|
A.
|
Selected financial
data.
|
In
the table below, we provide you with historical selected financial data for the fiscal years ended December 31, 2020, 2019, 2018,
2017 and 2016. The information is derived from our consolidated financial statements included elsewhere in this annual report
and previous annual report filed. 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
42,284
|
|
|
$
|
49,230
|
|
|
$
|
29,561
|
|
|
$
|
42,298
|
|
|
$
|
39,902
|
|
Gross profit
|
|
|
4,476
|
|
|
|
5,977
|
|
|
|
8,029
|
|
|
|
10,556
|
|
|
|
13,023
|
|
Operating expenses
|
|
|
14,821
|
|
|
|
14,886
|
|
|
|
5,679
|
|
|
|
5,984
|
|
|
|
4,372
|
|
Income (loss) from operations
|
|
|
(10,345
|
)
|
|
|
(8,909)
|
|
|
|
2,350
|
|
|
|
4,572
|
|
|
|
8,651
|
|
Income (loss) from continuing operations before income tax expense (credit)
|
|
|
(10,634
|
)
|
|
|
(9,295)
|
|
|
|
2,028
|
|
|
|
4,476
|
|
|
|
8,333
|
|
Income tax expense (credit)
|
|
|
(612
|
)
|
|
|
364
|
|
|
|
1,031
|
|
|
|
1,528
|
|
|
|
1,367
|
|
Net income (loss) from continuing operations
|
|
|
(10,022
|
)
|
|
|
(9,659)
|
|
|
|
997
|
|
|
|
2,948
|
|
|
|
6,966
|
|
Net income (loss) from discontinued operations
|
|
|
-
|
|
|
|
(299)
|
|
|
|
83
|
|
|
|
65
|
|
|
|
(2,358
|
)
|
Net income (loss)
|
|
|
(10,022
|
)
|
|
|
(9,958)
|
|
|
|
1,080
|
|
|
|
3,013
|
|
|
|
4,608
|
|
Net income (loss) attributable to the non-controlling interest
|
|
|
(3,502
|
)
|
|
|
(3,602)
|
|
|
|
(897
|
)
|
|
|
(754
|
)
|
|
|
308
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(6,520
|
)
|
|
$
|
(6,356)
|
|
|
$
|
1,977
|
|
|
$
|
3,767
|
|
|
$
|
4,299
|
|
Earnings (loss) from continuing operations per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.21)
|
|
|
$
|
0.07
|
|
|
$
|
0.15
|
|
|
$
|
0.19
|
|
Earnings (loss) from discontinued operations per share
|
|
$
|
0.00
|
|
|
$
|
(0.01)
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.10
|
)
|
Balance
sheet data:
|
|
As
of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Working
capital
|
|
$
|
65,097
|
|
|
$
|
49,028
|
|
|
$
|
48,159
|
|
|
$
|
62,456
|
|
|
$
|
49,560
|
|
Current assets
|
|
|
81,901
|
|
|
|
68,162
|
|
|
|
70,314
|
|
|
|
89,245
|
|
|
|
63,659
|
|
Total assets
|
|
|
116,295
|
|
|
|
115,451
|
|
|
|
134,194
|
|
|
|
138,487
|
|
|
|
94,303
|
|
Current liabilities
|
|
|
16,804
|
|
|
|
19,134
|
|
|
|
22,155
|
|
|
|
26,789
|
|
|
|
14,097
|
|
Total liabilities
|
|
|
16,804
|
|
|
|
20,919
|
|
|
|
24,208
|
|
|
|
28,875
|
|
|
|
14,097
|
|
Total equity
|
|
$
|
99,491
|
|
|
$
|
94,532
|
|
|
$
|
109,986
|
|
|
$
|
109,612
|
|
|
$
|
80,206
|
|
|
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
We
face risks related to health epidemics that could impact our sales and operating results.
Our
business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the outbreak of
respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious
diseases, and other adverse public health developments, particularly in China, could have a material and adverse effect on our
business operations. These could include disruptions or restrictions on our ability to produce our products, as well as temporary
closures of our facilities or the facilities of our customers and third-party service providers. Any disruption or delay of our
customers or third-party service providers would likely impact our operating results and the ability of the Company to continue
as a going concern. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread
health crisis that could adversely affect the economies and financial markets of China and many other countries, resulting in
an economic downturn that could affect demand for our services and significantly impact our operating results.
The
coronavirus disease 2019 (COVID-19) has had a significant impact on our operations since January 2020 and could materially adversely
affect our business and financial results for the fiscal year 2021.
Our
ability to manufacture and/or sell our products may be impaired by damage or disruption to our manufacturing, warehousing or distribution
capabilities, or to the capabilities of our suppliers, logistics service providers or distributors as a result of the impact from
COVID-19. This damage or disruption could result from events or factors that are impossible to predict or are beyond our control,
such as raw material scarcity, pandemics, government shutdowns, disruptions in logistics, supplier capacity constraints, adverse
weather conditions, natural disasters, fire, terrorism or other events. In December 2019, COVID-19 emerged in Wuhan, China. In
compliance with the government mandates, the Company temporarily closed and its production operations were halted after the Chinese
New Year holiday until late February 2020. After that, it requested that all employees either work remotely or work at premises
in shifts for limited periods of time. It only fully resumed operations since March 23, 2020. The COVID-19 outbreak had a significant
adverse impact on our business and operations of our fiscal year 2020. While the spread of the disease has gradually been under
control in China, COVID-19 could adversely affect our business and financial results for the fiscal year 2021.
A
weakening of the Chinese economy could hurt demand for our Charcoal Doctor products and vehicle 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. Since 2010,
China’s GDP growth rate has slowed from more than 10% to less than 7%. If China’s economy continues to slow, or if
customer spending for household items decreases, demand for our charcoal products may be reduced, which would negatively affect
sales of our Charcoal Doctor products.
The
demand for our vehicle products, such as electric vehicles (EVs) and fuel midibuses, are also impacted by Chinese economy. As
a result, the slowed Chinese economy will negatively affect sales of our vehicle products.
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 primarily on consumer products in our Charcoal
Doctor line of products, and to a lesser extent vehicles and mining, we rely on our ability to predict the needs and desires of customers
several months before fulfilling orders for distributors. 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. Though we are broadening our business focus to vehicles and investments in mining, our lack of product and business
diversification at this time 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
face competition from smaller competitors that may be able to provide similar charcoal briquette 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 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.
Our
electric vehicle (EV) business of Shangchi Automobile Co., Ltd. (“Shangchi Automobile”) does not meet our expectation
when we acquired it, and we do not know if such business will grow in the future.
We acquired 70% of Shangchi
Automobile, formerly known as Suzhou E-Motors Co., Ltd. (“Suzhou E-Motors”), in 2017 as we valued its potential in EV business.
While the overall EV market in China is growing, Shangchi Automobile’s EV business has not reached to our original expectation.
During the year 2020, due to the impact of COVID-19, Shangchi Automobile was unable to maintain normal operations and all sales and marketing
events were disrupted due to travel restrictions and other government regulations. While the spread of COVID-19 has gradually been under
control in China, it could adversely affect the Company’s business for the future. Shangchi Automobile has no immediate business
plan to start manufacturing the electric vehicles. Management determined that the electric vehicle manufacturing license should be impaired.
