable expenses incurred by Mr. Liang.
|
Mr. Liang’s employment agreement was
terminated on February 1, 2016 following his resignation as our chief financial officer.
The following table sets forth information
with respect to beneficial ownership of our common shares as of April 30, 2015 by:
|
•
|
Each of our directors and named executive officers; and
|
|
•
|
All directors and named executive officers as a group.
|
The number and percentage of common shares
beneficially owned are based on 22,293,000 common shares outstanding as of March 31, 2016. Information with respect to beneficial
ownership has been furnished by each director, officer or beneficial owner of 5% or more of our common shares. Beneficial ownership
is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with
respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage
ownership of such person, common shares underlying options, warrants or convertible securities held by each such person that are
exercisable or convertible within 60 days of March 31, 2016 are deemed outstanding, but are not deemed outstanding for computing
the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable
community property laws, all persons listed have sole voting and investment power for all common shares shown as beneficially owned
by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company
at Zhejiang Tantech Bamboo Technology Co., Ltd, No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province 323000,
People’s Republic of China. As of the date of the Annual report, we have one (1) shareholder of record.
Named Executive Officers and Directors
|
|
Amount of Beneficial
Ownership(1)
|
|
|
Percentage
Ownership(2)
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
Zhengyu Wang
(2)
|
|
|
15,880,000
|
|
|
|
68.2
|
%
|
Zaihua Chen
|
|
|
—
|
|
|
|
0.0
|
%
|
Jianming Wu
|
|
|
—
|
|
|
|
0.0
|
%
|
Qingsong Dong
|
|
|
200,000—
|
|
|
|
0.86
|
%
|
Yefang Zhang
(2)
|
|
|
15,880,000
|
|
|
|
68.2
|
%
|
Wencai Pan
|
|
|
—
|
|
|
|
0.0
|
%
|
Shudong Wang
|
|
|
—
|
|
|
|
0.0
|
%
|
Hongdao Qian
|
|
|
—
|
|
|
|
0.0
|
%
|
All directors and executive officers as a group (five (5) persons)
|
|
|
—
|
|
|
|
0.0
|
%
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common shares.
|
|
(2)
|
The number of our common shares outstanding used in calculating the percentage for each listed person includes the common shares underlying options held by such person to the extent such options are exercisable within 60 days of the date hereof.
|
Options
Incentive Securities Pool
We have established a pool for shares
and share options for our employees. As of the date of this report, this pool contain shares and options to purchase
2,160,000 of our common shares, equal to 10% of the number of common shares outstanding at the conclusion of our initial
public offering, and we have registered 1,600,000 of such shares by filing two registrations statements on Form S-8. We may
grant options or shares in any percentage determined for a particular grant.
Any options granted will vest at a rate of
20% per year for five years and have a per share exercise price equal to the fair market value of one of our common shares on the
date of grant. We expect to grant shares and/or options under this pool to certain employees. We have not yet determined the recipients
of any such grants.
Item 7. Major
Shareholders and Related Party Transactions
The following table sets forth information
with respect to beneficial ownership of our common shares as of April 25, 2016 by:
|
•
|
Each person who is known by us to beneficially own 5% or more of our outstanding common shares.
|
The number and percentage of common shares
beneficially owned are based on 23,293,000 common shares outstanding as of March 31, 2016. Information with respect to beneficial
ownership has been furnished by each director, officer or beneficial owner of 5% or more of our common shares. Beneficial ownership
is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with
respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage
ownership of such person, common shares underlying options, warrants or convertible securities held by each such person that are
exercisable or convertible within 60 days of March 31, 2016 are deemed outstanding, but are not deemed outstanding for computing
the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable
community property laws, all persons listed have sole voting and investment power for all common shares shown as beneficially owned
by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company
at Zhejiang Tantech Bamboo Technology Co., Ltd, No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province 323000,
People’s Republic of China. As of the date of the annual report, we have one (1) shareholder of record.
Shareholders
|
|
Amount of Beneficial
Ownership(1)
|
|
|
Percentage
Ownership(2)
|
|
Tanbsok Group Ltd
(2)
|
|
|
15,880,000
|
|
|
|
68.20
|
%
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common shares.
|
|
(2)
|
Tanbsok Group Ltd holds one hundred percent of our issued and outstanding shares prior to our initial public offering. The sole shareholder of Tanbsok Group Ltd is Ms. Yefang Zhang, who is a director of our company and the spouse of our Chief Executive Officer and founder, Mr. Zhengyu Wang. By virtue of this relationship, Mr. Wang may be deemed to share beneficial ownership of the shares of our company held by Tanbsok Group Ltd with Ms. Zhang.
|
|
B.
|
Related party transactions
|
In addition to the executive officer and
director compensation arrangements discussed in “Executive Compensation,” below we describe transactions since January
1, 2013, to which we have been a participant, in which the amount involved in the transactions is material to us or the related
party.
Since the beginning of 2013, we have had
transactions with the following related parties:
|
•
|
Yefang Zhang
|
|
•
|
Wangfeng Yan
|
|
•
|
LiShui JiuAnJu Commercial Trade Co., Ltd.
|
|
•
|
Zhejiang Forasen Group Co., Ltd.
|
|
•
|
Zhejiang Forasen Food and Stuff Co., Ltd.
|
|
•
|
Hangzhou Forasen E-Commerce Co., Ltd.
|
|
•
|
Hong Kong Clean Energy Ltd.
|
Summary of Status of Related Party Transactions
Given the number of related transactions,
we believe it is helpful to provide an overview of the largest amount outstanding for each of the related party transactions described
here during the periods covered that is material to us or the related party. For more detail, please refer to note 11 of the financial
statements for the years ended December 31, 2014 and 2013. As described in more detail below, as of the date of this filing, there
is no related party balance outstanding.
As to all related party transactions that
are loans, we disclose them below without regard to whether such loans is material. All such related party loans carried no interest
and were repayable upon demand, with no periodic payments required. The other details regarding such loans are described for each
such loan.
These related parties fall within two categories:
those who are shareholders, officers and directors of THL and/or Tantech Bamboo, and those who are related to Zhejiang Forasen
Group Co., Ltd. All amounts described in this section are unsecured, interest-free and due on demand.
Shareholders, Officers, Directors and Employees of THL and
Tantech Bamboo
Before the IPO, THL is owned entirely by
Tanbsok Group Ltd., the sole shareholder of which is Ms. Yefang Zhang, the spouse of our Chief Executive Officer and the Chairman
of our Board of Directors, Mr. Zhengyu Wang.
THL owns 100% of USCNHK, which in turn owns
95% of Tantech Bamboo. The remaining 5% of Tantech Bamboo is owned by five individual PRC resident shareholders, each of whom owns
1% of Tantech Bamboo. Those shareholders are Wangfeng Yan, Xiaozhong Lin, Dexian Zhang (the brother of Yefang Zhang), Yaqing Ye
and Xiaolin Chen.
All of these shareholders of Tantech Bamboo
invested cash for their interests in Tantech Bamboo and, with the exception of Mr. Lin, are employed by our company and/or our
subsidiaries. Mr. Lin was previously employed by Tantech Bamboo. All of the shares of Tantech Bamboo held by these five individual
shareholders are encumbered by a right of first refusal that gives the remaining shareholders the right to acquire a pro rata interest
in such shares in the event such shareholder wishes to sell.
The largest outstanding amount Zhengyu Wang
owed our company in 2015, 2014 and 2013 was nil, nil and approximately RMB 1.5 million (approximately $245,000), respectively,
representing loans made to Mr. Wang for his business related expenses. As of December 31, 2013, all such amounts have been repaid.
