Tantech Holdings Ltd. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; filed June 30, 2020. This is an annual report, not a standalone Q4 filing. Financial statements are prepared under U.S. GAAP and audited by Prager Metis CPAs, LLC, which gave an unqualified opinion on the 2018–2019 statements. The auditor did not express an opinion on 2017 as a whole.
Business context
Tantech is a British Virgin Islands holding company with substantially all operations in China. Its businesses include bamboo-charcoal household and consumer products, charcoal trading, specialty electric vehicles (EVs), and minority investments in mining companies. Consumer products generated 93% of 2019 revenue. The company owns 70% of its EV subsidiary, Shangchi Automobile, with part of its control exercised through VIE contractual arrangements. It also holds indirect 18% interests in marble and basalt mining ventures, subject to subsequent dilution noted below.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $49.23 million | $29.56 million |
| Gross profit / margin | $5.98 million / 12.1% | $8.03 million / 27.2% |
| Operating income (loss) | ($8.91 million) | $2.35 million |
| Net income (loss), including discontinued operations | ($9.96 million) | $1.08 million |
| Net income (loss) attributable to common shareholders | ($6.36 million); EPS ($0.22) | $1.98 million; EPS $0.07 |
| Cash provided by operating activities | $14.70 million | $14.66 million |
Revenue rose 66.5%, but cost of revenue increased faster, up 100.9%, and gross margin contracted sharply. Consumer-product revenue more than doubled to $45.82 million as Tantech cut selling prices to increase volume; the segment’s gross margin fell to 12.4% from 35.9%. Trading revenue declined 10.5% to $3.38 million, while its gross margin improved to 32.8% from 12.9%. EV revenue was only about $30,000, primarily commission income, versus $3.40 million in 2018; EV production was paused. A $8.48 million goodwill impairment and $1.10 million impairment of EV licenses and permits drove the operating loss. Discontinued operations generated a $0.30 million net loss, including a $0.57 million disposal loss.
Operating cash flow remained positive despite the net loss, supported by noncash charges, customer deposits, collections and cash flows from discontinued operations. It included $9.58 million of goodwill and intangible-asset impairment adjustments and $4.63 million of cash from discontinued operations; accounts receivable increased by $9.88 million. Cash flow therefore merits review alongside underlying collections and recurring operations.
Financial position and liquidity
- At December 31, 2019, total assets were $115.45 million, total liabilities $20.92 million, and equity $94.53 million. Working capital was $49.03 million and the current ratio was 3.6, versus 3.2 in 2018.
- Cash and cash equivalents were $12.44 million, with $0.21 million restricted cash. Current assets were $68.16 million and current liabilities $19.13 million.
- Net accounts receivable was $39.35 million after a $5.73 million allowance; receivables equaled 269 days of sales. The company reported collecting $13.0 million, or 29% of year-end continuing-business receivables, through June 23, 2020.
- Net advances to suppliers were $13.08 million, after a $1.52 million allowance. The company cited supplier prepayments and receivables as important to liquidity.
- Short-term bank loans were $6.86 million and bank acceptance notes payable were $0.21 million. Loans were secured by property; the filing says the 2019 loans were repaid at maturity and renewed in 2020. Contractual obligations totaled $8.98 million, including $1.63 million due to related parties and $0.29 million due to third parties.
- Investing cash outflow was $5.93 million, principally the $6.71 million payment for the basalt-mining investment. Financing cash outflow was $5.46 million. Capital expenditures were reported as approximately $6.8 million.
Material changes, outlook and risks
- Strategy and segment changes: Tantech sold Tantech Energy in July 2019, following earlier closures of other businesses, and continued shifting emphasis toward consumer products and EVs. EV production was paused amid stricter subsidy requirements, reduced rebates and delayed collections. The company reported $7.75 million of outstanding government manufacturing rebate receivables at year-end, largely relating to prior-year vehicle sales.
- COVID-19: Manufacturing was temporarily suspended from late January to mid-February 2020 and operations were fully resumed from March 23, according to the filing. Management estimated consumer-product revenue for January–May 2020 could be about 20% lower year over year, while trading sales increased with demand for bamboo charcoal used in purification and sanitation. The filing warns that further disruption and a second wave could materially affect results. These are estimates, not full-year guidance.
- Liquidity outlook: Management expected operating cash flow, bank-loan renewals, possible equity financing and support pledged by the principal shareholder and affiliates to cover at least the next 12 months from the report date. This outlook depends in part on collecting receivables, realizing supplier advances and receiving government rebates; the company said it might otherwise rely more heavily on borrowing or related-party support.
- Mining permit and investment: Fuquan Chengwang’s mining permit had expired in May 2019. COVID-related delay affected renewal; Tantech was negotiating to extend the renewal deadline from June 30 to December 31, 2020. A third-party investment in April 2020 diluted Tantech’s indirect interest in Fuquan Chengwang from 18% to 14.76%.
- Guarantees and contingencies: Tantech disclosed guarantees secured by company property for related-party borrowing, including a Forasen Group credit line of approximately $8.2 million with a stated expiry of July 2020 and a Forasen Food loan of approximately $1.4 million due in 2022. It also jointly guaranteed a share-purchase payment obligation with approximately RMB57.94 million unpaid at year-end; a related party provided a backstop guarantee in June 2020, which management believed reduced but did not eliminate the risk.
- Concentration and operating risks: Six customers each represented approximately 12%–19% of 2019 sales, and three suppliers together represented 76% of purchases. About 90% of sales were through distributors. Other material exposures include China regulatory and currency risks, dependence on bamboo-charcoal supply, EV subsidy and approval uncertainty, VIE enforceability, and limited control over minority mining investments.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2019. The stated material weaknesses included insufficient U.S. GAAP and SEC-reporting expertise among accounting staff and audit adjustments; weaknesses from 2018 had not been fully remediated. The auditor did not provide an ICFR effectiveness opinion.
Most important facts for investors to verify
- Whether the $39.35 million net receivable balance and $13.08 million supplier advances were subsequently collected or converted into goods, and how much of the stated $13.0 million receivable collection was realized.
- Collection timing and recoverability of the $7.75 million government rebate receivable, and the effect of subsidy rules on any resumption of EV production.
- Whether the basalt-mining permit was renewed, whether the investment deadline amendment was executed, and the status of the marble and basalt investments and related dilution.
- The complete current status and maximum exposure under property-backed related-party guarantees and the share-purchase guarantee, including whether the third-party payment and related-party backstop were fulfilled.
- Whether internal-control weaknesses were remediated, and whether subsequent reporting confirms cash-flow quality, customer concentration and the effects of COVID-19.