UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 20-F
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2019
☐
☐
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report __________
OR
Commission file number 001-36885
TANTECH HOLDINGS LTD
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s Name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
c/o Tantech Holdings (Lishui) Co., Ltd.
No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City,
Zhejiang Province 323000, People’s
Republic of China
(Address of principal executive offices)
Mr. Weilin Zhang
c/o Tantech Holdings (Lishui) Co., Ltd., No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province 323000, People’s Republic
of China
Tel: +86-578-226-2305
Fax: +86-578-226-2360
Email: tantech@tantech.cn
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Common shares
Trading Symbol
TANH
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Common Shares
(Title of Class)
The number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report was:
28,853,242
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth
company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ☒
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
Other ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 15T.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
TABLE OF CONTENTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING.
ADDITIONAL INFORMATION.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
CONTROLS AND PROCEDURES.
CONTROLS AND PROCEDURES.
[RESERVED]
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
CORPORATE GOVERNANCE.
MINE SAFETY DISCLOSURE
FINANCIAL STATEMENTS.
FINANCIAL STATEMENTS.
EXHIBITS.
2
3
3
3
3
32
72
73
93
105
108
108
109
116
116
117
117
117
117
120
120
120
120
120
121
121
121
121
121
122
122
122
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Special Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements. All statements contained in this annual report other than statements of historical fact,
including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future
operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar
expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and
projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-
term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and
assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New
risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements
we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this annual report may not occur and actual
results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking
statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the
date of this annual report or to conform these statements to actual results or revised expectations.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable for annual reports on Form 20-F.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable for annual reports on Form 20-F.
ITEM 3. KEY INFORMATION
A.
Selected financial data.
In the table below, we provide you with historical selected financial data for the fiscal years ended December 31, 2019, 2018, 2017, 2016 and 2015.
The information is derived from our consolidated financial statements included elsewhere in this annual report and previous annual report filed. Historical
results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is
important that you read it along with the historical financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”
included elsewhere in this annual report. Our audited consolidated financial statements are prepared and presented in accordance with Generally Accepted
Accounting Principles in the United States of America, or U.S. GAAP.
3
(All amounts in thousands of U.S. dollars)
Statement of operations data:
Revenues
Gross profit
Operating expenses
Income from operations
Income from continuing operations before income taxes
Provision for Income taxes
Net income from continuing operations
Net income (loss) from discontinued operations
Net income
Net income (loss) attributable to the non-controlling interest
Net income attributable to common stockholders
Earnings from continuing operations per share
Earnings (loss) from discontinued operations per share
Balance sheet data:
Working capital
Current assets
Total assets
Current liabilities
Total liabilities
Total equity
$
$
For the year ended December 31,
2019
2018
2017
2016
49,230 $
5,977
14,886
(8,909)
(9,295)
364
(9,659)
(299)
(9,958)
(3,602)
(6,356) $
(0.21)
(0.01)
29,561 $
8,029
5,679
2,350
2,028
1,031
997
83
1,080
(897)
1,977 $
0.07
0.00
42,298 $
10,556
5,984
4,572
4,476
1,528
2,948
65
3,013
(754)
3,767 $
0.15
0.00
39,902
13,023
4,372
8,651
8,333
1,367
6,966
(2,358)
4,608
308
4,299
0.19
(0.10)
2019
2018
As of December 31,
2017
2016
2015
48,159 $
70,314
134,194
22,155
24,208
109,986 $
62,456 $
89,245
138,487
26,789
28,875
109,612 $
49,560 $
63,659
94,303
14,097
14,097
80,206 $
49,697
62,683
87,075
13,986
13,986
73,089
$
$
49,028
68,162
115,451
19,134
20,919
94,532
4
EXCHANGE RATE INFORMATION
Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions
denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the
transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations
as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”, which was subsequently codified within ASC 830, “Foreign Currency Matters”.
The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and
average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’
equity. The relevant exchange rates are listed below:
US$:RMB exchange rate
December 31, 2019
December 31, 2018
December 31, 2017
Period End $
$
Average
0.1436 Period End $
$
0.1448 Average
0.1513 Period End $
$
0.1454 Average
0.1537
0.1478
We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may
be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the
conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.