The largest outstanding amount our company owed Mr. Wang in the year ended December 31, 2014 was RMB37,870 (equivalent to $6,169),
representing payments made by Mr. Wang on the company’s behalf. As of December 31, 2014, such amount has been reimbursed
to Mr. Wang.
The largest outstanding amount Yefang Zhang
owed our company in 2015, 2014 and 2013 was nil, nil and approximately RMB 2.7 million (approximately $430,000), respectively,
representing loans made to Ms. Zhang for her business related expenses. As of December 31, 2013, all such amounts have been repaid.
The largest outstanding amount Wangfeng Yan
owed our company in 2015, 2014 and 2013 was nil, nil and approximately RMB 576,000 (approximately $93,000) ,respectively, representing
loans made to Mr. Yan for his business related expenses. As of December 31, 2013, all such amounts have been repaid.
Lishui JiuAnJu Commercial Trade Co., Ltd.
Wangfeng Yan and Dexian Zhang (Yefang Zhang’s
brother) each own 50% of the equity of Lishui JiuAnJu Commercial Trade Co., Ltd. (“LJC”). Although LJC’s name
shares “JiuAnJu” in common with a third-party debtor, ZheJiang JiuAnJu Environment Protection Co., Ltd., this entity
is unrelated to LJC or its shareholders. Prior to September 11, 2011, LJC was an unrelated party owned by Yonghong Wu. At that
time, LJC was a customer of our company and distributed our products for sale. Although the terms of such sales were generally
interest-free 60 days net payment, LJC became delinquent in its payments to our company and accrued a significant account payable
to our company. In order to protect our company from the risk of default by LJC, Zhengyu Wang personally loaned Mr. Zhang and Mr.
Yan RMB 10 million to purchase all of the equity of LJC from Ms. Wu and assume the liabilities of LJC. In the event Mr. Zhang and
Mr. Yan fail to repay Mr. Wang upon demand, Mr. Wang has the right to obtain ownership of LJC.
The largest outstanding amount LJC owed our
company in 2015, 2014 and 2013 was nil, nil and approximately RMB44.0 million (approximately $7.1 million), respectively, representing
trade accounts receivable for sales made to LJC by our company and further loans from our company to LJC for its operational needs.
As of December 31, 2013, all such amounts have been repaid.
Forasen Companies
Mr. Zhengyu Wang and Ms. Yefang Zhang each
own 50% of the equity of Zhejiang Forasen Group Co., Ltd. (“Forasen Group”). Moreover, 95% of Tantech Bamboo was previously
owned by Forasen Group, rather than USCNHK. Forasen Group owns part of the equity of Zhejiang Forasen Food and Stuff Co., Ltd. (“ZFF”)
and Forasen Group previously owned all of the equity of Hangzhou Forasen E-Commerce Co., Ltd. (“HFE”)..
The largest outstanding amount Forasen Group
owed our company in 2015, 2014 and 2013 was nil, approximately RMB 21.0 million (approximately $3.4 million) andapproximately RMB
83.8 million (approximately $13.6 million) , respectively, representing loans made to support the rubber and mushroom trading activities
of Forasen Group. As of December 31, 2014, all such amounts have been repaid. In the years ended December 31, 2014 and 2013, we
purchased $839,059 and $3,622,905, respectively in raw materials from Forasen Group based on market terms to use in our normal
production process. The raw materials purchased from Forasen Group were primarily charcoal powder used in our EDLC carbon production,
and market terms were set at prevailing commodity rates. Purchases were made on credit, without an interest rate and were due on
demand.
The largest outstanding amount ZFF owed our
company in 2015, 2014 and 2013 was nil, nil and approximately RMB 19.0 million (approximately $3.1 million), respectively, representing
loans made to support the rubber and mushroom trading activities of Forasen Group. We understand that ZFF made such funds available
to Forasen Group. As of December 31, 2013, all such amounts have been repaid.
The largest outstanding amount HFE owed our
company in 2015, 2014 and 2013 was nil, nil and RMB169,192, respectively, representing loans made to pay for working capital needs
of HFE. As of December 31, 2013, all such amounts have been repaid.
Other Related Parties
Hong Kong Clean Energy Ltd. (“HKCE”)
is a company registered in Hong Kong and is wholly owned by Mr. Zhengyu Wang. Before December 2014, our company owed HKCE $120,000,
representing the payment made by HKCE on the company’s behalf.
Settlement of Related Party Balances
On March 20, 2013, USCNHK paid RMB 115,520,000
(approximately $18.5 million) to Forasen Group for the acquisition of Tantech Bamboo. Among the amount being paid, RMB 37,635,136
(equivalent of approximately $6.1 million) was borrowed from Mr. Zhengyu Wang. On September 20, 2013, USCNHK, Mr. Wang and Forasen
Group reached an agreement in which Mr. Wang forgave the borrowing from USCNHK and the Company agreed to offset such borrowing
against the receivables from Forasen Group for RMB 37,635,136 (equivalent of approximately $6.1 million). The settlement decreased
the Company’s “due from related parties” balances by approximately $6.1 million and decreased its additional
paid-in capital account by the same amount.
As of December 31, 2014, the Company settled
all related party balances. As of the date of this filing, no related party balances remain outstanding. Except the above-mentioned
approximately $6.1 million settlement on September 20, 2013, all other outstanding related party balances were settled in cash.
Future Related Party Transactions
Our Corporate Governance Committee of our
Board of Directors (which consists solely of independent directors) will approve all future related party transactions.
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C.
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Interests of experts
and counsel
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Not applicable for annual reports
on Form 20-F.
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Item 8.
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Financial
Information
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See information provided in response to
Item 18 below.
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Item 9.
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The
Offer and Listing.
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A.
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Offer and listing details
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Our common shares
have been listed on the NASDAQ Capital Market since March 24, 2015 under the symbol “TANH.” The table below shows,
for the periods indicated, the high and low market prices for our shares.
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Market Price Per Share
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High
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Low
|
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Annually
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|
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2015
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$
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31.09
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$
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3.12
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Quarterly
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2015
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First Quarter
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$
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8.00
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$
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6.66
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Second Quarter
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$
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21.48
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$
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8.11
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Third Quarter
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$
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31.09
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$
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15.95
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Fourth Quarter
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$
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12.63
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$
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3.12
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Monthly:
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2015
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January
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$
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|
|
|
$
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|
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February
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|
$
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|
|
|
$
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|
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March
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$
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8.00
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$
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6.66
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April
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$
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15.05
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$
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8.11
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May
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$
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15.22
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$
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10.12
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June
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$
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21.48
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$
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14.75
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July
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$
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25.95
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$
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18.58
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August
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$
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31.09
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$
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21.31
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September
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$
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30.33
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$
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15.95
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October
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$
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12.63
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$
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3.12
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November
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$
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5.53
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$
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3.47
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December
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$
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5.35
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$
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4.65
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2016
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$
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5.89
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$
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4.36
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January
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|
$
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5.47
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|
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$
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4.36
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February
|
|
$
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5.40
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|
|
$
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4.83
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March
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|
$
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5.89
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$
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4.54
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April (through April 25, 2016)
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$
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5.69
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$
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4.68
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Not applicable for annual reports on Form 20-F.
Our common shares are listed on the NASDAQ Capital Market under
the symbol “TANH.”
Not applicable for annual reports on Form 20-F.
Not applicable for annual reports on Form 20-F.
Not applicable for annual reports on Form 20-F.
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Item 10.
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Additional
Information.
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Not applicable for annual reports on Form
20-F.
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B.
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Memorandum and articles
of association
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We incorporate by reference the description
of our Memorandum and Articles of Association, as currently in effect in the British Virgin Islands, set forth in our registration
statement on Form F-1, declared effective on March 18, 2015 (File No. 333-198788).
Other than as otherwise described elsewhere
in this annual report, we did not have any other materials contracts.