The Company recorded an impairment of $11,998,606 for the year ended December 31, 2020. For the year ended December 31, 2019, the
Company recorded an impairment of $1,103,332 because the carrying amount was not recoverable and it exceeded its fair value
based on the management’s assessment for the electric vehicle manufacturing license.
Our
future growth of EV business is highly dependent upon the adoption by customers of, and we are subject to a risk of any reduced
demand for, alternative fuel vehicles in general and electric vehicles (EVs) in particular. The market for alternative fuel vehicles
(including EVs) is relatively new and rapidly evolving, characterized by rapidly changing technologies, price competition, evolving
government regulation and industry standards both domestically and abroad, frequent new vehicle announcements and changing consumer
demands and behaviors. If the market for EVs in China does not develop as we expect or develops more slowly than we expect, our
business, prospects, financial condition and operating results will be harmed.
Our
high concentration of vehicle sales to relatively few customers may result in significant impact on our liquidity, business, results
of operations and financial condition.
For the year ended December 31, 2020, one customer accounted for 100%
of vehicle sales for Shangchi Automobile. For the year ended December 2018, another customer accounted for 100% of vehicle sales for Shangchi
Automobile. No vehicle sales happened in the year ended December 31, 2019 from an accounting perspective. Mainly due to the concentration
of sales to relatively few customers, loss of one customer will have relatively high impact on our operational results. We expect this
trend to continue for the foreseeable future. In the event there is an unfavorable change in our business relationship with our significant
customers, it could have a material adverse effect on our business and financial results.
Our vehicle models
are highly dependent on the approvals from the Ministry of Industry and Information Technology of the People’s Republic China (the
“MIIT”). A failure to obtain approval quickly or at all might cause significant delays in production and sales, results of
operations and financial conditions.
Through Shangchi Automobile, we submit certain vehicle models’
application to the MITT from time to time. The MIIT’s approval of our application is the key for us to produce and sell any related
vehicle products. Any delays or rejections in our applications will have significant negative impact on our Shangchi Automobile’s
operations and financial conditions.
Our
EVs make use of lithium-ion battery cells, which have the potential to catch fire or vent smoke and flame. This may lead to additional
concerns about batteries used in automotive applications.
The
battery packs in our EV products make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy
they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. Extremely
rare incidents of laptop computers, cell phones and EV battery packs catching fire have focused consumer attention on the safety
of these lithium-ion cells. These events have raised concerns about batteries used in automotive applications. To address these
questions and concerns, a number of battery cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to
improve safety. We may have to recall our vehicles or participate in a recall of a vehicle that contains our battery packs, or
redesign our battery packs, which would be time consuming and expensive. Also, negative public perceptions regarding the suitability
of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other
fire, even if such incident does not involve us, could seriously harm our business.
Compliance
with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and
potentially significant monetary damages and fines.
Our
various business operations generate noise, waste water, gaseous byproduct and other industrial waste. We are required to comply
with all national and local regulations regarding the protection of the environment. We are in compliance with current environmental
protection requirements and have all necessary environmental permits to conduct our business. However, if more stringent regulations
are adopted in the future, the costs of compliance with these new regulations could be substantial. Additionally, if we fail to
comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease
operations. Any failure by us to control the use of, or to adequately restrict the unauthorized discharge of, hazardous substances
could subject us to potentially significant monetary damages and fines or suspensions to our business operations. Certain laws,
ordinances and regulations could limit our ability to develop, use, or sell our products.
Developments
in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our
EV products.
Significant
developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements
in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways
we do not currently anticipate. Any failure by us to develop new or enhanced technologies or processes, or to react to changes
in existing technologies, could materially delay our development and introduction of new and enhanced EV products, which could
result in the loss of competitiveness of our EVs, decreased revenue and a loss of market share to competitors.
Our
strategy of developing driverless street sweepers may fail and as a result, our future results of operations and growth prospects
may be materially and adversely affected.
We
have been focusing on developing driverless street sweepers. While we believe the potential market of these products could be
considerable, there are chances that our driverless street sweepers do not have competitive strengths, the demand is not as much
as we expect, or the revenue is not high enough to cover our costs including R&D expenses. Accordingly, our strategy of developing
driverless street sweepers may fail and we may lose all of our investments. Our future results of operations and growth prospects
may be materially and adversely affected.
If
we are unable to keep up with advances in EV technology, we may suffer a decline in our competitive position.
We
may be unable to keep up with changes in EV technology, and we may suffer a resulting decline in our competitive position. Any
failure to keep up with advances in EV technology would result in a decline in our competitive position which would materially
and adversely affect our business, prospects, operating results and financial condition. Our research and development efforts
may not be sufficient to adapt to changes in EV technology. As technologies change, we plan to upgrade or adapt the vehicles and
introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology.
However, our vehicles may not compete effectively with alternative vehicles if we are not able to source and integrate the latest
technology into our vehicles. For example, we do not manufacture battery cells, which makes us dependent upon other suppliers
of battery cell technology for our battery packs.
Changes
to the Chinese government’s subsidy/rebate support policies and further delays in subsidy/rebate payments may have further
negative impacts on our EV segment.
The
Company sells electric vehicles in China and is eligible for a government manufacturing rebate on each qualifying electric vehicle
sold. The Chinese central government subsidy support policies, or rebate policies, have been changing every year. The policy changes
have caused certain uncertainties and negative impacts on our EV operations and may cause further negative impacts on our EV segment.
For example, the Chinese central government subsidy support policies effective as of January 1, 2017, called for a 20% of reduction
in central government subsidies per electric car in 2017 from its 2016 level and the total local government subsidy matched to
be not more than 50% of the total central government subsidies per electric car. The reduction of subsidies from both the central
government and local governments inevitably increased the costs to the consumers to purchase our EVs, which caused temporary pressure
for us to expand our EV sales. The change in subsidy payment methods in 2017 from paid-in-advance to paid post-sale and further
delay in releasing subsidy payments for the EVs manufactured and sold in the prior years also caused the potential delay in collection
of the accounts receivable from our business partners, which temporarily increased the pressure on our working capital for continuing
operations. Since 2018, the rebate policies required all the EVs manufactured since 2016 to install the national platform so the
government could monitor the mileage and other information. Accordingly, we installed the platform on our EVs manufactured since
2016. Since 2019, the rebate policies required the battery capacity attenuation can’t exceed 20%. Accordingly, we plan to
inspect the batteries of our EVs. In addition, we decided to pause EV productions as our costs would not be covered when we are
not able to receive the government rebates to EV manufacturers timely because of the much stricter new government rebate policy
issued in 2019 which has become stricter in 2020 and 2021.
The
unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business,
financial condition, operating results and prospects.
We
do not own 100% of our electric vehicle subsidiary, and we are a minority investor in Libo Haokun and Fuquan Chengwang, our mining
investments.
We
only own 70% of Shangchi Automobile. Zhangjiagang Jinke Chuangtou Co., Ltd. (“Jinke”) holds the remaining 30% equity
interest in Shangchi Automobile and has significant influence on its operation. The potential for differences between us and Jinke
may result in ineffective operation of Shangchi Automobile and our operating results would be materially negatively affected.
Further, we own an indirect
18% interest in Libo Haokun Stone Co., Ltd. (“Libo Haokun”), a marble mining operating company, and an indirect 14.76% interest
in Fuquan Chengwang Mining Co., Ltd. (“Fuquan Chengwang”), a basalt mining company. As such, we have an inability to control
or significantly influence Libo Haokun’s and Fuquan Chengwang’s management and operations. If we believe that Libo Haokun
and Fuquan Chengwang are being managed or operated ineffectively, we have limited options.