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The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
Period
2015
2016
2017
2018
2019
2020
January
February
March
April
May
June (until June 22, 2020)
Period-End
Midpoint of Buy and Sell Prices
for U.S. Dollar per RMB
High
Average
Low
6.4917
6.9448
6.5074
6.8776
6.9618
6.9335
6.9909
7.0896
7.0648
7.1363
7.0699
6.2288
6.6441
6.7578
6.6163
6.9081
6.9228
6.9946
7.0245
7.0703
7.1023
7.0643
6.4917
7.0672
6.9535
6.9720
7.1786
6.9718
7.0383
7.0974
7.0942
7.1591
7.1297
6.0933
6.4494
6.4686
6.2660
6.6822
6.8587
6.9934
6.9320
7.0351
7.0612
7.0643
As of June 22, 2020, the exchange rate is RMB 7.0699 to $1.00.
Over the past several years, the Renminbi has moved from a period of strengthening against the dollar to a period of recent weakening against the
dollar. Our primary sales outside China occur in Japan, South Korea, Taiwan, the Middle East and Europe, but all such sales outside China are made in U.S.
dollars.
B.
Capitalization and indebtedness.
Not applicable for annual reports on Form 20-F.
C.
Reasons for the offer and use of proceeds.
Not applicable for annual reports on Form 20-F.
D.
Risk factors.
Risks Related to Our Business and Industry
We face risks related to health epidemics that could impact our sales and operating results.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of
respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases, and other adverse
public health developments, particularly in China, could have a material and adverse effect on our business operations. These could include disruptions or
restrictions on our ability to resume the general shipping agency services, as well as temporary closures of our facilities and ports or the facilities of our
customers and third-party service providers. Any disruption or delay of our customers or third-party service providers would likely impact our operating
results and the ability of the Company to continue as a going concern. In addition, a significant outbreak of contagious diseases in the human population
could result in a widespread health crisis that could adversely affect the economies and financial markets of China and many other countries, resulting in an
economic downturn that could affect demand for our services and significantly impact our operating results.
The coronavirus disease 2019 (COVID-19) has had a significant impact on our operations since January 2020 and could materially adversely affect
our business and financial results for the remaining months of the 2020 fiscal year.
Our ability to manufacture and/or sell our products may be impaired by damage or disruption to our manufacturing, warehousing or distribution
capabilities, or to the capabilities of our suppliers, logistics service providers or distributors as a result of the impact from the COVID-19. This damage or
disruption could result from events or factors that are impossible to predict or are beyond our control, such as raw material scarcity, pandemics, government
shutdowns, disruptions in logistics, supplier capacity constraints, adverse weather conditions, natural disasters, fire, terrorism or other events. In December
2019, COVID-19 emerged in Wuhan, China. In compliance with the government mandates, the Company temporarily closed and its production operations
were halted after the Chinese New Year holiday until late February 2020. After that, it requested that all employees either work remotely or work at
premises in shifts for limited periods of time. It only fully resumed operations since March 23, 2020. The COVID-19 outbreak has had a significant adverse
impact on our business and operations during the first quarter of 2020. While the spread of the disease has gradually been under control in China, COVID-
19 could adversely affect our business and financial results for the remaining months of the year 2020.
Chinese economic downturn or growth slowdown may harm our business.
Since 2014, Chinese economic growth has been slowing down from double-digit GDP speed. The situation has impacted many industries and economic
segments in China, such as restaurants, the hospitality industry, auto industry, and discretionary consumer spending. Our business operations in China
mainly rely on consumer cash availability and spending, consumer demand for our products and consumer confidence, which are impacted by an economic
downturn. The recent rapid spread of COVID-19, or fear of such an event, can have a material adverse effect on the demand for our products and therefore
have a material adverse effect on our business and results of operations. Office closings, travel restrictions and required quarantines implemented in China
has caused significant slowdown of China’s economic growth and could further adversely affect China’s economy resulting in an economic downturn. If
China’s economy continues to slow down or go into recession, our financial and operation results could be materially and adversely affected as a result of
slower consumer spending on our products or below par performance of the consumer discretionary goods industries.
A weakening of the Chinese economy (and in particular consumer spending) could hurt demand for our products.