Foreign Currency Exchange
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments
of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made
in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval
from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is
to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular
on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency
Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign
currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45
on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB
capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital
of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital
may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
In November 2012, SAFE promulgated the Circular
of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends
and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign
exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment
of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested
enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for
the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular
on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment
by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating
to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
We typically do not need to use our offshore
foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE
and other PRC government authorities as necessary.
SAFE Circular 37
In July 2014, SAFE issued SAFE Circular 37,
which supersedes SAFE Circular 75, and requires that PRC citizens or residents must register with the relevant local SAFE branch
before making capital contribution to any offshore entity directly established or indirectly controlled by that PRC citizen or
resident for the purpose of investment or financing and with onshore or offshore assets or equity interests legally owned by that
PRC citizen or resident. In addition, the SAFE registrations are required to be updated with local SAFE branch with respect to
that offshore special purpose company in connection with the change of its basic information, such as its company name, business
term, shareholding by individual PRC citizens or residents, merger, or division and, with respect to the individual PRC citizens
or residents in case of any increases or decreases of capital in that offshore special purpose company, or share transfers or swaps
by the individual PRC citizens or residents.
Regulation of Dividend Distribution
The principal laws, rules and regulations
governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly
Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation regulations.
Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if
any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign
owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative
amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until
any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with
distributable profits from the current fiscal year.
The following sets forth the material British
Virgin Islands, Chinese and U.S. federal income tax consequences related to an investment in our common shares. It is directed
to U.S. Holders (as defined below) of our common shares and is based upon laws and relevant interpretations thereof in effect as
of the date of this annual report, all of which are subject to change. This description does not deal with all possible tax consequences
relating to an investment in our common shares, such as the tax consequences under state, local and other tax laws.
The following brief description applies only
to U.S. Holders (defined below) that hold common shares as capital assets and that have the U.S. dollar as their functional currency.
This brief description is based on the tax laws of the United States in effect as of the date of this annual report and on U.S.
Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative
interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change
could apply retroactively and could affect the tax consequences described below.
The brief description below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for
U.S. federal income tax purposes,
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•
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an individual who is a citizen or resident of the United States;
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•
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;
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•
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an estate whose income is subject to U.S. federal income taxation regardless of its source; or
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•
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a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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WE URGE POTENTIAL PURCHASERS OF OUR SHARES
TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING
AND DISPOSING OF OUR SHARES.
People’s Republic of China Enterprise
Taxation
The following brief description of Chinese
enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends,
if any, we are ultimately able to pay to our shareholders. Our company pays a 17% value added tax and EIT rates of 15% for Tantech
Bamboo and Tantech Energy and 25% for Tantech Charcoal. Tantech Bamboo and Tantech Energy pay a lower EIT rate than Tantech Charcoal
because Tantech Bamboo and Tantech Energy have been certified as high technology companies and thus enjoy a preferable rate. If
this favorable EIT rate were to be terminated or Tantech Bamboo or Tantech Energy were to fail to qualify to receive these rates,
they would be subject to taxation at the standard EIT rate of 25% for enterprise income taxes, unless we were otherwise to qualify
for a decreased tax rate.
British Virgin Islands Taxation
Under the BVI Act as currently in effect,
a holder of common shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax
on dividends paid with respect to the common shares and all holders of common shares are not liable to the British Virgin Islands
for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose
a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.
There are no capital gains, gift or inheritance
taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act. In addition, shares of
companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention
currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.
United States Federal Income Taxation
The following does not address the tax consequences
to any particular investor or to persons in special tax situations such as:
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•
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financial institutions;
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•
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regulated investment companies;
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•
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real estate investment trusts;
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•
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traders that elect to mark-to-market;
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•
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persons liable for alternative minimum tax;
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•
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persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction;
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•
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persons that actually or constructively own 10% or more of our voting shares;
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•
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persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or
|
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•
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persons holding our common shares through partnerships or other pass-through entities.
|
Prospective purchasers are urged to consult
their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state,
local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.
Taxation of Dividends and Other Distributions on our Common
Shares
Subject to the passive foreign investment
company rules discussed below, the gross amount of distributions made by us to you with respect to the common shares (including
the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of
receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as
determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed
to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders,
including individual U.S. Holders, dividends are taxed at the lower capital gains rate applicable to qualified dividend income,
provided that (1) the common shares are readily tradable on an established securities market in the United States, or we are eligible
for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program,
(2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid
or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority,
common shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the
United States if they are listed on the NASDAQ Capital Market. You are urged to consult your tax advisors regarding the availability
of the lower rate for dividends paid with respect to our common shares, including the effects of any change in law after the date
of this annual report.
Dividends will constitute foreign source
income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above),
the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to
the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this
purpose, dividends distributed by us with respect to our common shares will constitute “passive category income” but
could, in the case of certain U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated
first as a tax-free return of your tax basis in your common shares, and to the extent the amount of the distribution exceeds your
tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal
income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Common Shares
Subject to the passive foreign investment
company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a
share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars)
in the common shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual
U.S. Holder, who has held the common shares for more than one year, you will be eligible for (a) reduced tax rates of 0% (for individuals
in the 10% or 15% tax brackets), (b) higher tax rates of 20% (for individuals in the 39.6% tax bracket) or (c) 15% for all other
individuals. If capital gains preferential rates are not renewed, such gains would be taxable at the personal income rates then
in place. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally
be treated as United States source income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company
We believe that we are not a passive foreign
investment company for U.S. federal income tax purposes for the year ended December 31, 2015, but we cannot be certain whether
we will be treated as a passive foreign investment company for any future taxable year. PFIC status is a factual determination
for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for
any taxable year if either:
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at least 75% of its gross income is passive income; or
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).
|
We will be treated as owning our proportionate
share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly,
at least 25% (by value) of the stock.
We must make a separate determination each
year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes
of the asset test will generally be determined based on the market price of our common shares, our PFIC status will depend in large
part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us
to become a PFIC. If we are a PFIC for any year during which you hold common shares, we will continue to be treated as a PFIC for
all succeeding years during which you hold common shares.
However, if we cease to be a PFIC, you
may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the common
shares.
If we are a PFIC for any taxable year during
which you hold common shares, you will be subject to special tax rules with respect to any “excess distribution” that
you receive and any gain you realize from a sale or other disposition (including a pledge) of the common shares, unless you make
a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125%
of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period
for the common shares will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the common shares;
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
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the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
|
The tax liability for amounts allocated to
years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such
years, and gains (but not losses) realized on the sale of the common shares cannot be treated as capital, even if you hold the
common shares as capital assets.
A U.S. Holder of “marketable stock”
(as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above.
If you make a mark-to-market election for the common shares, you will include in income each year an amount equal to the excess,
if any, of the fair market value of the common shares as of the close of your taxable year over your adjusted basis in such common
shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value
as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the
common shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election,
as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary loss treatment
also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized on the
actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or
loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are
not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income
discussed above under “— Taxation of Dividends and Other Distributions on our Common shares” generally would
not apply.
The mark-to-market election is available
only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days
during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable
U.S. Treasury regulations), including the NASDAQ Capital Market. If the common shares are regularly traded on the NASDAQ Capital
Market and if you are a holder of common shares, the mark-to-market election would be available to you were we to be or become
a PFIC.
Alternatively, a U.S. Holder of stock in
a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed
above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross
income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year.
However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information
regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare
or provide the information that would enable you to make a qualified electing fund election. If you hold common shares in any year
in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on
the common shares and any gain realized on the disposition of the common shares.
You are urged to consult your tax advisors
regarding the application of the PFIC rules to your investment in our common shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our common
shares and proceeds from the sale, exchange or redemption of our common shares may be subject to information reporting to the U.S.
Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however,
to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal
Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt
status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their
tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax.
Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund
of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal
Revenue Service and furnishing any required information.
We are subject to the information requirements
of the Exchange Act. In accordance with these requirements, the Company files reports and other information with the SEC. You may
read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
a web site at
http://www.sec.gov
that contains reports and other information regarding registrants that file electronically
with the SEC.
I.
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Subsidiary Information
|
Not applicable.
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Item 11.
|
Quantitative and Qualitative Disclosures About Market Risk.
|
Our exposure to interest rate risk primarily
relates to excess cash invested in short-term instruments with original maturities of less than a year and long-term held-to-maturity
securities with maturities of greater than a year. Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these
factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses
in principal if we have to sell securities that have declined in market value due to changes in interest rates. We have not been,
and do not expect to be, exposed to material interest rate risks, and therefore have not used any derivative financial instruments
to manage our interest risk exposure.
We had no short-term investments and long-term
held-to-maturity investments as of December 31, 2015.
Foreign Exchange Risk
Our functional currency is the RMB, and our
financial statements are presented in U.S. dollar. The RMB depreciated by 0.46% and 5.4% in 2014 and 2015, respectively. The depreciation
in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving
effect to any underlying change in our business or results of operation.
Currently, our assets, liabilities, revenues
and costs are mainly denominated in RMB. However, we may generate revenues denominated in U.S. dollar, and our offering was in
U.S. dollar. Therefore, a portion of our cash and cash equivalents and short-term financial assets are denominated in U.S. dollar.
Our exposure to foreign exchange risk primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation
of RMB against U.S. dollar may materially affect our earnings and financial position, and the value of, and any dividends payable
on, our common shares in U.S. dollars in the future. See “Risk Factors — Risks Related to Doing Business
in China — Fluctuations in exchange rates could adversely affect our business and the value of our securities.”
Commodity Risk
As a developer and manufacturer of bamboo-based
charcoal products, our Company is exposed to the risk of an increase in the price of raw bamboo and, as a result, bamboo charcoal.
We historically have lacked an ability to pass on price increases to customers, but we have not entered into any contract to hedge
any specific commodity risk. Moreover, our Company does not purchase or trade on commodity instruments or positions; instead, it
purchases commodities (bamboo charcoal and wood-based charcoal) for use.
In summer 2012, we faced a supply shortage
based on local government initiatives to reduce the risk of fire caused by charcoal. As a result, the local government in Daxing
Anlin, where one of our main wood-based OEM BBQ charcoal suppliers is located, restricted the production of charcoal during June,
July and August 2012. At that time, our stock of OEM BBQ charcoal was insufficient to avoid demand pressures. We have viewed this
temporary shortage as an isolated event and do not expect it to recur in the future. If, however, this belief is incorrect, the
absence of hedging could exacerbate our commodity risk.
|
Item 12.
|
Description
of securities other than equity securities.
|
With the exception of Items 12.D.3 and
12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and 12.D.4, this Item 12 is not applicable,
as the Company does not have any American Depositary Shares.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and
nature of business
Tantech Holdings Ltd. (“Tantech BVI”)
is a holding company established under the laws of the British Virgin Islands on November 19, 2010.
Tantech BVI owns 100% interest of USCNHK
Group Limited (“USCNHK”), a limited liability company established in Hong Kong.
On December 31, 2010, USCNHK entered into
an equity transfer agreement with Zhejiang Forasen Group Co., Ltd. ("Forasen Group”), in which USCNHK agreed to acquire
95% ownership interest of Zhejiang Tantech Bamboo Technology Co., Ltd. ("Tantech Bamboo" or “Bamboo”) from
Forasen Group for the consideration of RMB115,520,000 (approximately $18.5 million). The consideration was fully paid on March
20, 2013. Five other individuals own the remaining 5% equity interest of Tantech Bamboo. Jointly owned by Mr. Zhengyu Wang, the
CEO of Tantech BVI and his wife, Ms. Yefang Zhang, the board director of Tantech BVI, Forasen Group is a related party to the Company.
On March 20, 2013, USCNHK completed payments
of RMB 115,520,000 (equivalent of approximately $18.5 million) to Forasen Group for the acquisition of Tantech Bamboo. USCNHK borrowed
RMB 37,635,136 (equivalent of approximately $6.1 million) from Mr. Zhengyu Wang in order to complete the transaction. On September
20, 2013, USCNHK, Mr. Wang and Forasen Group reached an agreement to offset the amount of borrowing against the receivables from
Forasen Group for RMB 37,635,136 (equivalent of approximately $6.1 million).
For accounting purposes, the above mentioned
transactions were accounted for in a manner similar to a recapitalization. Tantech BVI and its wholly-owned subsidiary USCNHK,
who own 95% interest of Tantech Bamboo, were effectively controlled by the same majority shareholders of Tantech Bamboo. Therefore,
Tantech BVI, USCNHK and Tantech Bamboo are all considered under common control. The consolidation of Tantech Bamboo and its subsidiaries
into Tantech BVI has been accounted for at historical cost and prepared on the basis as if the aforementioned reorganization had
become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.
Incorporated in the City of Lishui, Zhejiang
Province of the People’s Republic of China (“China” or “PRC”) on December 5, 2005, Tantech Bamboo
is engaged in the research and development, production and distribution of various products made from bamboo. In addition, Tantech
Bamboo also has five wholly-owned subsidiaries: Zhejiang Tantech Bamboo Charcoal Co., Ltd. (“Tantech Charcoal” or “Charcoal”),
Zhejiang Tantech Energy Tech Co., Ltd. (“Tantech Energy” or “Energy”), Zhejiang Babiku Charcoal Co., Ltd.
(“Tantech Babiku” or “Babiku”), Lishui Zhongzhu Charcoal Co., Ltd. (“Lishui Zhongzhu” or “Zhongzhu”)
and Hangzhou Tanbo Tech Co., Ltd. (“Tanbo Tech” or “Tanbo”). Tantech Charcoal conducts trading business,
including the export of charcoal products; Tantech Energy is engaged in the manufacturing of EDLC carbon and low emission barbecue
(“BBQ) charcoal; Tantech Babiku, established by Tantech Bamboo on October 20, 2015, conducts BBQ charcoal business and Tantech
Energy is currently in the process of transferring its low emission BBQ charcoal business to Tantech Babiku. Lishui Zhongzhu, established
by Tantech Bamboo on November 18, 2015, will be engaged in the production and sales of active charcoal and other products. Tanbo
Tech, a new entity established by Tantech Bamboo on December 8, 2015, plans to explore business opportunities outside Lishui area.
Note 2 –
S
ummary of
significant accounting policies
Principal of Consolidation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”). The consolidated financial statements include the financial statements of Tantech BVI and its subsidiaries, USCNHK,
Tantech Bamboo as well as Tantech Bamboo’s wholly owned subsidiaries, Tantech Charcoal, Tantech Energy and Tantech Babiku
(collectively, the “Company”). All significant inter-company balances and transactions are eliminated upon consolidation.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing the consolidated financial
statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well
as the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions
include the useful lives of property and equipment; allowances pertaining to the allowance for doubtful accounts and advances to
related parties and suppliers; the valuation of inventories; and the realizability of deferred tax assets.
Fair Value of Financial Instruments
The Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, defines
fair value, establishes a three-level valuation hierarchy for fair value measurements and enhances disclosure requirements.
The three levels are defined as follows:
Level 1 - inputs to the valuation methodology
are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
Level 3 - inputs to the valuation methodology
are unobservable.
Unless otherwise disclosed, the fair value
of the Company’s financial instruments including cash, restricted cash, accounts receivable, advances to suppliers, accounts
payable, customer deposits, accrued expenses, short term bank loans and bank acceptance notes payable approximates their recorded
values due to their short-term maturities.