Outstanding
bank loans may reduce our available funds.
We
have approximately $7.3 million in outstanding bank loans and bank acceptance notes payable as of December 31, 2020. The
loans and payables are held at multiple banks, and we used our land and property as the collateral for the debt. While our land
and property are worth more than the total loan amount and we also have approximately $37.1 million in cash and approximately
$81.9 million of current 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 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.
On
January 27, 2016, we entered into a framework agreement to acquire Suzhou E-Motors which is now known as Shangchi Automobile,
a specialty electric vehicles manufacturer. Pursuant to the Call Option Agreement executed on May 2, 2016, Supplemental Agreement
I signed on December 22, 2016 and Supplemental Agreement II signed on July 12, 2017, the Company acquired a 70% equity interest
of Shangchi Automobile with total cash consideration of RMB 103,200,000 (approximately $15.9 million) and a share consideration
of 2,500,000 restricted shares of the Company’s common stock.
Our
70% equity interest in Shangchi Automobile comprises a 19% equity interest owned directly through Hangzhou Jiyi Investment Management
Co., Ltd (“Jiyi”) and a 51% equity interest owned through a series of contractual agreements with the owners of Hangzhou
Wangbo Investment Management Co., Ltd (“Wangbo”). Jiyi is 100% owned through Shanghai Jiamu Investment Management
Co., Ltd (“Jiamu”), which is, in turn, wholly owned by Euroasia International Capital (“Euroasia”), a
100% owned subsidiary of the Company. These agreements include an Exclusive Management Consulting and Technology Agreement, two
Equity Pledge Agreements, two Exclusive Call Option Agreements, two Proxy Agreements and two Powers of Attorney (collectively,
the “VIE Agreements”). Pursuant to the VIE Agreements, Jiamu has the exclusive right to provide to Wangbo consulting
services related to business operations including technical and management consulting services. All the above contractual agreements
obligate Jiamu to absorb a majority of the risk of loss from Wangbo’s activities and entitle Jiamu to receive a majority
of their residual returns. In essence, Jiamu has gained effective control over Wangbo. Therefore, the Company believes that Wangbo
should be considered as a Variable Interest Entity (“VIE”) under the Statement of Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation.”
The
Company had originally negotiated to acquire 100% of Shangchi Automobile; however, following initial discussions, Shangchi Automobile’s
minority shareholder, Jinke, a local government-led venture capital fund, opted to retain its 30% interest.
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
face risks and uncertainties associated with our recent investment in mining and processing operations.
In January 2018, we made
a purchase of an indirect 18% interest in Libo Haokun, a marble mining operating company. In November 2019, we made a purchase of an indirect
18% interest in Fuquan Chengwang, a basalt mining company. The Company’s indirect interest in Fuquan Chengwang was diluted from
18% to 14.76% in April 2020 after a third party signed an investment agreement with Jingning Meizhongkuang Industry Co., Ltd. to invest
in Fuquan Chengwang by paying $7.13 million (RMB 46.5 million) to exchange 18% of the interest of Fuquan Chengwang. Libo Haokun’s
and Fuquan Chengwang’s mining and processing operations are subject to a number of operating risks and hazards, some of which are
beyond our control. These operating risks and hazards include: (i) unexpected maintenance or technical problems; (ii) periodic interruptions
of its mining operations due to inclement or hazardous weather conditions and natural disasters; (iii) industrial accidents; (iv) power
or fuel supply interruptions; (v) critical equipment failures; and (vi) unusual or unexpected variations in the quarry and geological
or mining conditions, such as instability of the slopes and subsidence of the working areas. These risks and hazards may result in personal
injury, damage to, or destruction of, properties or production facilities, environmental damages, business interruptions and damage to
Libo Haokun’s and Fuquan Chengwang’s business reputation. In addition, the breakdown of machinery and equipment, difficulties
or delays in obtaining replacement machinery and equipment, natural disasters, industrial accidents or other events could temporarily
disrupt its operations. Any disruption for a sustained period to the operations of Libo Haokun’s and Fuquan Chengwang’s quarry
or supporting infrastructure, or any change to the natural environment surrounding its quarry may have a material adverse effect on our
investment in Libo Haokun and Fuquan Chengwang.
In addition, while Fuquan Chengwang has received a renewed government-issued
mining permit with a term from March 2021 to March 2024, it took long time for it to go through the renewal process, and we do not know
if it will be able to renew it again when the permit expires.
We
may experience increased costs or losses resulting from the hazards and uncertainties associated with mining operations.
The
exploration for natural resources and the development and production of mining operations are activities that involve a high level
of uncertainty. These can be difficult to predict and are often affected by risks and hazards outside of our control. These factors
include, but are not limited to:
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Industrial
accidents, including in connection with the operation of mining transportation equipment and accidents associated with the
preparation and ignition of any blasting operations, milling equipment, conveyor systems and transportation of chemicals,
explosions or other materials;
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Environmental
hazards, including discharge of metals, concentrates, pollutants or hazardous chemicals;
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Surface
or underground fires or floods;
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Unexpected
geological formations or conditions (whether in mineral or gaseous form);
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Ground
and water conditions;
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Fall-of-ground
accidents in underground operations;
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Other
natural phenomena, such as lightning, cyclonic or tropical storms, floods or other inclement weather conditions.
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The
occurrence of one or more of these events in connection with Libo Haokun’s and Fuquan Chengwang’s exploration activities
and development and production of mining operations may result in the death of, or personal injury to, its employees, other personnel
or third parties, the loss of mining equipment, damage to or destruction of mineral properties or production facilities, monetary
losses, deferral or unanticipated fluctuations in production, environmental damage and potential legal liabilities, all of which
may adversely affect Libo Haokun’s, Fuquan Chengwang’s and our reputation, business, prospects, results of operations
and financial position.
Mining
companies are increasingly required to consider and provide benefits to the communities and countries in which they operate, and
are subject to extensive environmental, health and safety laws and regulations.
As
a result of public concern about the real or perceived detrimental effects of economic globalization and global climate impacts,
businesses generally and corporations in natural resources industries, such as Libo Haokun and Fuquan Chengwang, in particular,
face increasing public scrutiny of their activities. These businesses are under pressure to demonstrate that, as they seek to
generate satisfactory returns on investment to shareholders, other stakeholders, including employees, governments, communities
surrounding operations and the countries in which they operate, benefit and will continue to benefit from their commercial activities.
Such pressures tend to be particularly focused on companies whose activities are perceived to have a high impact on their social
and physical environment. The potential consequences of these pressures include reputational damage, legal suits, increasing social
investment obligations and pressure to increase taxes and royalties payable to governments and communities.
In
addition, Libo Haokun’s and Fuquan Chengwang’s ability to successfully obtain key permits and approvals to explore
for, develop and operate mines and to successfully operate in communities in China will likely depend on its ability to develop,
operate and close mines in a manner that is consistent with the creation of social and economic benefits in the surrounding communities,
which may or may not be required by law. Libo Haokun’s and Fuquan Chengwang’s ability to obtain permits and approvals
and to successfully operate in particular communities may be adversely impacted by real or perceived detrimental events associated
with its activities or those of other mining companies affecting the environment, human health and safety of communities in which
we operate. Delays in obtaining or failure to obtain government permits and approvals may adversely affect Libo Haokun’s,
Fuquan Chengwang’s and our operations, including Libo Haokun’s and Fuquan Chengwang’s ability to explore or
develop properties, commence production or continue operations. Key permits and approvals may be revoked or suspended or may be
varied in a manner that adversely affects Libo Haokun’s and Fuquan Chengwang’s operations, including our ability to
explore or develop properties, commence production or continue operations.