Our Charcoal Doctor products are generally considered “household use and decorative items,” meaning that these products are used for beautification
and decoration purposes in addition to purification purposes. For example, consumers tend to purchase charcoal products for their value in absorbing odors
and tend to purchase some of our bamboo charcoal products for these purposes and also for the perceived attractiveness of our products. We seek to design
bamboo charcoal products that our customers want to display throughout their homes.
6
As such, we have relied on consumer spending to drive sales in this product line. In the past, sales have been increased as Chinese consumers have had
more disposable income. Since 2010, China’s GDP growth rate has slowed from more than 10% to less than 7%. If China’s economy continues to slow, or
if customer spending for household items decreases, demand for our charcoal products may be reduced, which would negatively affect sales of our
Charcoal Doctor products.
If we are unable to develop products that meet the demands of our customers, sales of our products could decrease.
As a company that focuses primarily on consumer products in our Charcoal Doctor line of products, and to a lesser extent electric vehicles and mining,
we rely on our ability to predict the needs and desires of customers several months before fulfilling orders for stores. If we are unable to accurately forecast
our customers’ preferences, we may lose market share to our competitors.
Our two largest competitors are significantly larger than our company.
Although our company is one of the largest providers of bamboo charcoal-based products of their kind, we compete with companies that make
products that have equivalent function but that are not bamboo charcoal-based, and some of these competitors are much larger than we are. Charcoal
Doctor’s two largest such competitors are Guangzhou Blue Moon Industry Co., Ltd, which makes Blue Moon branded products (“Blue Moon”), and
Shanghai SC Johnson Wax Co., Ltd, which makes Mr. Muscle branded products (“Mr. Muscle”). Blue Moon and Mr. Muscle are substantially larger than
Charcoal Doctor. We believe that they have a much greater customer recognition level than Charcoal Doctor. Charcoal Doctor has not historically spent
substantial resources on television or print advertising. As a result, we expect that such competitors are likely to continue efforts to improve their brand
recognition, while we may be unable to do so without changing our business plan to increase spending on such advertisements.
As a charcoal-based provider of household products, we are subject to supply risks that some of our competitors do not face.
Some of our largest competitors in the provision of household products such as our bamboo vinegar products rely on chemical solutions, rather than
charcoal and derivatives of charcoal, to create their products. As a result, we do not believe they are subject to business risk in the event bamboo or wood
charcoal supplies are compromised. On the other hand, if we were unable to procure bamboo or wood charcoal products or unable to procure them on
attractive terms, our product line could become substantially more expensive or our growth rate could be limited, resulting in us becoming less competitive
than others in our industry.
In summer 2012, we faced a supply shortage based on local government initiatives to reduce the risk of fire caused by charcoal. As a result, the local
government in Daxing Anlin, where one of our main suppliers of wood-based OEM BBQ charcoal is located, restricted the production of charcoal during
June, July and August 2012. At that time, our stock of OEM BBQ charcoal was insufficient to avoid demand pressures. As a result, our revenues declined
during this period. If local governments similarly reduce production of charcoal in the future, we could be negatively impacted by the lack of supply, either
as to our ability to obtain suitable product or by our ability to obtain such product at a reasonable price.
We lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a more
diversified company.
Our primary business activities focus on bamboo-related products. Because our focus is limited in this way, any risk affecting the bamboo industry or
consumers’ desire for bamboo- and bamboo charcoal-related products could disproportionately affect our business. Though we are broadening our business
focus to electric vehicles and an investment in mining, our lack of product and business diversification at this time could inhibit the opportunities for
growth of our business, revenues and profits.
7
Our suppliers’ bamboo is subject to risks related to fire, flooding, disease and pests.
While bamboo is considered a relatively hardy plant, it remains a plant that can be burned in fires or damaged by prolonged flooding or exposure to
diseases, fungus and pests. If our suppliers’ bamboo resources were affected by such natural risks, it could be more difficult or expensive to source the
bamboo charcoal for our products.
Increases in bamboo charcoal costs may negatively affect our operating results.
