Business Context and Reporting Period
Company: Tantech Holdings Ltd (Foreign Private Issuer)
Filing Type: Form 6-K (Current Report)
Reporting Period: Six months ended June 30, 2016 (Interim Unaudited)
Filing Date: December 22, 2016
Business Overview: Tantech is engaged in the research, development, production, and distribution of bamboo products, including charcoal, biofuel energy products, and consumer goods. Operations are primarily located in the People's Republic of China (PRC).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Revenues | $22,788,505 | $30,394,676 |
| Gross Profit | $5,999,708 | $9,768,750 |
| Gross Margin | 26.3% | 32.1% |
| Net Income | $1,660,214 | $5,168,791 |
| Net Income Attributable to Common Stockholders | $1,533,160 | $4,880,024 |
| Earnings Per Share (Basic & Diluted) | $0.07 | $0.23 |
| Cash and Cash Equivalents (End of Period) | $4,689,811 | $9,990,983 |
| Total Assets | $96,231,463 | $87,074,992 |
| Total Current Liabilities | $15,297,711 | $13,985,507 |
| Short-term Bank Loans | $8,503,476 | $8,444,680 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased by approximately 25% ($7.6 million) compared to the prior year, driven primarily by a significant drop in the Trading segment (down from $3.3M to $0.2M) and the Biofuel Energy segment (down from $6.0M to $3.8M).
- Profitability Compression: Net income attributable to common stockholders fell by 68.6% to $1.53 million. Gross margin contracted from 32.1% to 26.3%.
- Cash Flow Deterioration: Net cash provided by operating activities swung from a positive $3.0 million in 2015 to a negative $8.9 million in 2016. This was largely due to a $15.3 million increase in advances to suppliers.
- Balance Sheet Shifts: Total assets increased by $9.2 million, primarily due to a new long-term advance to a supplier ($9.0 million) and deposits for business acquisitions ($10.8 million). Cash reserves decreased by $1.6 million.
- Foreign Currency Impact: A foreign currency translation loss of $1.77 million significantly reduced comprehensive income, contrasting with a gain of $0.4 million in the prior period.
Guidance, Outlook, and Risks
Management Commentary and Transactions:
- Acquisition Activity: The Company is in the process of acquiring Suzhou E-Motors Co., Limited (electric vehicles and power batteries). As of June 30, 2016, the Company paid approximately $10.8 million in cash and issued 2.5 million restricted shares to lock in the deal. Closing is expected in Q1 2017.
- Supplier Financing: Entered a long-term supply agreement with Zhejiang Longquanzhixin Commercial & Trade Co., Ltd., involving a $9.0 million advance to secure bamboo forest rights and raw material supply for three years.
- Capital Raise: Issued 1.69 million shares in a private placement in March 2016, raising approximately $7.96 million.
Risks and Contingencies:
- Concentration Risk: Two major customers accounted for 27% of sales in the first half of 2016. One customer held 26% of accounts receivable.
- Regulatory and Political Risk: Operations are subject to PRC political, economic, and legal environments, including currency conversion restrictions and tax policy changes.
- Insurance: The Company lacks business interruption and product liability insurance, exposing investors to potential uninsured losses.
- Accounting Standards: The Company is evaluating the impact of several new FASB accounting updates (ASU 2016-09, 2016-10, 2016-12, 2016-15, 2016-16, 2016-17) effective in 2017 or 2018.
Investor Verification Checklist
- Acquisition Status: Verify the final terms and closing status of the Suzhou E-Motors acquisition, including the final equity percentage and total consideration.
- Supplier Advances: Assess the recoverability of the $29.4 million total advances to suppliers (current and long-term), particularly the new $9.0 million long-term advance.
- Operating Cash Flow: Investigate the causes of the $12 million swing in operating cash flow from positive to negative and the sustainability of the current working capital strategy.
- Revenue Concentration: Monitor the stability of the top two customers who represent over a quarter of total revenue.
- Foreign Exchange Exposure: Evaluate the impact of RMB volatility on future earnings, given the significant translation loss recorded in the current period.