Cash and cash equivalents
For purposes of the statements of cash
flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less and money
market accounts to be cash equivalents. All cash balances are in bank accounts in PRC and Hong Kong and are not insured by the
Federal Deposit Insurance Corporation or other programs.
Restricted Cash
Restricted cash represents required cash
deposits as a part of collateral for bank acceptance notes payable and letters of credit. The Company is required to maintain 50%
of the balance of the bank acceptance notes payable in restricted cash to ensure future credit availability. The Company earns
interest at a variable rate per month on this restricted cash.
Concentrations of credit risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of cash, trade accounts receivable and advances to suppliers. All of the Company’s
cash is maintained with banks within the People’s Republic of China and Hong Kong of which no deposits are covered by insurance.
The Company has not experienced any losses in such accounts. A significant portion of the Company's sales are credit sales which
are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas. The Company
also makes cash advances to certain suppliers to ensure the stable supply of key raw materials. The Company performs ongoing credit
evaluations of its customers and key suppliers to help further reduce credit risk.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable
Accounts receivable are presented net of
an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company
reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability
of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors,
including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after efforts at collection prove unsuccessful.
Inventory
The Company values its inventories at the
lower of cost, determined on a weighted average basis, or market. The Company reviews its inventories periodically to determine
if any reserves are necessary for potential obsolescence or if a write-down is necessary if the carrying value exceeds net realizable
value.
Advances to Suppliers
In order to ensure a steady supply of raw
materials, the Company is required from time to time to make cash advances when placing its purchase orders. The Company reviews
its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of
a supplier to refund an advance to the Company.
Property and Equipment and Construction
in Progress
Property and equipment are stated at cost
less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing
the asset to its present working condition and location for its intended use.
Depreciation is computed on a straight-line
basis over the estimated useful lives of the related assets. The estimated useful lives for significant property and equipment
are as follows:
Buildings
|
20 years
|
Machinery and equipment
|
5-10 years
|
Transportation equipment
|
4 years
|
Office equipment
|
4 - 5 years
|
Electronic equipment
|
3 years
|
Repairs and maintenance costs are normally
charged to earnings in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure
has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure
is capitalized as an additional cost of the asset.
Construction in progress includes direct
costs of construction or acquisition of equipment, interest expense associated with the loans used for the construction and design
fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided
until it is completed and ready for its intended use.
Customer Deposits
Customer deposits represent amounts received from customers
in advance of shipments relating to the sales of the Company’s products.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-controlling interest
Non-controlling interest represents the
minority stockholders’ proportionate share of 5% of the equity of Tantech Bamboo.
Seasonality
The Company’s sales have seasonality,
with low sales volume in January and February, and high sales volume in November and December. The sales between March and September
do not follow any seasonal pattern. The seasonality is mainly due to China’s biggest sales season of the year, the Spring
Festival, which usually falls between January and February. Before the Spring Festival, supermarkets usually increase their purchases
to prepare for the holiday sale. The Company’s main customers are supermarkets chain stores, who also increase purchases
from the Company in November and December in preparation for the annual sale.
Revenue Recognition
The Company recognizes revenues under FAS
Codification Topic 605 (“ASC 605”). Revenue is recognized when all of the following have occurred: (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable,
and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied by the Company at the time of delivery
for sales, which is the point when risk of loss and title passes to the customer.
The delivery of goods either occurs when
(a) goods leave the Company’s warehouse or production facilities or (b) goods are delivered and accepted by customer, usually
at a location outside the Company. For sales under free on board (“FOB”) warehouse or production facilities term, the
Company recognizes revenue when product leaves the Company’s warehouse or production facility. Product delivery is evidenced
by warehouse shipping log as well as signed shipping bills from the shipping company. For sales under FOB destination term, the
Company recognizes revenue when product is delivered and accepted by customer. Product delivery is evidenced by signed receipt
document upon delivery. Revenue recognized under such method accounted for approximately 68% and 70% of its total revenue for the
years ended December 31, 2015 and 2014, respectively.
Under both cases, the risk of loss and/or
title of goods have been passed to customer at the time of delivery. The Company does not recognize any revenue for any sale arrangements
that do not transfer title and/or risk of loss. The Company’s sales cutoff for both methods is evidenced by the receipt of
goods delivery either signed by the shipping company or the customer acknowledging the receipt of goods. Such document is used
as the proof of transfer of title and/or risk of loss.
Revenue is reported net of all value added
taxes. The Company does not routinely permit customers to return products and historically, customer returns have been immaterial.
Cost of revenues
Cost of revenues includes cost of raw materials
purchased, inbound freight cost, cost of direct labor, depreciation expense and other overhead. Cost of revenues also includes
the cost of raw materials and utility purchased from related parties. Write-down of inventory for lower of cost or market adjustments
is also recorded in cost of revenues.
Subsidy Income
The Company periodically receives various
government grants such as “High Technology Projects Subsidy” and “Scientific Research Grant”. There is
no guarantee the Company will continue to receive such grants in the future.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Income
Other income was primarily related to the
consulting fee that the Company charged a third party using a Company’s patent in the production of doors with air treatment
functionality.
Foreign Currency Translation
The Company’s financial information
is presented in U.S. dollars. The functional currency of the Company’s subsidiaries in the PRC is the RMB, the currency of
the PRC. Any subsidiary transactions, which are denominated in currencies other than RMB, are translated into RMB
at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange
gains and losses are included in the statements of operations as foreign currency transaction gain or loss. The consolidated financial
statements of the Company have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”.
The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates for assets
and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange
rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component
of accumulated other comprehensive income in stockholders’ equity. Cash flows from the Company’s operations are calculated
based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported
on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
The exchange rates in effect as of December
31, 2015 and 2014 were RMB 1 for $0.1541 and $0.1629, respectively. The average exchange rates for the years ended December 31,
2015 and 2014 were RMB 1 for $0.1606 and $0.1628, respectively.
Comprehensive Income
Comprehensive income consists of two components,
net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under
GAAP are recorded as an element of shareholder’s equity but are excluded from net income. Other comprehensive income consists
of foreign currency translation adjustment from those subsidiaries not using the U.S. dollar as their functional currency.
Income Taxes
The Company’s subsidiaries in China
are subject to the income tax laws of the PRC. No taxable income was generated outside the PRC for the years ended December 31,
2015 and 2014. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an
asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of
deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or future
deductibility is uncertain.
ASC 740-10-25 prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return.
It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination,
accounting for income taxes in interim periods and income tax disclosures. There were no material uncertain tax positions as of
December 31, 2015 and 2014. All tax returns since the Company’s inception are subject to examination by tax authorities.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Value Added Tax (“VAT”)
The Company is subject to VAT for selling
merchandise. The applicable VAT rate is 13% or 17% (depending on the type of goods involved) for products sold in the PRC. The
amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less
VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company
pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and
there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is
issued. In the event the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office
has the right to assess a penalty based on the amount of taxes which is determined to be late or deficient, with any penalty being
expensed in the period when a determination is made by the tax authorities that a penalty is due. During the reporting periods,
the Company had no dispute with PRC tax authorities and there was no tax penalty incurred.
Earnings per Share
The Company computes earnings per share
(“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”), and SEC Staff Accounting
Bulletin No. 98 (“SAB 98”). ASC 260 requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS
is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities,
options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential
common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Statement of Cash Flows
In accordance with ASC 230, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheets.
Risks and Uncertainties
The operations of the Company are located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the
political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy. The Company’s
results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The Company’s sales, purchases and
expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB.
The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required
by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the
central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order to effect
the remittance.
The Company does not carry any business
interruption insurance, products liability insurance or any other insurance policy except for a limited property insurance policy.
