Tantech Holdings Ltd. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
Tantech is a China-based manufacturer and seller of bamboo-charcoal consumer products, with trading activities and a specialty electric-vehicle (EV) business. It owns 70% of Shangchi Automobile, consolidating the business while a minority shareholder retains 30%. In 2018, the company also acquired an indirect 18% interest in a marble-mining company for approximately $18.2 million. It discontinued or closed several operations, including the EDLC-carbon business sold in 2017, and classified related businesses as discontinued operations.
Financial highlights
Amounts below are in U.S. dollars; income-statement amounts are for continuing operations unless noted.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $29.56 million | $42.30 million |
| Gross profit / margin | $8.03 million / 27.2% | $10.56 million / 25.0% |
| Operating income / margin | $2.35 million / 7.9% | $4.57 million / 10.8% |
| Income before tax | $2.03 million | $4.48 million |
| Net income from continuing operations | $1.00 million | $2.95 million |
| Net income attributable to common shareholders | $1.98 million | $3.77 million |
| Operating cash flow | $14.66 million | $2.15 million |
| Investing cash flow | $(18.00) million | $(3.49) million |
| Financing cash flow | $(0.81) million | $8.34 million |
Revenue fell 30.1%, while gross margin improved, mainly reflecting stronger consumer-product margins. Operating income declined 48.6% and continuing-operations net income fell 66.2%. Consolidated net income, including discontinued operations, was $1.08 million, versus $3.01 million in 2017. Common-shareholder income includes the reported noncontrolling-interest allocation and should not be confused with consolidated net income.
- Revenue mix: Consumer products generated $22.39 million (70.9% of revenue), trading $3.78 million, and EVs $3.40 million. Consumer-product revenue decreased 29.8%; management attributed this to e-commerce competition, reduced supermarket business with weak economics, and cuts to lower-margin products.
- Margins by segment: Consumer products 35.9%, trading 12.9%, and EVs negative 14.7%, compared with 25.7%, 22.8%, and positive 22.6%, respectively, in 2017. EV sales were 110 logistics vehicles; management reported a segment gross loss of approximately $0.50 million.
- Costs and unusual items: General and administrative expense included about $2.1 million of bad-debt expense and a $0.7 million inventory reserve. The filing reports a $0.9 million allowance against continuing-operations receivables and an additional allowance against supplier advances. R&D expense was $0.39 million, down from $0.63 million.
- Liquidity: At year-end, current assets were $70.31 million and current liabilities $22.15 million, with reported working capital of $48.16 million and a current ratio of 3.2. Cash and cash equivalents were $7.75 million; restricted cash of $2.12 million was separately reported. Net accounts receivable were $32.50 million, supplier advances $14.39 million, and manufacturing-rebate receivable $9.80 million.
- Debt and other obligations: Short-term bank loans were $7.68 million and bank-acceptance notes $2.12 million. The contractual-obligations table also lists $3.25 million due to third parties and $1.72 million due to related parties, all due within one year; the balance sheet instead reports $2.10 million due to related parties. The debt is short term, and some facilities are secured by property or guaranteed by related parties.
- Cash flow: Reported operating cash flow of $14.66 million includes $3.58 million from discontinued operations; continuing operations contributed $11.08 million. Operating cash benefited substantially from receivable collections and noncash reserves. Investing outflow included $17.45 million for the marble investment.
Material changes and management outlook
- Revenue decreased from $42.30 million in 2017, with the consumer-products decline the main driver; EV revenue also fell from $8.58 million to $3.40 million. Trading revenue increased to $3.78 million.
- EV subsidy timing and policy changes remain important: the company reported $9.80 million of manufacturing-rebate receivables at year-end, including amounts attributable to 2016–2018 vehicle sales. Management said collection was delayed and expected to work with local authorities to accelerate collection during 2019.
- Management said cash, operating cash flow, bank-loan renewals, possible equity financing and support pledged by the principal shareholder and an affiliated company should fund liquidity needs for at least 12 months from the report date. This outlook depends on collecting receivables and rebates, using supplier advances, and renewing or replacing borrowings.
- After year-end, the company reported collecting $15.6 million, or 48%, of continuing-business receivables outstanding at December 31, 2018, through May 10, 2019. It also reported collecting approximately $0.43 million of discontinued-operation receivables.
- There is no specific earnings or revenue guidance. The company said it intended to reduce costs, focus on more marketable consumer products, control customer credit, and reduce EV costs while developing products less dependent on rebates. It stated that it did not expect to pay dividends in the foreseeable future.
Risks, contingencies and governance
- Receivables and concentration: Receivables collection is a key liquidity risk; reported collection days were 285 in 2018. Two customers represented 49% of total sales in the financial-statement note, while a risk-factor disclosure states 67%. Three customers represented 69% of year-end receivables. Major suppliers represented more than 73% of purchases.
- EV business: EV sales depend on a small number of customers, MIIT model approvals, subsidy policies and payments, and external suppliers for major components, including lithium-ion batteries. Shangchi’s 30% minority owner has significant influence.
- Related-party guarantee: Tantech guaranteed Forasen Group’s RMB 57.07 million credit line, approximately $8.77 million, through July 2020 and pledged company property. Forasen reported a 2018 net loss and a current ratio below 1.0. The filing gives differing carrying values for the pledged building.
- Marble investment: The 18% Libo Haokun interest is accounted for at cost; Tantech says it cannot control or significantly influence the investee. Mining permits, operating hazards, environmental compliance and capital needs may affect the investment.
- China and corporate structure: The company faces PRC regulatory, foreign-exchange, dividend-remittance and legal-system risks. The EV stake is partly controlled through contractual VIE arrangements, whose enforceability and regulatory treatment are risks.
- Internal controls: Management concluded that internal control over financial reporting was ineffective at year-end 2018 due to material weaknesses involving U.S. GAAP and SEC-reporting expertise. The weaknesses existed at year-end 2017 and were not fully remediated. The auditor did not provide an opinion on internal-control effectiveness.
- Auditors and reporting: The 2018 financial statements received an unqualified audit opinion from Prager Metis. The 2017 and 2016 financial statements were audited by another firm; the current auditor did not opine on those statements as a whole, though it audited specified discontinued-operations adjustments.
- Other exposure: Cash deposits in China and Hong Kong are uninsured; the company reports limited property insurance and no business-interruption or product-liability insurance. Currency movements affect reported results, and the company does not hedge its currency exposure.
Important facts for investors to verify
- Reconcile the 49% versus 67% disclosure of 2018 sales concentration, and assess customer receivable concentration and subsequent collections.
- Confirm actual collection of the $9.80 million EV rebate receivable, particularly older balances, and the effect of subsidy changes on EV margins and working capital.
- Reconcile the related-party payable amounts in the balance sheet and contractual-obligations table, and verify the Forasen guarantee, collateral valuation and repayment status.
- Assess whether liquidity plans remain adequate given short-term maturities, supplier advances, receivables and reliance on bank renewals or shareholder support.
- Review the valuation, operating status, permits and financial condition of the marble investee, and the rationale and terms for its $18.2 million acquisition.
- Track remediation of the disclosed material weaknesses and clarify inconsistencies in reported cash, capital expenditure and discontinued-operation figures.