TANTECH HOLDINGS LTD annual report, Q4 FY2015

Business context and reporting period

Tantech Holdings Ltd. filed this Form 20-F for the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter report. The company is a British Virgin Islands holding company whose operations are principally in China. It develops and manufactures bamboo-charcoal household products, EDLC carbon for supercapacitors, and charcoal briquettes, with a smaller trading business. Financial statements are audited under U.S. GAAP; the auditor issued an unqualified opinion.

Key financial metrics

Amounts are U.S. dollars unless stated otherwise.

At December 31, 2015, current assets were $63.68 million, current liabilities $13.99 million, working capital $49.70 million and the current ratio 4.55. Total assets were $87.07 million; total equity was $73.09 million, including $3.44 million of noncontrolling interest. Short-term bank debt was $8.44 million, all reported due within one year; there were no bank acceptance notes payable at year-end. Debt is secured by company property and land-use rights.

Investing cash outflow was $7.15 million, mainly reflecting an approximately $8.03 million deposit toward the proposed Suzhou E Motors acquisition. Financing cash inflow was $8.84 million, including bank borrowings and approximately $5.66 million of net IPO proceeds. R&D expense was $1.08 million, versus $0.75 million in 2014.

Material changes versus 2014

• Revenue declined 10.2%, mainly because consumer-product sales fell from $53.05 million to $43.24 million. Domestic barbecue charcoal sales were affected by a temporary supply disruption in the last two months of 2015; bamboo vinegar and other household-product sales also weakened.
• EDLC carbon sales increased: reported product revenue rose to $11.39 million from $8.63 million, and volume increased to 367 tons from 280 tons. The broader energy segment generated $12.02 million of revenue, up from $9.44 million.
• Gross margin fell 2.8 percentage points. Management cited higher raw-material costs, including bamboo charcoal, and lower gross profitability in the energy segment.
• Operating expenses rose 92.4% to $6.67 million. General and administrative expense increased to $4.72 million, including higher bad-debt expense, insurance, legal and public-company costs. The allowance for doubtful accounts rose to $1.22 million from $0.31 million.
• Operating income declined 40.5%; net income attributable to common stockholders declined 39.6%. Currency translation losses were $3.98 million, versus $0.18 million in 2014, reducing comprehensive income attributable to common stockholders to $4.66 million.
• Consumer products represented 73.5% of revenue, down from 81.0%; energy rose to 20.4% from 14.4%; trading was 6.1% versus 4.6%. The trading segment recorded a $0.73 million loss, compared with $0.18 million profit in 2014.

Outlook, risks and unusual items

• Management expects household-product and EDLC-carbon sales to grow, but says total revenue could decline if those businesses do not grow or the company finds no new opportunities. The filing provides no formal revenue or earnings guidance.
• Management planned approximately $1.5 million of R&D spending in 2016 and estimated capital expenditures of approximately $20 million in 2016 and $25 million in 2017, primarily related to Suzhou E Motors and a new-energy-vehicle R&D center.
• The proposed acquisition of 100% of Suzhou E Motors remained subject to due diligence and a definitive agreement. The company had paid a $7.705 million deposit at year-end; completion terms, including cash and restricted shares, were not finalized in the filing.
• After year-end, a private placement closed on March 1, 2016: 1.693 million shares were sold at $4.70 per share for $7.957 million gross proceeds. The filing reports 23.293 million shares outstanding after issuance.
• Key risks include customer concentration (the seven largest customers generated approximately 54% of 2015 revenue), distributor dependence, supplier concentration (three suppliers accounted for 61% of purchases), collection risk and large customer receivables. Approximately 30% of year-end receivables, or $12.4 million, had been collected by March 31, 2016; management expected significant remaining balances from major customers to be collected by June.
• Other material exposures include dependence on bamboo-charcoal supplies, competition and EDLC-market uncertainty, RMB movements and PRC foreign-exchange controls, uninsured PRC bank deposits, and restrictions on transfers of subsidiary funds. A guarantee for a related party’s renewable bank acceptance notes of RMB35.1 million (about $5.4 million) was disclosed as outstanding through April 2017, secured by a company building with approximately $7.6 million net book value; the company was seeking termination.
• The filing notes significant share-price volatility following negative reports by a short seller in September 2015. The company stated its disclosure controls were effective, but, under a newly public company transition provision, it did not include management’s assessment of internal control over financial reporting; the auditor did not opine on internal controls.
• Government subsidies of $326,000 in 2015 were described as one-time grants and may not recur. The company also reported approximately $1.09 million of other income, primarily patent-related consulting fees.

Important facts for investors to verify

• Confirm the status, final consideration, funding plan and expected capital needs of the Suzhou E Motors acquisition, and the recoverability or application of the $7.705 million deposit.
• Review subsequent collections of accounts receivable and supplier advances, customer-level exposures, allowance adequacy and the effect of the 2015 increase in bad-debt expense.
• Reconcile reported EPS and share counts: the filing reports 2015 basic and diluted EPS of $0.40 and 2014 EPS of $0.33, while weighted-average shares are shown as 21.24 million and 41.89 million, respectively, despite the disclosed 2014 share cancellation and IPO-related share changes.
• Assess short-term loan maturities, collateral and refinancing needs, and whether the related-party guarantee was terminated before its stated April 2017 expiry.
• Track EDLC margins, customer demand, product qualification and capacity spending, as well as recovery in household and domestic barbecue-charcoal sales.
• Evaluate the adequacy of internal controls and public-company reporting after the transition-period omission, and monitor the share issuance, ownership concentration and potential dilution.