Tantech Holdings Ltd. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; this annual filing does not provide standalone fourth-quarter results. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars. Tantech is a China-focused bamboo-charcoal products company that added specialty electric vehicles (EVs) through its July 2017 acquisition of a 70% interest in Suzhou E-Motors. It sold its EDLC carbon business in December 2017.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $43.08 million | $40.53 million |
| Gross profit / margin | $10.68 million / 24.8% | $13.06 million / 32.2% |
| Operating income / margin | $4.61 million / 10.7% | $8.61 million / 21.2% |
| Net income from continuing operations | $2.98 million | $6.92 million |
| Net income attributable to common shareholders | $3.77 million | $4.30 million |
| Cash from operating activities | $2.30 million | $(7.03) million |
Net income attributable to common shareholders exceeded consolidated net income of $3.01 million because the EV subsidiary recorded a non-controlling-interest loss. FY 2017 basic and diluted EPS from continuing operations was $0.15, versus $0.19 in 2016.
- Revenue mix: Consumer products generated $32.68 million, down about 18%; trading generated $1.83 million; and EV generated $8.58 million after acquisition. EV gross margin was 22.6%, and the segment reported a $2.51 million loss.
- Margins and costs: Consolidated cost of revenue rose 17.9% to $32.41 million, faster than revenue. Management cited lower consumer-product selling prices and higher material costs. Operating expenses rose 36.4% to $6.07 million, including higher R&D and administrative costs.
- Cash, liquidity and working capital: Cash and cash equivalents were $9.94 million; restricted cash was a further $3.90 million. Working capital was $62.46 million and the current ratio was 3.3, down from 4.5. Total current assets were $89.24 million and current liabilities $26.79 million.
- Debt: Short-term bank loans totaled $5.21 million and bank acceptance notes payable $6.98 million. Loans and notes are short term; some are secured by company property, and notes require restricted-cash collateral.
- Receivables and supplier advances: Net accounts receivable totaled $51.76 million, including $44.83 million from continuing operations; net supplier advances totaled $17.52 million. The company reported $9.27 million in EV manufacturing-rebate receivables.
- Equity: Total equity was $109.61 million, including $8.80 million of non-controlling interest. The company issued 1.89 million shares in a September 2017 private placement, receiving $5.97 million net, and issued 2.5 million shares as part of the EV acquisition.
Changes, outlook and material matters
- Revenue rose 6.3%, mainly from the newly consolidated EV business and higher trading sales, but consumer-product revenue fell $7.7 million. Consumer gross margin declined from 31.3% to 25.5%.
- Management attributed the consumer-product decline to competition from online, lower-priced brands; reduced sales to supermarkets with poor margins or slow collections; and 3%–5% lower average selling prices. Distributor and specialty-shop sales increased, while supermarket revenue fell sharply.
- EDLC was classified as a discontinued operation. The sale price was RMB 16 million (about $2.46 million), payable over ten years; the company recognized a $1.95 million disposal gain. The buyer was controlled by the company’s former CTO, who resigned at year-end. EDLC had operating losses in 2017 and 2016, and the company recorded a substantial bad-debt reserve against EDLC supplier advances.
- Management said it expects adequate liquidity for at least 12 months, relying on operating cash flow, bank-loan renewals, possible additional equity, collections and shareholder/affiliate support. By May 6, 2018, it reported collecting $16.4 million of continuing-operation receivables and $5.4 million of EDLC receivables, and using or recovering $2.4 million of continuing-operation supplier advances. It expected remaining supplier advances to be collected or utilized in 2018 and EV rebate receivables to be collected in 2019.
- Management said EV operations were not yet generating net income. It planned to reduce costs and consider higher prices or less subsidy-dependent products. The filing gives no quantified revenue or earnings guidance for 2018; it states an expected 2018 R&D investment of approximately $1 million.
- In January 2018, the company acquired an indirect 18% interest in a marble-mining business for about $18.4 million, paid in full by March 2018. The mine’s permit was then due to expire in May 2019, subject to renewal conditions. The investment is non-controlling and brings mining, permitting, environmental, operational and funding risks.
- Two customers represented approximately 47% of total sales in 2017, and one customer represented about 43% of year-end receivables. Three suppliers accounted for more than 61% of purchases.
- The company reported that disclosure controls and internal control over financial reporting were ineffective at December 31, 2017. Management identified material weaknesses involving U.S. GAAP and SEC-reporting expertise; these weaknesses had also existed in 2016 and were not fully remediated. The auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
- Other material exposures include an $8.77 million guarantee of Forasen Group debt secured by company property; slow collections and rebate processing; customer and supplier concentration; PRC currency and remittance restrictions; EV subsidy and approval dependence; and foreign-exchange exposure. The filing says the company does not hedge currency risk and maintains limited insurance.
Investor verification priorities
- Verify subsequent collection of receivables and recovery or use of supplier advances, especially aged balances and amounts involving related parties.
- Confirm the timing and collectability of the $9.27 million EV rebate receivable and the assumptions supporting revenue recognition for rebates.
- Review near-term maturities, renewals and collateral for bank loans and acceptance notes, and assess the $8.77 million related-party guarantee and pledged property.
- Assess EV profitability, customer concentration, order pipeline, government approvals and subsidy-policy exposure, as well as the effect of the 70% ownership structure and VIE arrangements.
- Review the EDLC disposal’s long-term payment terms, collectability, related-party safeguards and the remaining supplier-advance reserve.
- Confirm the mining acquisition’s final economics, permit renewal status, funding needs and the company’s limited ability to influence the investee.
- Track remediation of the disclosed material weaknesses and the effectiveness of controls over accounting, SEC reporting, receivables and related-party transactions.