As a result, the Company may incur uninsured losses, increasing the possibility that investors would lose their entire investment
in the Company.
Research and development costs
Research and development costs are expensed
to operations as incurred.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shipping and handling costs
All shipping and handling costs are expensed
as incurred and included in selling expenses. Total shipping and handling expenses were $222,782 and $299,797 for the years ended
December 31, 2015 and 2014, respectively.
Advertising expense
Advertising expenses included in selling
expenses were $25,999 and $860 for the years ended December 31, 2015 and 2014, respectively.
Recent accounting pronouncements
In February 2015, the Financial Accounting
Standards Board (“FASB”) issued new guidance for evaluating whether a reporting organization should consolidate certain
legal entities. This guidance is effective for annual and interim periods beginning after December 15, 2015, and early adoption
is permitted. The guidance should be applied either using a modified retrospective approach or retrospectively. The Company adopted
this standard on January 1, 2016, and the Company is currently assessing which implementation method it will apply and the impact
its adoption will have on its financial position and results of operations.
In June 2015, the FASB issued Accounting
Standards Updates (“ASU”) 2015-10, “Technical Corrections and Improvements.” This ASU corrects for differences
between original guidance and the Accounting Standards Codification (“ASC”) and makes minor improvements affecting
several topics. The Company is currently in the process of evaluating this standard, but does not expect its adoption to have a
material impact on its consolidated financial statements. The amendments in this Update will apply to all reporting entities within
the scope of the affected accounting guidance.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 330) - Simplifying the Measurement of Inventory.” The amendments in this Update do not apply to inventory
that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which
includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within
the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments
in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial
Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The Company is currently in the process of evaluating
this standard, but does not expect its adoption to have a material impact on its consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of
the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), until the interim and annual reporting periods
beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning after December
15, 2016. The Company is evaluating the effect of this standard on its consolidated financial position, results of operations and
cash flows.
In September 2015, the FASB issued ASU
2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the
requirement to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening
balance sheet. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of
the acquisition date for adjustments to provisional amounts. This guidance is effective for fiscal years beginning after December
15, 2015, including interim periods within fiscal years. The Company does not expect this update will have a material impact on
its consolidated financial position, results of operations and cash flows.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes intended to improve how deferred taxes are classified
on companies' balance sheets. ASU 2015-17 eliminates the current requirement for companies to present deferred tax liabilities
and assets as current and non-current in a classified balance sheet. Instead, companies will be required to classify all deferred
tax assets and liabilities as non-current. The amendments apply to all organizations that present a classified balance sheet. For
public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15,
2016, and interim periods within those annual periods. The Company does not expect this update will have a material impact on its
consolidated financial position.
In February 2016, the FASB issued ASU 2016-02,
"Leases (Topic 842)" to increase the transparency and comparability about leases among entities. The new guidance requires
lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional
disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018,
and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the
impact of this new standard on its consolidated financial statements and related disclosures.
Note 3 – Accounts receivable
Accounts receivable consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
41,709,235
|
|
|
$
|
43,875,479
|
|
Allowance for doubtful accounts
|
|
|
(1,224,364
|
)
|
|
|
(307,710
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
40,484,871
|
|
|
$
|
43,567,769
|
|
Approximately 30% of the accounts receivable balances (equivalent
to approximately $12.4 million) as of December 31, 2015 have been collected by March 31, 2016.
An analysis of the allowance for doubtful accounts for the years
ended December 31, 2015 and 2014 is as follows:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of year
|
|
$
|
307,710
|
|
|
$
|
1,659,281
|
|
Addition to doubtful accounts expense
|
|
|
1,033,782
|
|
|
|
191,578
|
|
Deduction – collection of doubtful accounts
|
|
|
(106,246
|
)
|
|
|
(1,536,464
|
)
|
Translation adjustments
|
|
|
(10,882
|
)
|
|
|
(6,685
|
)
|
Balance at end of year
|
|
$
|
1,224,364
|
|
|
$
|
307,710
|
|
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Inventory
Inventory consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
539,704
|
|
|
$
|
569,103
|
|
Finished products
|
|
|
533,831
|
|
|
|
580,689
|
|
Work in process
|
|
|
173,943
|
|
|
|
189,510
|
|
Subtotal
|
|
|
1,247,478
|
|
|
|
1,339,302
|
|
Inventory reserve
|
|
|
(150,430
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,097,048
|
|
|
$
|
1,339,302
|
|
Inventory includes raw materials, packaging
materials and finished goods. Finished goods include direct material costs, direct labor costs and manufacturing overhead.
Note 5 – Advances to suppliers,
net
Advances to Suppliers consisted of the
following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Advances to Suppliers
|
|
$
|
15,904,023
|
|
|
$
|
10,967,390
|
|
Allowance for doubtful accounts
|
|
|
(306,915
|
)
|
|
|
(333,110
|
)
|
|
|
|
|
|
|
|
|
|
Advances to Suppliers, net
|
|
$
|
15,597,108
|
|
|
$
|
10,634,280
|
|
Advances to Suppliers represent prepayments
made to assure continuous supply, high quality and favorable payment terms.
An analysis of the allowance for doubtful accounts for the years
ended December 31, 2015 and 2014 is as follows:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of year
|
|
$
|
333,110
|
|
|
$
|
138,834
|
|
Addition to doubtful accounts expense
|
|
|
35,355
|
|
|
|
252,952
|
|
Deduction – utilization or return of advances
|
|
|
(46,042
|
)
|
|
|
(58,117
|
)
|
Translation adjustments
|
|
|
(15,508
|
)
|
|
|
(559
|
)
|
Balance at end of year
|
|
$
|
306,915
|
|
|
$
|
333,110
|
|
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Intangible assets, net
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
752,101
|
|
|
$
|
795,050
|
|
Land use rights
|
|
|
1,988,087
|
|
|
|
2,101,619
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,740,188
|
|
|
|
2,896,669
|
|
Less: Accumulated amortization
|
|
|
(637,681
|
)
|
|
|
(474,248
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
2,102,507
|
|
|
$
|
2,422,421
|
|
There is no private ownership of land in
China. Land is usually owned by the local government and the government grants land use rights for specified terms. The Company
acquired two land use rights from the local government in December 2002 and September 2008 for periods of 50 years. As of December
31, 2015 and December 31, 2014, land use rights with net book value of $1,669,445 and $1,806,812, respectively, were pledged as
collateral for bank loans.
The land use rights are amortized over
fifty years and the software is amortized over 5 years. Amortization expense for intangible assets for the years ended December
31, 2015 and 2014 were $197,026 and $216,086, respectively. Amortization expense for each of the next five years will approximate
$200,000.
Note 7 – Property, plant and equipment, net
Property, plant and equipment stated at
cost less accumulated depreciation consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
12,776,709
|
|
|
$
|
13,506,334
|
|
Machinery and Production equipment
|
|
|
2,982,759
|
|
|
|
2,964,189
|
|
Electronic equipment
|
|
|
251,508
|
|
|
|
246,595
|
|
Office equipment
|
|
|
50,294
|
|
|
|
52,509
|
|
Automobiles
|
|
|
227,094
|
|
|
|
280,396
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
16,288,364
|
|
|
|
17,050,023
|
|
Accumulated depreciation
|
|
|
(5,169,729
|
)
|
|
|
(4,247,091
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,118,635
|
|
|
$
|
12,802,932
|
|
Depreciation expense was $1,244,154 and
$1,290,857 for the years ended December 31, 2015 and 2014, respectively.
Note 8 – Deposit for asset acquisition
The Company made several deposits for the
right to use multiple patents in the production of batteries as well as for purchase of certain equipment. As of December 31, 2015,
the outstanding balance of $2,465,600 included deposit payments of $2,003,300 for the right to use patents and $462,300 for the
purchase of equipment. The balances will be returned in full by June 30, 2016.