Libo
Haokun’s and Fuquan Chengwang’s exploration, development, mining and processing operations are subject to extensive
laws and regulations governing worker health and safety and land use and the protection of the environment, which generally apply
to air and water quality, protection of endangered, protected or other specified species, hazardous waste management and reclamation.
Libo Haokun and Fuquan Chengwang have made, and expects to make in the future, significant expenditures to comply with such laws
and regulations. Compliance with these laws and regulations imposes substantial costs and burdens, and can cause delays in obtaining,
or failure to obtain, government permits and approvals which may adversely impact Libo Haokun’s and Fuquan Chengwang’s
closure processes and operations.
Future
changes in applicable laws, regulations, permits and approvals or changes in their enforcement or regulatory interpretation could
substantially increase costs to achieve compliance, lead to the revocation of existing or future exploration or mining rights
or otherwise have an adverse impact on Libo Haokun’s, Fuquan Chengwang’s and our results of operations and financial
position. Increased global attention or regulation on consumption of water by industrial activities, as well as water quality
discharge, and on restricting or prohibiting the use of hazardous substances in processing activities could similarly have an
adverse impact on Libo Haokun’s and Fuquan Chengwang’s results of operations and financial position due to increased
compliance and input costs.
Libo
Haokun’s and Fuquan Chengwang’s business requires substantial capital investment and it may be unable to raise additional
funding on favorable terms.
The
construction and operation of potential future mining projects and various exploration projects will require significant funding.
Libo Haokun’s and Fuquan Chengwang’s operating cash flow and other sources of funding may become insufficient to meet
all of these requirements, depending on the timing and costs of development of these and other projects. As a result, new sources
of capital may be needed to meet the funding requirements of these investments, fund its ongoing business activities and pay dividends.
Libo Haokun’s and Fuquan Chengwang’s ability to raise and service significant new sources of capital will be a function
of macroeconomic conditions, future marble prices, its operational performance and its current cash flow and debt position, among
other factors. In the event of lower marble prices, unanticipated operating or financial challenges, or a further dislocation
in the financial markets as experienced in recent years, Libo Haokun’s and Fuquan Chengwang’s ability to pursue new
business opportunities, invest in existing and new projects, fund its ongoing operations, retire or service all of our outstanding
debt and pay dividends could be significantly constrained, all of which could have an adverse effect on our minority investment.
Competition
from other natural resource companies may harm Libo Haokun’s and Fuquan Chengwang’s business.
Libo
Haokun and Fuquan Chengwang compete with other natural resource companies to attract and retain key executives, skilled labor,
contractors and other employees. They also compete with other natural resource companies for specialized equipment, components
and supplies necessary for exploration and development. They may be unable to continue to attract and retain skilled and experienced
employees, or to obtain the services of skilled personnel and contractors or specialized equipment or supplies.
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:
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limit
our ability to pay dividends or require us to seek consent for the payment of dividends;
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increase
our vulnerability to general adverse economic and industry conditions;
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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
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limit
our flexibility in planning for, or reacting to, changes in our business and our industry.
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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 charcoal product
customers could reduce our revenues and our profitability.
Our key charcoal product customers are principally third-party distributors
in the PRC. For the years ended December 31, 2020, five major customers accounted for approximately 28%, 20%, 14%, 12% and 10% of the
Company’s total charcoal product sales, respectively. 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.
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 92%, 90% and 92% of our total sales in 2020, 2019 and 2018, 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, and disruption in supply may increase our production cost.
For
the year ended December 31, 2020, two major suppliers accounted for approximately 70% of the Company’s total purchases.
For the years ended December 31, 2019 and 2018, three major suppliers accounted for approximately 76% and 72% of the Company’s
total purchases, respectively.
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 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 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 on our
CEO, Mr. Wangfeng Yan to manage our operations to some extent. Mr. Yan has been involved in the bamboo charcoal industry by working
at our subsidiaries for almost 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.
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 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 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.
Our
business may be negatively affected by low share prices in the stock market.
The trading price of our shares has been fluctuated over the past year.
And we encountered an over 90% decline in market value since 2015. The continued decline in our share price could continue to harm investor
confidence, affect our ability to retain existing investors, affect our ability to attract potential investors, affect our ability to
maintain access to the capital market, 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 currently hold five patents on charcoal products and eighteen patents on vehicles.
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 trademarks.
We rely on our “Charcoal Doctor” brand in the marketing
and distribution of a majority of our bamboo charcoal 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 “Charcoal Doctor” brand will be adversely affected and our customers may lose
confidence in our products. This will adversely affect our sales of charcoal products, hence affecting our business and financial performance.
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
Chinese
economic downturn or growth slowdown may harm our business.
Since
2010, Chinese economic growth has been slowing down from double-digit GDP speed. The situation has impacted many industries and
economic segments in China, such as restaurants, the hospitality industry, auto industry, and discretionary consumer spending.
Our business operations in China mainly rely on consumer cash availability and spending, consumer demand for our products and
consumer confidence, which are impacted by an economic downturn. The recent rapid spread of COVID-19, or fear of such an event,
can have a material adverse effect on the demand for our products and therefore have a material adverse effect on our business
and results of operations. Office closings, travel restrictions and required quarantines implemented in China has caused significant
slowdown of China’s economic growth and could further adversely affect China’s economy resulting in an economic downturn.
If China’s economy continues to slow down or go into recession, our financial and operation results could be materially
and adversely affected as a result of slower consumer spending on our products or below par performance of the consumer discretionary
goods industries.
U.S.
regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.
The Securities and Exchange Commission (the “SEC”), the
U.S. Department of Justice and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors
or executive officers in the PRC. The SEC has stated that there are significant legal and other obstacles to obtaining information needed
for investigations or litigation in China. China has recently adopted a revised securities law that became effective on March 1, 2020,
Article 177 of which provides, among other things, that no overseas securities regulator is allowed to directly conduct investigation
or evidence collection activities within the territory of the PRC. Accordingly, without governmental approval in China, no entity or individual
in China may provide documents and information relating to securities business activities to overseas regulators when it is under direct
investigation or evidence discovery conducted by overseas regulators, which could present significant legal and other obstacles to obtaining
information needed for investigations and litigation conducted outside of 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,
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, USCNHK and Euroasia are controlled (although indirectly) by a foreign individual, rather than by a PRC enterprise or a PRC
enterprise group, we do not believe that any of THL,USCNHK or Euroasia 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 common shares, 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.
