TANTECH HOLDINGS LTD annual report, Q4 FY2014

Tantech Holdings Ltd. — FY2014 Form 20-F

Reporting period: Fiscal year ended December 31, 2014, compared with FY2013. This is an annual report, not a standalone Q4 filing; separate fourth-quarter results are not provided. Amounts are in U.S. dollars unless stated otherwise. The company manufactures bamboo-charcoal household products, EDLC carbon and charcoal products, and conducts a smaller trading business, primarily in China.

Financial performance and position

Metric	FY2014	FY2013	Change
Revenue	$65.49 million	$61.22 million	+7.0%
Gross profit / margin	$20.64 million / 31.5%	$17.16 million / 28.0%	Margin +3.5 percentage points
Operating income / margin	$17.17 million / 26.2%	$11.83 million / 19.3%	+45.1%
Net income	$14.72 million	$10.09 million	+45.9%
Net income attributable to common stockholders	$13.98 million	$9.58 million	+45.9%
Operating cash flow	$2.46 million	$(1.95) million	Improved by $4.41 million

Gross margin improved mainly because lower-margin rubber trading was reduced; cost of revenues fell to 68.5% of sales from 72.0%. Operating expenses decreased 34.9%, including lower selling costs and general and administrative expenses.
FY2014 G&A benefited substantially from a $1.54 million collection of previously reserved receivables and related allowance reversal; the filing reports a $1.34 million decrease in receivable allowance in the cash-flow reconciliation. Supplier-advance bad-debt expense increased, and the ending allowance on supplier advances rose to $333,000 from $139,000.
Consumer products generated $53.05 million (81.0% of revenue), trading $3.00 million (4.6%), and energy products $9.44 million (14.4%). Consumer revenue rose 19.3%; trading revenue fell about 62.5%; energy revenue rose 7.9%.
EDLC carbon revenue was $8.63 million, with gross profit of approximately $2.2 million, down from approximately $2.8 million. Management attributed the gross-profit decline to higher raw-material costs. The energy segment returned to profit of approximately $779,000 from a $561,000 loss, helped by lower G&A.
At December 31, 2014, current assets were $59.75 million, current liabilities $16.23 million, working capital $43.52 million, and the current ratio 3.68. Total assets were $78.71 million and total equity $62.48 million.
Cash and equivalents were $415,000; restricted cash was $3.58 million. Accounts receivable, net, was $43.57 million, up from $28.46 million. Advances to suppliers, net, were $10.63 million.
Reported short-term bank loans were $2.12 million and bankers’ acceptance notes payable $7.17 million, for total reported debt-like obligations of $9.29 million, all due within one year. Property and land-use rights secure bank borrowings; restricted cash collateralizes acceptance notes.
Investing cash flow was $533,000, including collections of third-party loans; financing cash outflow was $4.23 million, mainly reflecting repayment of bank loans. Capital expenditures were $1.59 million.

Material changes and notable items

The reduction in rubber trading lowered revenue but improved the company’s overall gross-margin mix. Management says rubber trading will not be a business focus.
Consumer-product growth reflected higher purification and deodorizer sales; the company reported selling 4.9 million air-purification products and 7.9 million deodorizer products, versus 4.3 million and 6.6 million, respectively, in 2013.
Accounts receivable increased by $13.9 million during 2014, partly because the company offered supermarket chains longer credit terms. The filing says approximately $13.5 million of year-end receivables had been collected by April 2015; it gives April 10 in MD&A and April 20 in the financial-statement note. Management expected most of the remaining balances from major customers to be paid by the end of June 2015.
A planned EDLC equipment purchase was cancelled in December 2014 after the equipment failed testing. Of approximately $3.3 million advanced in 2013, about $2.3 million had been returned by year-end, leaving approximately $1.0 million under negotiation. Management expected repayment in Q2 2015 if the contract was not resumed.
The company completed its IPO in March 2015: 1.6 million shares at $4.00 each, generating $6.4 million gross and approximately $5.1 million net proceeds. The filing reports 21.6 million shares outstanding after the IPO, versus 20.0 million at year-end 2014.

Outlook, risks and contingencies

Management expects household-product and EDLC-carbon sales to grow, while warning that declining trading revenue could reduce total sales if growth in the other businesses does not offset it. It expects BBQ charcoal revenue to stabilize as attention shifts to higher-margin products.
Management projected approximately $1.0 million of 2015 R&D spending, including plans for a dedicated EDLC R&D center. It cited approximately $2.7 million of investment needs for production lines and manufacturing upgrades and about $500,000 for the EDLC R&D center; its separate capital-expenditure forecast was approximately $3.2 million for 2015 and $4.8 million for 2016.
Management believed working capital, operating cash flows and bank borrowings would be sufficient for operations and planned needs over the next 12 months. Cash was low relative to receivables and acceptance-note obligations, and the company noted it had no material unused liquidity sources at year-end.
Customer concentration is material: the seven largest customers represented about 50% of 2014 revenue, and two customers individually represented 15.8% and 10.5%. The three largest suppliers represented approximately 72% of purchases. Distributor sales rose to about 70% of total sales from 52%.
Related-party guarantees expose company property to potential foreclosure if Forasen Group does not meet its obligations: a RMB20 million bank loan and RMB35.1 million of renewable bankers’ acceptance notes were guaranteed and secured by a company building. The stated guarantee expirations were June 2015 and April 2017, respectively.
Other risks include dependence on China and bamboo-related products, raw-material supply and pricing, competition, EDLC demand and quality acceptance, customer collections, currency conversion and RMB movements, PRC regulatory and tax uncertainty, and limited insurance. The company said it does not hedge currency or commodity exposure and that its PRC bank deposits are uninsured.
Management concluded disclosure controls were effective at December 31, 2014, but the report did not include management’s internal-control-over-financial-reporting assessment under a transition period for newly public companies; the auditor expressed no opinion on internal controls. The financial statements received an unqualified audit opinion.
The company does not expect to pay dividends in the foreseeable future. Its controlling shareholder group beneficially owned approximately 85.2% of shares after the IPO, according to the filing.

Investor verification priorities

Verify subsequent collection of the $30.1 million of receivables remaining after the reported early-2015 collections, including the large-customer balances and the allowance adequacy.
Confirm repayment or refinancing of the $7.17 million acceptance notes and $2.12 million bank loan, and assess available unrestricted cash versus working-capital needs.
Check recovery of the approximately $1.0 million equipment advance and progress, costs and timing of planned production capacity and EDLC R&D investments.
Review performance and margins of EDLC carbon, including customer qualification, raw-material costs and whether technology improvements translate into repeat orders and profitable growth.
Assess exposure under the Forasen guarantees, related-party dealings and the status of collateral and guarantee expirations.
Reconcile the filing’s differing collection dates for receivables and assess the effect of the $1.54 million allowance release on reported earnings and future credit-loss risk.