As of March 31, 2016, deposit of $1,541,000
for the purchase of right to use patents has been returned to the Company.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2014, the balance of
$3,707,702 included deposit payments of $2,117,700 for the right to use patents, $1,101,302 for the purchase of equipment and $488,700
for the planned research and development project.
Note 9 – Deposit for business
acquisition
In December 2015, the Company entered into
a framework agreement with Suzhou E Motors Co., Ltd. (“Suzhou E Motors”), a specialty electric vehicles manufacturer
based in Zhangjiagang City, Jiangsu Province, China, to acquire 100% equity interest of Suzhou E Motors.
Pursuant to a framework agreement, the
Company made a deposit of RMB 50,000,000 (approximately $7,705,000 as of December 31, 2015) for the planned business acquisition.
The closing of the acquisition, which will be a combination of cash and restricted shares of the Company’s common stock,
shall be subject to the terms and conditions set forth in a definitive agreement to be negotiated between the Company and the shareholders
of Suzhou E Motors. The Company is the process of conducting its due diligence and the definitive agreement is expected to be signed
in May 2016.
Note 10 – Short-term bank loans
On January 8, 2014, the Company entered
into a loan agreement with Bank of China, Lishui Branch to borrow RMB 13 million (equivalent of $2,117,700) for working capital
needs. The loan was due on January 7, 2015 with an annual interest rate of 6.9%. The Company pledged the factory buildings and
land use rights as collateral for the loan. The loan was repaid on January 7, 2015.
On May 13, 2015, the Company entered into
a new loan agreement with Bank of China, Lishui Branch to borrow RMB 14.8 million (equivalent of $2,280,680) for working capital
needs. The loan is due on May 12, 2016 with a floating interest rate (6.9% for current period average). The loan is guaranteed
by a non-related third party, Ms. Yefang Zhang and Mr. Zhengyu Wang, the major shareholder and the principal officer of the Company.
On August 17, 2015, Tantech Bamboo entered
into a new loan agreement with Shanghai Pudong Development Bank, Lishui Branch to borrow RMB 20 million (equivalent of $3,082,000)
for working capital needs. The loan is due on August 16, 2016 with an annual interest rate of 6.305%. The loan is guaranteed by
Tantech Energy, Ms. Yefang Zhang, Mr. Zhengyu Wang and Zhejiang Forasen Group Co., Ltd., a related party.
On December 16, 2015, Tantech Bamboo entered
into a new loan agreement with Bank of China, Lishui Branch to borrow RMB 20 million (equivalent of $3,082,000) for working capital
needs. The loan is due on June 17, 2016 with an annual interest rate of 5.66%. The Company pledged the factory buildings and land
use rights as collateral for the loan. The loan is also guaranteed by Mr. Zhengyu Wang and Lishui Jiuanju Trading Co., Ltd., a
related party.
Note 11 – Accrued Liabilities and Other Payable
Accrued liabilities and other payable as of December 31, 2015
and December 31, 2014 consist of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
312,172
|
|
|
$
|
82,656
|
|
Salaries and employee benefits payable
|
|
|
248,564
|
|
|
|
99,120
|
|
Other payable
|
|
|
497,424
|
|
|
|
188,435
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,058,160
|
|
|
$
|
370,211
|
|
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Commitments and Contingencies
Guaranty provided for related party
The Company provided a guaranty on behalf
of Forasen Group’s bank loan of RMB 20,000,000 (equivalent to $3,082,000) on April 15, 2014 and renewable bank acceptance
notes of RMB35,100,000 (equivalent to $5,408,910) on April 8, 2014 by pledging the Company’s building with a net book value
of approximately $7.6 million as the collateral for the loan and notes. The guaranty on the bank loan expired in June 2015 and
the guaranty on the renewable bank acceptance notes will expire in April 2017. The Company is currently seeking to terminate the
guaranty as Forasen Group no longer needs the guaranty to issue bank acceptance notes.
Note 13 – Stockholders’
equity
Stock split
On November 25, 2014, the Company completed
a 1,000-for-1 stock split of its common stock and simultaneously repurchased and canceled 30,000,000 shares. All common shares
and per share information in the financial statements and footnotes have been retroactively adjusted to reflect the effects of
this stock split.
IPO
On March 18, 2015, the Security Exchange
Commission (“SEC”) declared effective the Company’s registration statement on Form F-1 (“IPO Registration
Statement”). Pursuant to this IPO Registration Statement, along with the accompanying prospectus, the Company registered
an offering of 1,600,000 shares of common stock at a price of $4.00 per share.
On March 24, 2015, the Company closed its
initial public offering of 1,600,000 shares of common stock at a price of $4.00 per share for gross proceeds of $6.4 million and
net proceeds of approximately $5.7 million.
S-8
On April 13, 2015, the Company filed Form
S-8 with SEC to register 1,200,000 shares under the Company’s 2015 Share Incentive Plan. On June 1, 2015, the Company issued
1,200,000 shares to two service providers for their proposed services related to the Company’s strategic planning, corporate
governance, compliance operations and its e-Commerce business. On November 8, 2015, all of these shares were returned and cancelled
as the Company terminated these service agreements. The Company agreed to compensate the service providers with early termination
fees of RMB 1,100,000 (equivalent to $176,660) for certain services that had already been rendered.
On July 23, 2015, the Company filed Form
S-8 with SEC to register 400,000 shares under the Company’s 2015 Share Incentive Plan. On July 24, 2015, the Company issued
400,000 shares to a service provider for its proposed services related to the IT infrastructure initiatives. On November 8, 2015,
all of these shares were returned and cancelled as the Company terminated the service agreement. The Company agreed to compensate
the service provider with an early termination fee of RMB 200,000 (equivalent to $32,120) for certain services that had already
been rendered.
Statutory reserve
The Company is required to make appropriations
to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net
income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations
to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC
GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the discretionary surplus reserve
are made at the discretion of the Board of Directors.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The statutory surplus reserve fund is non-discretionary
other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion
or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing
the par value of shares currently held by them, provided the remaining statutory surplus reserve balance after such issue is not
less than 25% of the registered capital before the conversion.
Pursuant to the Company’s articles
of incorporation, the Company is to appropriate 50% of the entity’s registered capital as the statutory surplus reserve.
The Company made appropriations of $1,023,598
and $1,375,990 in 2015 and 2014, respectively.
Note 14 – Taxes
Taxes Payable
Taxes payable as of December 31, 2015 and December 31, 2014
consist of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
VAT tax payable
|
|
$
|
-
|
|
|
$
|
568,515
|
|
Corporation income tax payable
|
|
|
687,745
|
|
|
|
1,543,294
|
|
Other tax payable
|
|
|
116,525
|
|
|
|
160,297
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
804,270
|
|
|
$
|
2,272,106
|
|
Corporation Income Tax (“CIT”)
Tantech BVI was incorporated in the BVI
and is not subject to income taxes under the current laws of BVI.
USCNHK is a holding company registered
in Hong Kong and has no operating profit for tax liabilities.
Tantech Bamboo was registered in the PRC
and is subject to corporate income tax at unified rate of 15% starting from 2008 when it was approved by local government as a
high-tech company.
Tantech Energy was registered in the PRC and is subject to corporate
income tax at unified rate of 15% starting from 2013 when it was approved by local government as a high-tech company.
Tantech Charcoal is subject to corporate income tax at unified
rate of 25%.
Tantech Babiku is subject to corporate income tax at unified
rate of 25%.