Historically,
the principal regulation governing foreign ownership of businesses in the PRC was the Guidance Catalogue for Industrial Structure
Adjustments (the “Catalogue”). The Catalogue classified various industries into three categories: encouraged, restricted
and prohibited. The Catalogue has been replaced by the Special Administrative Measures (Negative List) for Foreign Investment
Access (2018), effective July 28, 2018, and amended and restated by the 2020 version, effective July 23, 2020 (the “Negative
List”). The Negative List specifies the prohibited and non-prohibited (similar to the restricted in the Guidance Catalogue)
industries for foreign investment. For the industries not covered by the Negative List, the foreign investment and the domestic
investment have equal access. Foreign investors may not invest in the prohibited industries specified by the Negative List. For
the non-prohibited industries on the Negative List, a foreign investor must obtain an investment permit. There are certain requirements
on the equity ownership and the executive officers of the foreign invested enterprises. If PRC has certain equity requirements
in certain investment fields, no foreign-invested partnership may be established. For example, pursuant to the latest Negative
List, the general automobile industry falls in the prohibited industry and the percentage of foreign ownership cannot exceed 50%
(except for some categories such as electric vehicle which is not prohibited).
According
to the Negative List, our charcoal products and electric vehicle products are not prohibited. Therefore, our proportion of the
foreign investment for these products may be up to 100%. However, we may also produce the traditional automobiles which fall in
the prohibited industry and are subject to the abovementioned 50% limit. In addition, we are not sure if the Negative List will
change in a way that the foreign investment may be limited or prohibited in our business.
Another
example is the changes to the Chinese government’s subsidy/rebate support policies to EV manufactures. Those changes have
happened on a yearly basis and are at least partially causing delays in our collection of the accounts receivable.
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 the State Administration of Foreign Exchange of the People's Republic of
China (the “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, 2020, 2019 and 2018, we had adjustments of $5,892,311, $(5,494,731)
and $(949,689), 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.
In recent years, 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 the 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 Saint Lucia, 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 (the “Nasdaq”) 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 share repurchase obligation of related parties and share purchase obligation of an unrelated party;
if any such party fails to pay the bank loan or the share purchase obligation, our property may be subject to foreclosure or enforcement.
In
July 2020, we provided a guaranty on a line of credit on behalf of a related party, Zhejiang Forasen Food Co., Ltd. (“Forasen
Food”). Forasen Food’s outstanding line of credit of RMB 10 million (approximately $1.5 million) will expire on July
8, 2023.
In
connection with this guaranty, we pledged our building and land’s rights as collateral for Forasen Food’s loans.
At
the time we offered these guarantees, we believed Forasen Food would be able to repay (and would in fact repay) such loans and
bank acceptance notes. Forasen Food, like our Company, is controlled by Ms. Yefang Zhang. For this reason, we are aware that Forasen
Food has historically had a strong credit history with the banks with which it does business.
We
also guaranteed the share repurchase obligation of a related party in 2018 and that guaranty has been replaced by a guaranty for
the share purchase obligation of an unrelated party in 2019. In May 2018, our wholly owned subsidiary Zhejiang Tantech Bamboo
Technology Co., Ltd. (“Tantech Bamboo”) signed an agreement with other co-guarantors to jointly and severally guarantee
the share repurchase obligation of Forasen Group Co., Ltd. (“Forasen Group”), in favor of an unrelated third party.
Such third party filed a complaint to claim a payment of RMB 29.50 million against Forasen Group, together with the guarantors
on January 9, 2019. On August 30, 2019, the court issued a settlement by which another unrelated third party agreed to purchase
the shares from the plaintiff by paying RMB 90 million, and all the co-guarantors including Tantech Bamboo jointly and severally
guarantee the payment obligation regarding the RMB 90 million and other possible fees, for three years from June 30, 2020, the
due date of the share purchase payment obligation. The other unrelated third party has paid approximately $5.3 million (RMB 34.86
million) and approximately $8.5 million (RMB 55.14 million).
Accordingly,
in June 2020, Lishui Jiuanju Commercial Trade Co., Ltd. (“LJC”), another related party, issued to Tantech Bamboo an
anti-guaranty guaranty to guarantee Tantech Bamboo’s potential payment obligation, and a bank statement of RMB 70 million.
Therefore, our PRC counsel believes Tantech Bamboo’s legal risk has been relieved to some extent. The Company believes that
it is more likely than not that LJC will perform its guaranty obligation and Tantech Bamboo will not need to make the payment.
Entities
controlled by our employees, officers and/or directors control a significant percentage 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 31.5% 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 “ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES – E. Share Ownership.”
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 SEC 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 Securities Exchange Act of 1934, as amended (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 not 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.
We may lose our foreign private issuer status in the future,
which could result in significant additional costs and expenses.
The determination of our status as a foreign private issuer is made annually on the last business day of our
most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on or after June
30, 2021. We would lose our foreign private issuer status if (1) a majority of our outstanding voting securities are directly or indirectly
held of record by U.S. residents, and (2) a majority of our shareholders or a majority of our directors or management are U.S. citizens
or residents, a majority of our assets are located in the United States, or our business is administered principally in the United States.
If we were to lose our foreign private issuer status, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic
issuer may be significantly higher. We may also be required to modify certain of our policies to comply with corporate governance practices
associated with U.S. domestic issuers, which would involve additional costs.
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, Zhengyu Wang, and his wife and our director, Yefang Zhang, collectively own all of 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.
Yefang
Zhang is also the Chairman and Chief Executive Officer of Farmmi, Inc. (“Farmmi”), another Nasdaq listed company,
and Zhengyu Wang is a director of Farmmi. Mr. Wang has historically devoted approximately 15% of his time to matters concerning
Farmmi, approximately 15% of his time to matters for Tantech, and approximately 70% of his time to matters concerning Forasen
Group. As Ms. Zhang and Mr. Wang devote considerable time and efforts to Farmmi and Forasen Group, these sort of business activities
could both distract them from focusing on Tantech and pose an issue of time commitment.
Ms.
Zhang also indirectly controls 22.04% of CN Energy Group. Inc. (“CN Energy”), another Nasdaq-listed company. CN Energy
is a manufacturer and supplier of wood-based activated carbon and a producer of biomass electricity. Neither Ms. Zhang nor Mr.
Wang currently holds any position at CN Energy.
Mr.
Wang and Ms. Zhang signed a Non-Competition Agreement with our company, Farmmi and CN Energy which provides that Mr. Wang and
Ms. Zhang shall not vote in favor or otherwise cause Farmmi or CN Energy to engage in the business that we conduct. Although,
because of this non-competition agreement, we do not believe that there are business activities of Mr. Wang and Ms. Zhang that
will compete directly with our business operations, it is possible that the enforceability of this agreement may be challenged
and a conflict of interest may occur.
In addition, we have permitted Forasen Group to occupy and use 6,415.32
square meters of our Tianning Street real property as office and factory facilities. We have not historically charged Forasen Group for
such usage, 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
A recent joint statement by the SEC and
the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by The Nasdaq
Stock Market LLC (“NASDAQ”), and an act passed by the U.S. Senate all call for additional and more stringent criteria to be
applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not
inspected by the PCAOB. These developments could add uncertainties to our continued listing on NASDAQ in the future.
On April 21, 2020, the SEC
and PCAOB released a joint statement highlighting the risks associated with investing in companies based in or having substantial operations
in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect
auditors and audit work papers in China and higher risks of fraud in emerging markets.
On
May 18, 2020, NASDAQ filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating
in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors
for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the
qualifications of the company’s auditor.
On
May 20, 2020, the U.S. Senate passed an act requiring a foreign company to certify it is not owned or manipulated by a foreign
government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection.
If the PCAOB is unable to inspect the company’s auditor for three consecutive years, the issuer’s securities are prohibited
to trade on a national exchange.
On
June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit
a report to the President within 60 days of the date of the memorandum that should include recommendations for actions that can
be taken by the executive branch and by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on
U.S. stock exchanges and their audit firms. However, it remains unclear what further actions, if any, the U.S. executive branch,
the SEC, and PCAOB will take to address the problem.
The
lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures
of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability
of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting
firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB
inspections, which could cause investors and potential investors in our Ordinary Shares to lose confidence in our audit procedures
and reported financial information and the quality of our financial statements.
Our auditor, Prager Metis CPAs, LLC, is an independent registered public
accounting firm with the PCAOB, and as an auditor of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to
which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor has been
inspected by the PCAOB on a regular basis. However, the above recent developments have added uncertainties to our continued listing on
NASDAQ in the future, to which NASDAQ may apply additional and more stringent criteria after considering the effectiveness of our auditor’s
audit and quality control procedures, adequacy of personnel and training, sufficiency of resources, geographic reach, and experience as
related to our audit.
If
we continue to be 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, 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. If
we continue to 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 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 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 as we have ceased to be 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 $0.81 to $33.97 per common share, and the last reported trading price on April 21, 2021 was $1.32 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 incur significant 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.
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. Lishui Forasen Food Co.
Ltd. was established in January 1998. In April 2003, it changed its name to Lishui Forasen Green Industry Group, later renamed Forasen
Group Co. Ltd. (“Forasen Group”). In May 2003, 60% of THL’s shares were acquired by the Forasen Group. A second subsidiary,
Zhejiang Tantech Bamboo Charcoal Co., Ltd. (“Tantech Charcoal”), was acquired in September 2006 to manage the Forasen Group’s
export business. In September 2008 a third subsidiary, Zhejiang Tantech Energy Technology Co., Ltd. (“Tantech Energy”), was
established to research and develop bamboo charcoals application as a carbon component for EDLCs. On December 14, 2017, the Company entered
into a sale agreement and related agreements to transfer its EDLC carbon business (including intellectual property rights and equipment)
to Zhejiang Apeikesi Energy Co., Ltd. (the “Buyer”), a PRC start-up company controlled by Dr. Zaihua Chen, the Company’s
then Chief Technology Officer. 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. In May and December 2016, Tantech Holdings (Lishui) Co., Ltd., formerly
Zhejiang Tantech Bamboo Technology Co., Ltd., a USCNHK’s wholly owned subsidiary, acquired 100% of Tantech Bamboo’s shares
from USCNHK and five individuals.
Historical
Timeline
Below
is a brief timeline of key dates in our Company’s history since its formation.
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January 1998: Lishui Forasen Food Co. Ltd. is established.
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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 RMB 3.15 million.
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April 2003: Lishui Forasen Food Co. Ltd. is renamed “Lishui Forasen Green Industry Group” (the former name of Forasen Group Co., Ltd.).
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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 RMB 21 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 RMB 27 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: Lishui Forasen Green Industry Group is renamed “Forasen
Group Co. Ltd.”.
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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 RMB 80 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 Nasdaq.
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April 2015: THL
established a subsidiary Euroasia.
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July 2015: Euroasia
established a subsidiary Jiamu.
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December 2015: Hangzhou
Tanbo Technology Co., Ltd. was established.
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February 2016: Jiamu
established a subsidiary Jiyi.
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April 2016: USCNHK
established a new subsidiary as “Zhejiang Tantech Bamboo Technology Co., Ltd.”
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May 2016: USCNHK
transferred 95% of Tantech Bamboo’s shares it owned to Zhejiang Tantech Bamboo Technology Co., Ltd.
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December 2016: Zhejiang
Tantech Bamboo Technology Co., Ltd acquired the remaining 5% of Tantech Bamboo’s shares.
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May 2017: Zhejiang
Tantech Bamboo Technology Co., Ltd changes its name to Lishui Tantech Energy Technology Co., Ltd, which in turn changed its
name in July 2017 to Tantech Holdings (Lishui) Co., Ltd.
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On July 12, 2017,
the Company acquired a 70% equity interest of Shangchi Automobile, formerly Suzhou E-Motors. The 70% equity interest comprises
a 19% equity interest owned directly through Jiyi and a 51% equity interest owned through a series of contractual agreement
with the owners of Wangbo.
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October 2017: Euroasia
established a subsidiary Euroasia New Energy Automotive (Jiangsu) Co., Ltd.
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On December 14,
2017, the Company entered into a sale agreement and related agreements to transfer its EDLC carbon business (including intellectual
property rights and equipment) to Zhejiang Apeikesi Energy Co., Ltd., a PRC start-up company controlled by Dr. Zaihua Chen,
our former Chief Technology Officer.
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On January 10, 2018,
the Company signed a share purchase agreement with Shanghai Shicai Minerals Co., Ltd. (“Shanghai Shicai”) to acquire
all of the shares of Lishui Xincai Industrial Co., Ltd. (“Lishui XinCai”), a wholly-owned subsidiary of Shanghai
Shicai, at a price of approximately $18.2 million (or RMB 120 million). Lishui Xincai owns 18% of the equity interests in
Libo Haokun, so we indirectly hold a 18% stake in Libo Haokun.
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On October 24, 2018,
the Company closed Khorgas Tantech Business Service Co., Ltd. and Khorgas Yabo Software Co., Ltd.
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On November 5, 2018,
the Company closed Zhejiang Tantech Tourism Development Co., Ltd.
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On November 12,
2018, the Company closed Zhejiang Babiku Charcoal Co., Ltd.
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On November 13,
2018, the Company established Shenzhen Yimao New Energy Sales Co., Ltd., a sales subsidiary through Shangchi Automobile (formerly
known as Suzhou E-Motors).
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On June 26, 2019,
the Company entered a share transfer agreement to sell all of its shares in its wholly-owned subsidiary Tantech Energy to
an unrelated third party.
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On November 29,
2019, the Company signed an investment agreement with Jingning Zhonggang Mining Co., Ltd. (“Jingning Zhonggang”)
to acquire 18% of the equity interest of Fuquan Chengwang, a wholly-owned subsidiary of Jingning Zhonggang, at a price of
RMB 46.323 million, or $6.48 million.
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On December 31,
2019, the Company’s wholly owned subsidiary Tantech Bamboo transferred all of its shares in its wholly-owned subsidiary
Tantech Charcoal to Lishui Xincai, the Company’s another wholly owned subsidiary Lishui Xincai.
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In January 2020,
Lishui Jikang Energy Technology Co., Ltd. was established.
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In November 2020,
Lishui Smart New Energy Automobile Co., Ltd. (“Lishui Smart”) and Zhejiang Shangchi New Energy Automobile Co., Ltd.
(“Zhejiang Shangchi”) were established.
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In November
2020, the Company launched driverless and autonomous street sweepers.
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In November 2020,
the Company closed an offering with institutional investors, raising approximately $10 million in gross proceeds, before deducting
placement agent fees and other standard offering expenses, from the sale of 6,060,608 of its common shares, priced at $1.65
per share, registered warrants to purchase up to 2,754,820 common shares in a registered direct offering, and unregistered
warrants to purchase up to 3,305,788 common shares in a concurrent private placement.
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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. On
July 12, 2017, we completed the acquisition of Suzhou E Motors Co, which was later renamed as Shangchi Automobile, a vehicle manufacturer
based in Zhangjiagang City, Jiangsu Province, and our business includes the manufacture and sale of vehicles. In November 2020, we established
two subsidiaries in Zhejiang Province with the plan of producing and selling specialty electric vehicles such as driverless street sweepers.