The following table reconciles PRC statutory rates to the Company’s
effective tax rates for the years ended December 31, 2015 and 2014:
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Statutory PRC income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Favorable tax rate impact
(a)
|
|
|
(12
|
)%
|
|
|
(10
|
)%
|
Permanent difference
|
|
|
5
|
%
|
|
|
1
|
%
|
Changes of deferred tax assets allowances
|
|
|
3
|
%
|
|
|
-
|
|
Total
|
|
|
21
|
%
|
|
|
16
|
%
|
(a) Two of the Company’s subsidiaries,
Tantech Bamboo and Tantech Energy are subject to tax rate of 15%.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income tax consists of
the following:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
$
|
2,377,715
|
|
|
$
|
2,524,901
|
|
Deferred
|
|
|
-
|
|
|
|
329,588
|
|
Total
|
|
$
|
2,377,715
|
|
|
$
|
2,854,489
|
|
Significant components of deferred tax
assets are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Allowance for doubtful accounts and other reserves
|
|
$
|
324,053
|
|
|
$
|
140,226
|
|
Accumulated depreciation
|
|
|
72,834
|
|
|
|
26,109
|
|
Valuation allowance
|
|
|
(396,887
|
)
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
166,335
|
|
Note 15 – Major customers and
suppliers
For the year ended December 31, 2015, two
major customers accounted for approximately 17% and 12% of the Company’s total sales, respectively. For the year ended December
31, 2014, two major customers accounted for approximately 16% and 10% of the Company’s total sales, respectively. Any decrease
in sales to these customers will negatively impact the Company’s operations and cash flows if the Company fails to increase
its sales to other customers.
As of December 31, 2015, two customers
accounted for approximately 19% and 11% of the Company’s accounts receivable balance.
As of December 31, 2014, one customer accounted
for approximately 12% of the Company’s accounts receivable balance.
For the year ended December 31, 2015, three
major suppliers accounted for approximately 30%, 18%, and 13% of the total purchases, respectively. For the year ended December
31, 2014, three major suppliers accounted for approximately 37%, 25%, and 11% of the total purchases, respectively.
Note 16 – Segment information
The Company uses the “management
approach” in determining reportable operating segments. The management approach considers the internal organization and reporting
used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source
for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation
results by the revenue of consumer products, trading and biofuel energy products. As such, the Company has determined that it has
three operating segments as defined by ASC 280, “Segment Reporting”: consumer products, trading and biofuel energy.
Consumer products segment manufactures
and sells Charcoal Doctor branded products and BBQ charcoal in China. Trading segment conducts rubber and other trading businesses.
Biofuel energy segment produces and sells BBQ charcoal to customers in Asia, Europe and North America and produces and sells bamboo-based
fuel for Electric Double Layer Capacitor.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjustments and eliminations of inter-company
transactions were not included in determining segment (loss) profit, as they are not used by the chief operating decision maker.
The following table presents summary information
by segment for the years ended December 31, 2015 and 2014, respectively.
|
|
Consumer product
|
|
|
Trading
|
|
|
Biofuel Energy
|
|
|
Total
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Revenue from external customers
|
|
$
|
43,235,065
|
|
|
$
|
53,051,808
|
|
|
$
|
3,579,471
|
|
|
$
|
2,999,463
|
|
|
$
|
12,015,364
|
|
|
$
|
9,441,835
|
|
|
$
|
58,829,900
|
|
|
$
|
65,493,106
|
|
Revenue from intersegment
|
|
|
736,527
|
|
|
|
1,073,530
|
|
|
|
11,988
|
|
|
|
-
|
|
|
|
554,251
|
|
|
|
759,752
|
|
|
|
1,302,766
|
|
|
|
1,833,282
|
|
Cost of revenue
|
|
|
28,618,875
|
|
|
|
34,824,870
|
|
|
|
3,463,818
|
|
|
|
2,936,503
|
|
|
|
9,864,991
|
|
|
|
7,091,621
|
|
|
|
41,947,684
|
|
|
|
44,852,994
|
|
Gross profit
|
|
|
14,616,190
|
|
|
|
18,226,938
|
|
|
|
115,653
|
|
|
|
62,960
|
|
|
|
2,150,373
|
|
|
|
2,350,214
|
|
|
|
16,882,216
|
|
|
|
20,640,112
|
|
Interest Expenses
|
|
|
324,643
|
|
|
|
295,204
|
|
|
|
85,828
|
|
|
|
150,685
|
|
|
|
1,622
|
|
|
|
88,341
|
|
|
|
412,093
|
|
|
|
534,230
|
|
Depreciation & amortization
|
|
|
478,400
|
|
|
|
508,607
|
|
|
|
72,715
|
|
|
|
79,293
|
|
|
|
890,065
|
|
|
|
919,043
|
|
|
|
1,441,180
|
|
|
|
1,506,943
|
|
Segment profit
|
|
|
10,235,984
|
|
|
|
13,759,901
|
|
|
|
(734,126
|
)
|
|
|
178,931
|
|
|
|
256,704
|
|
|
|
778,830
|
|
|
|
9,758,562
|
|
|
|
14,717,662
|
|
Segment assets
|
|
$
|
72,302,734
|
|
|
$
|
64,878,256
|
|
|
$
|
2,071,215
|
|
|
$
|
6,760,386
|
|
|
$
|
7,738,850
|
|
|
$
|
7,069,952
|
|
|
$
|
82,112,799
|
|
|
$
|
78,708,594
|
|
Segment information by products for the years ended December
31, 2015 and 2014:
|
|
Cleaning
|
|
|
Purification &
Deodorization
|
|
|
Barbecue
Charcoal –
domestic
|
|
|
Trading
|
|
|
EDLC Carbon
|
|
|
Barbecue
Charcoal -
international
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,333,883
|
|
|
$
|
32,548,426
|
|
|
$
|
8,352,756
|
|
|
$
|
3,579,471
|
|
|
$
|
11,387,102
|
|
|
$
|
628,262
|
|
|
$
|
58,829,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
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Revenue
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$
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2,277,143
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$
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37,475,537
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$
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13,299,128
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$
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2,999,463
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$
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8,630,296
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$
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811,539
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$
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65,493,106
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All of the Company's long-lived assets
are located in the PRC. Geographic information about the revenues, which are classified based on customers, is set out as
follows:
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Year ended December 31,
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2015
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2014
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Revenue from China Sources
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$
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58,129,408
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$
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64,217,607
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Revenue directly from foreign countries
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700,492
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1,275,499
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Total Revenue
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$
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58,829,900
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$
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65,493,106
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Approximately $58.1million (99%) of our
revenue were generated through
Chinese domestic sources.
However, approximately $13.3 million (23%) of revenue that were sold through domestic distributor or exporters were sold to end-customers
in foreign countries. In effect, approximately 75% of our products are consumed in China and approximately 25% of our products
are consumed in foreign countries.
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Subsequent events
On August 19, 2015, the Board of Directors
of the Company authorized USCNHK to form a wholly-owned subsidiary, Lishui Tantech Energy Tech Co., Ltd. (“Lishui Tantech”).
On April 7, 2016, Lishui Tantech was registered in Lishui, China under the PRC law.
On March 1, 2016, Tantech Holdings Ltd.
(“Tantech”) entered into a securities purchase agreement (the “Securities Purchase Agreement”), pursuant
to which Tantech agreed to sell securities to various purchasers (the “Purchasers”) in a private placement transaction
(the “Private Placement”). The Private Placement closed on March 1, 2016. Pursuant to the Securities Purchase
Agreement, Tantech agrees to transfer, assign, set over and deliver to the Purchasers and the Purchasers agree, severally and not
jointly, to acquire from the Tantech in the aggregate 1,693,000 shares of Tantech’s common stock (the “Shares”)
at USD$4.70 per share for USD$7,957,100.00. There will be 23,293,000 shares of common stock outstanding after the issuance of the
shares purchased.