We
provide our products primarily in the following areas:
We oversee a national sales
network that has a presence in 19 cities throughout China for our charcoal products. Through distributors, our charcoal products are also
sold 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.
Further,
we own an indirect 18% interest in Libo Haokun Stone Co., Ltd., a marble mining operating company, and an indirect 14.76% interest in
Fuquan Chengwang, a basalt mining company.
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 58.5 million residents, and tenth in terms of population
density as of the end of 2019. 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 RMB 6.23
trillion in 2019 places it as the fourth highest in China in absolute amount.
Lishui
is a prefecture-level city located in southwest Zhejiang province. Approximately 2.7 million residents live in the city as the
end of 2019, and city-wide GDP is approximately RMB 147.7 billion in 2019. 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
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 currently own five patents and 36 trademarks in China covering our bamboo charcoal production
and eighteen patents and 2 trademarks in China veering our vehicle production.
For
the years ended December 31, 2020, 2019 and 2018, two major suppliers accounted for approximately 70%, three major suppliers accounted
for approximately 76% and three major suppliers accounted for approximately 72% of the Company’s 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 primarily 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.
The
total value of China’s bamboo industry was approximately $35 billion, as of 2018. As of 2018, it employs more than 8 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 60 to 65 percent by 2030 compared to 2005, we expect the bamboo technology
industry to continue to be important to the country’s long-term planning.
According to statistics from INBAR, China has more than 6 million hectares for bamboo production and over 500 bamboo species. In 2018,
for example, the domestic industry was worth $30 billion and employed more than 8 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; and
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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 CO2 /year, while one hectare of young forest can sequester 15 tons of CO2 /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.
The
global bamboos market size was valued at USD 68.8 billion in 2018 and is expected to grow at a compound annual growth rate of
5.0% from 2019 to 2025. There are about 39 genera of bamboo and more than 590 species in China with more than 6 million hectares
of pure bamboo forest, which accounts for 25% of the bamboo area in the world. With more than 6 million hectares of bamboo plantations
as of September 2018, 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 48.6 billion ($6.9 billion) in 2017. Zhejiang
province has almost one sixth of the whole bamboo forest area in China.
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 by the International Tree Foundation 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.
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 4 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 300-600 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 (Divested Business)
On
December 14, 2017, the Company entered into a sale agreement and related agreements to transfer its EDLC carbon business (including
intellectual property rights and equipment) to Zhejiang Apeikesi Energy Co., Ltd., a PRC start-up company controlled by Dr. Zaihua
Chen, our former CTO. With the completion of the transactions, the Company expected to focus its core business on the development
of electric vehicle products and traditional charcoal products. Tantech’s Board of Directors approved the terms of the sale
based on a valuation report obtained by the parties and with knowledge that Dr. Chen was the Company’s CTO during the transaction.
However, as part of the transactions, Dr. Chen resigned from the Company’s CTO position on December 31, 2017.
The
decision of the Company to divest its EDLC carbon business was made based on business considerations, including the fact that
(1) the company’s EDLC carbon business had been dependent on a very limited number of customers, (2) capital constraints
on additional substantial investment on developing EDLC Carbon products, (3) a challenging market condition and unfavorable political
climate and (4) the Company’s future transition focus of its traditional charcoal business to electric vehicle business.
Pursuant
to the agreements, Tantech sold to the buyer all of its intellectual property rights related to EDLC carbon and the equipment
for R&D and production. The buyer paid Tantech a total purchase price of RMB 16 million. The payment will be made over 10
years. Other key terms include the following: (a) the first payment of 28% of the total purchase price, or RMB 4.48 million, was
made in 2017, consisting of RMB 3.2 million in cash advancement and RMB 1.28 million as payment for Tantech’s EDLC carbon
related IP rights; (b) the remaining balance of the purchase price will be paid evenly over the following nine years; (c) the
second payment of RMB 1.28 million of the purchase price and cash interests on the remaining cash receivable was made in 2018;
and (d) Tantech will lease its office space, including offices and EDLC carbon R&D and production facilities, to the Buyer,
subject to a concession of a free leasehold for the first two years.
Our
Products
Before
acquisition of Shangchi Automobile, we primarily produced and sold three categories of products (including EDLC carbon products
which were divested in 2017), all of which are produced from bamboo charcoal or 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
Charcoal 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. Previously we produced most of these products
by ourselves. Since 2019, we stopped producing BBQ charcoal products due to the stricter environmental requirements by the local government
and started to purchase them from third party manufacturers.
Our
charcoal briquettes are processed from carbonized bamboo and wood 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 in oversea market will increase, however we expect total revenue
in our charcoal briquette will keep current relevant level in comparison to these other segments and in absolute terms.
Charcoal
Doctor Products
Our
primary consumer brand is Charcoal Doctor (“Tan Boshi” or “Dr. Tan” in Chinese). In processing the 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 products’ gross profit margins average 26%, 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 have expanded 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 nanotechnology.
We
use this silver ion nanotechnology 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 nanotechnology. 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 also sell these products
to 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 distributors typically invite us to apply in June or July to update the products we will offer for
sale in their customer 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.
Vehicles
On July 12, 2017, the Company
acquired a 70% equity interest of Shangchi Automobile, formerly Suzhou E-Motors. Suzhou E-Motors develops, manufactures, and sells electric
vehicles and fuel vehicles. The company also offers solar cells, lithium-ion batteries, auto parts, and electric control systems in China.
Its manufacturing facility, located in Zhangjiagang City, Jiangsu Province, is 15,000 square meters. Shangchi Automobile has been approved
by the MITT as qualified to manufacture vehicles. It is also entitled to both central and local government subsidies with any approved
EV models. As of the date of this report, Shangchi Automobile has not updated the previous ten EV models and one fuel vehicle model approved
by MIIT.
Shangchi Automobile has to
date developed a full range of electric buses and a variety of specialty vehicles. It has developed ten models of electric buses, electric
logistics cars, and electric specialty vehicles, such as high-speed brushless cleaning cars, electric cleaning cars, special emergency
vehicles, and funeral cars. The sale region for current products is mainly within Jiangsu Province where the Shangchi Automobile locates.
In 2018, we sold 110 electric logistic vehicles to Southern China. In 2019, we sold 117 electric logistic cars on behalf of other vehicle
manufacturers for commission income. In 2020, we produced 10 fuel midibuses and exported them to Singapore. In addition, we sold 85 fuel
midibuses and 59 electric specialty vehicles in fiscal 2020 on behalf of other vehicle manufacturers for commission income.
Below are examples of the
vehicles produced by Shangchi Automobile.
Tourist
Buses. The tourist buses are 12-meter-long and 7-meter-long lithium-battery-based buses whose interior noise is less than 76 dBs
and off vehicle acceleration noise is less than 82 dbs.
Logistic Vehicles.
The electric logistic vehicles are 4.2-meter-long, 810 kg standard load weight fully charged vehicles. Each are a 100% electricity-driven
vehicle specially designed for logistics companies. The batteries for this vehicle can be charged and discharged quickly, and each vehicle
is made of high quality steel stamping body which is highly durable. The internal structure and the design of the car doors are both
made for the deliverers’ convenience.
Urban Sanitary Vehicles.
The urban sanitary vehicles work with high efficiencies with low operating expenses. They travel (clean) around 20~30 km/hr with fuel
consumption rates approximately 3.33 km/liter. The vehicles are equipped with professional sanitary vehicle chasses, with front axle
drives & front axle steering to strengthen their operations’ stability and smoothness; the whole vehicle is made of strengthened
steel plates and pipes, making it more durable and anti-collusive.
Below
are the major vehicle components we purchase for assembling the EVs:
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Lithium-ion battery packs
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Three-in-One electric control systems
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In
general, the purchase of the vehicle chassis, electric motors, lithium-ion battery pack and three-in-one electric control system
have covered two-thirds of EVs’ production cost. We purchase these components from four different but well-established suppliers
in China.
We
currently rely on local EV distributors to sell our EVs to end-users. The primary reason for such a sales channel is the dependence
on local government subsidy policies. In general, local governments only allow the locally-licensed EV distributors to sell EV
vehicles, which are entitled to EV road permits and subsidies.
Over
the years, Shangchi Automobile has had more than 20 EV core technologies and patents, including nanotechnology for raw materials
for power lithium electronics, group technology of power lithium electronics and battery management technology.
Fuel
Buses. In addition to EVs including electric buses, Shangchi Automobile also produces fuel buses. Our major fuel bus products are
sleek, diesel midibuses which have an overall length of 7 meters, two doors and have seats for 23 passengers, with a total capacity of
50. Featuring a manual 5 speed transmission and all the luxuries of a high-end bus, the midibus boasts an efficient, luxury travel experience
with comfortable seating, USB charging ports, powerful air conditioning and a state-of-the-art air purification system. We can also assemble
fuel buses based on the customers’ customized requirements.
Autonomous
Electric Street Sweepers. We have developed three driverless and autonomous street sweeper models. They are designed for closed areas
and therefore do not require any vehicle manufacturing license. All of them are electric. The Shangchi SC-120A model features unmanned,
automatic sweeping, the Shangchi SC-120B model features manned, autonomous, intelligent sweepingle, and the Shangchi SC-100A features
unmanned, automatic sweeping, autonomous learning, and remote control. These street sweepers are designed for quieter operation and improved
cleaning performance, with the ability to reduce or eliminate the 7 to 8 humans required for typical sweeper vehicle operation. While
we have not produced any driverless street sweepers for sale as of the date of this report, we established two companies, Lishui Smart
and Zhejiang Shangchi, to produce and sell street sweepers, respectively.
Our
Processing Workflow of Bamboo Charcoal Products
We
develop and manufacture our bamboo charcoal products using the following processing workflow:
We
develop and manufacture our electric vehicles using the following processing workflow:
Raw
Materials
Our primary raw material for charcoal products is bamboo charcoal.
Each year, we purchase bamboo charcoal locally 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 four suppliers. In recent years, due to the rising awareness
of environmental protection, the Zhejiang province is taking a series of measures to improve water environment, which has led to a massive
closure of small-sized bamboo charcoal manufacturers. In addition, we were unable to purchase wood charcoal briquettes from a large supplier,
Tahe Xingzhongda Carbon Co. in 2016, due to shortage of supply. However, we have taken actions to remedy such matters, in particular to
our primary raw material, bamboo charcoal. Therefore, we do not expect any shortage supply from bamboo charcoal in coming years.
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. In 2016, we were unable to purchase raw material from Tahe Xingzhongda Carbon Co.
It caused major decline in our domestic charcoal briquettes sale. While we have adjusted our purchasing strategies to look for alternatives,
due to tightening environmental control in local authority, we expect the cost of wood charcoal briquettes would increase in the coming
years.
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.
Vehicles
We
do not produce major vehicles components directly from raw material. In general, we purchase major parts directly from four major
suppliers. The suppliers for parts are shown below:
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Beijing National Energy Battery Technology Co.,
Ltd — Lithium-ion battery cells
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Dongfeng Xiangyang Travel Vehicle Co., Ltd —
Vehicle chassis
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Suzhou Greencontrol Transmission Technology
Co., Ltd — Electric motors
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Wuhan Hiconics Power Technology Co., Ltd —
Three-in-One electric control systems
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Distribution
Channels and Methods of Competition
International
Markets and Customers
Our bamboo charcoal products are also sold directly or indirectly through
distributors to international markets. Such exported products include bamboo vinegar, bamboo charcoal and purification product. The majority
of our export items are for non-energy use. We estimate that with respect to our charcoal products that the percentage of goods sold for
export is approximately 5%, with the majority destined for Japan, South Korea and Taiwan.
Domestic
Markets and Customers
Currently,
our consumer products and vehicles are sold via our distributors’ networks. 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 have
been selling our products mainly through distributors instead of operating logistics and warehousing facilities internally. In
addition, we have significantly cut our charcoal product sales to supermarket customers.
We
are in the process of expanding our charcoal 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. In addition, we are in the process of restructuring our distribution
network in an effort to cut both overall time and costs relating to the sale cycle.
Geographic
Distribution of Revenues
Beginning
in 2017, our charcoal products are sold via distributors instead of direct distribution to supermarkets and chain stores. As all
of our sales are completed in China, with title transferring to our customers in the country, we estimate most of our products
are sold and used in China. We have divested our EDLC line of business, which had contributed greatly to our international sales.
Electric
Vehicles
Supported
by the Chinese government’s endorsement and driven by its focus on petroleum resource independence, environmental protection
and the “Made in China 2025” industrial upgrade, we believe the electric vehicle sector is the most promising segment
in the Chinese auto industry. China has become the largest new energy vehicle market in the world. According to a central government
forecast, China’s new energy vehicle sales are projected to grow to 1.8 million units in 2021, and its penetration rate
is expected to reach 7% by 2021.
Our
specialty vehicles have a variety of uses in many areas. Each of these vehicles integrate the advanced technology of mechanical,
electronic, hydraulic, chemical, environmental protection and other fields into a special vehicle chassis to realize its specific
function. Specialty vehicles are widely used in the highway transportation, engineering construction, oil fields, mines, electricity,
telecommunications, postal, medical, environmental sanitation, agriculture, water conservancy, aviation, food, public security,
fire protection, justice and national defense construction markets.
In
general, our EV product faces two group of competitors: manufacturers of conventional fuel vehicles and EV manufactures. In terms
of competitors specializing in conventional fuel vehicles, many of them are much larger in terms of size, have greater manufacturing
capabilities, and have larger customer bases than we do. However, the conventional fuel vehicle manufacturers face many challenges,
including environmental pollution and energy scarcity, which provides great opportunities for the rapid development of the EV
industry in China. In addition, conventional fuel vehicle manufacturers have begun focusing their attention on developing and
producing EV, and we expect that we may face tougher competition in the future from these manufacturers.
There
are many companies in China that engage in the research, production and distribution of electric vehicles. Competition within
the electric vehicle market is intense as we have to compete with many domestic and global companies, established and new EV manufactures,
some of which have greater brand recognition and resources than we do. As a brand new player in the Chinese electric vehicle industry,
we hope our focus on developing specialty vehicles might give us advantages in a niche market, rather than facing strong competition
from similar vehicles on the consumer vehicle market.
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
regard 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. (“Zhejiang Maitanweng”),
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.
Zhejiang Jiejiegao Charcoal Industry Ltd. Co. (“Jiejiegao”)
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. Jiejiegao 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. In addition, our subsidiary Tantech Charcoal participated
in the creation of Part 1, Part 2 and Part 3 of ISO 21626, an international standard for bamboo charcoal.
2004