While bamboo is a renewable resource (and thus bamboo products like bamboo charcoal may be considered renewable), the price of raw materials may
be inelastic when we wish to purchase supplies. While we have attempted to mitigate this risk by taking advantage of decreases in other expenses (due to
better transportation infrastructure reducing the cost of bringing materials to our company and from our company to our customers) and improving
efficiency, we cannot guarantee that we will be able to control our material expenses. In addition, as we are competing based upon low price, we will risk
losing customers by increasing our selling prices. To the extent our expenses increase beyond the price we can charge our customers, our operating results
could be harmed.
We face competition from smaller competitors that may be able to provide similar charcoal briquette products at lower prices.
Our charcoal briquette products are valued primarily for their ability to burn and create heat. As result, our competitors in this line of business do not
require the same high technology as our competitors for our Charcoal Doctor products. For this reason, our charcoal briquette business is subject to
competition from a variety of small producers, which may be able to provide similar product for a much lower price. To the extent our customers
discriminate based on price, we may find that we lose market share to such producers. Moreover, we may be required to reduce our price in order to
maintain or slow loss of market share for such products. As charcoal briquette products make up a substantial percentage of revenues, even at a lower profit
margin, the reduction of sales of such products could hurt our company.
Our future growth of our electric vehicle (EV) segment is dependent upon consumers’ willingness to adopt EVs.
Our growth is highly dependent upon the adoption by consumers of, and we are subject to a risk of any reduced demand for, alternative fuel vehicles in
general and electric vehicles (EVs) in particular. The market for alternative fuel vehicles (including EVs) is relatively new and rapidly evolving,
characterized by rapidly changing technologies, price competition, evolving government regulation and industry standards both domestically and abroad,
frequent new vehicle announcements and changing consumer demands and behaviors. If the market for EVs in China does not develop as we expect or
develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed.
Our high concentration of EVs sales to relatively few customers may result in significant impact on our liquidity, business, results of operations and
financial condition.
For the years ended December 31, 2019, 2018 and 2017, major customers (above 10% of the total revenue), in the aggregate, accounted for 0% (No
EV sales in 2019), 100% and 88%, respectively, of EV sales for Shangchi Automobile Co., Ltd. (“Shangchi Automobile”), formerly known as Suzhou E-
Motors Co., Ltd. (“Suzhou E-Motors”). Mainly due to the concentration of sales to relatively few customers, loss of one or more of these customers will
have relatively high impact on our operational results. We expect this trend to continue for the foreseeable future. In the event there is an unfavorable
change in our business relationship with our significant customers, it could have a material adverse effect on our business and financial results.
Our specialty-used EVs Models are highly dependent on the approvals from Ministry of Industry and Information Technology of the People's Republic
China (MIIT). A failure to obtain approval quickly or at all might cause significant delays in production and sales, results of operations and financial
conditions.
Each year, we submit certain EV models’ application to the Ministry of Industry and Information Technology of the People's Republic China (MITT).
The MIIT’s approval of our application is the key for us to produce and sell any related EV products. Any delays or rejections in our applications will have
significant negative impact on our Shangchi Automobile’s operations and financial conditions.
8
Our EVs make use of lithium-ion battery cells, which have the potential to catch fire or vent smoke and flame. This may lead to additional concerns
about batteries used in automotive applications.
The battery packs in our EV products make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by
venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. Extremely rare incidents of laptop computers, cell
phones and EV battery packs catching fire have focused consumer attention on the safety of these lithium-ion cells. These events have raised concerns
about batteries used in automotive applications. To address these questions and concerns, a number of battery cell manufacturers are pursuing alternative
lithium-ion battery cell chemistries to improve safety. We may have to recall our vehicles or participate in a recall of a vehicle that contains our battery
packs, or redesign our battery packs, which would be time consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-
ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other fire, even if such incident does not involve
us, could seriously harm our business.
Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and
potentially significant monetary damages and fines.
Our various business operations generate noise, waste water, gaseous byproduct and other industrial waste. We are required to comply with all national
and local regulations regarding the protection of the environment. We are in compliance with current environmental protection requirements and have all
necessary environmental permits to conduct our business. However, if more stringent regulations are adopted in the future, the costs of compliance with
these new regulations could be substantial. Additionally, if we fail to comply with present or future environmental regulations, we may be required to pay
substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to adequately restrict the unauthorized discharge of,
hazardous substances could subject us to potentially significant monetary damages and fines or suspensions to our business operations. Certain laws,
ordinances and regulations could limit our ability to develop, use, or sell our products.
Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our EV
Products.
Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the
fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate.
Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our
development and introduction of new and enhanced EV products, which could result in the loss of competitiveness of our vehicles, decreased revenue and a
loss of market share to competitors.
If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.
We may be unable to keep up with changes in EV technology, and we may suffer a resulting decline in our competitive position. Any failure to keep up
with advances in EV technology would result in a decline in our competitive position which would materially and adversely affect our business, prospects,
operating results and financial condition. Our research and development efforts may not be sufficient to adapt to changes in EV technology. As
technologies change, we plan to upgrade or adapt the vehicles and introduce new models in order to continue to provide vehicles with the latest technology,
in particular battery cell technology. However, our vehicles may not compete effectively with alternative vehicles if we are not able to source and integrate
the latest technology into our vehicles. For example, we do not manufacture battery cells, which makes us dependent upon other suppliers of battery cell
technology for our battery packs.
9
Changes to the Chinese government’s subsidy/rebate support policies and further delays in subsidy/rebate payments may have further negative impacts
on our EV segment.
The Company sells electric vehicles in China and is eligible for a government manufacturing rebate on each qualifying electric vehicle sold. The
Chinese central government subsidy support policies, or rebate policies, have been changing every year. The policy changes have caused certain
uncertainties and negative impacts on our EV operations and may cause further negative impacts on our EV segment. For example, the Chinese central
government subsidy support policies effective as of January 1, 2017, called for a 20% of reduction in central government subsidies per electric car in 2017
from its 2016 level and the total local government subsidy matched to be not more than 50% of the total central government subsidies per electric car. The
reduction of subsidies from both the central government and local governments inevitably increased the costs to the consumers to purchase our EVs, which
caused temporary pressure for us to expand our EV sales. The change in subsidy payment methods in 2017 from paid-in-advance to paid post-sale and
further delay in releasing subsidy payments for the EVs manufactured and sold in the prior years also caused the potential delay in collection of the
accounts receivable from our business partners, which temporarily increased the pressure on our working capital for continuing operations. Since 2018, the
rebate policies required all the EVs manufactured since 2016 to install the national platform so the government could monitor the mileage and other
information. Accordingly, we installed the platform on our EVs manufactured since 2016. Since 2019, the rebate policies required the battery capacity
attenuation can’t exceed 20%. Accordingly, we plan to inspect the batteries of our EVs. In addition, We decided to pause EV productions as our costs
would not be covered when we are not able to receive the government rebates to EV manufacturers timely because of the much stricter new government
rebate policy issued in 2019.
The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business, financial
condition, operating results and prospects.
We do not own 100% of our electric vehicle subsidiary, and we are a minority investor in Libo Haokun and Fuquan Chengwang, our recent mining
investments.
We only own 70% of Shangchi Automobile. Zhangjiagang Jinke Chuangtou Co., Ltd. (“Jinke”) holds the remaining 30% equity interest in Shangchi
Automobile and has significant influence on its operation. The potential for differences between us and Jinke may result in ineffective operation of
Shangchi Automobile and our operating results would be materially negatively affected.
Further, we own an indirect 18% interest in Libo Haokun Stone Co., Ltd. (“Libo Haokun”), a marble mining operating company, and Fuquan
Chengwang Mining Co., Ltd. (“Fuquan Chengwang”), a basalt mining company. As such, we have an inability to control or significantly influence Libo
Haokun’s and Fuquan Chengwang’s management and operations. If we believe that Libo Haokun and Fuquan Chengwang are being managed or operated
ineffectively, we have limited options.
Outstanding bank loans may reduce our available funds.
We have approximately $7.1 million in outstanding bank loans and bank acceptance notes payable as of December 31, 2019. The loans and payables
are held at multiple banks, and we used our land and property as the collateral for the debt. While our land and property are worth more than the total loan
amount and we also have approximately $12.4 million in cash and approximately $68.2 million of current assets available to pay the debt, there can be no
guarantee that we will be able to pay all amounts when due or refinance the amounts on terms that are acceptable to us or at all. If we are unable to make
our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.
While we do not believe they will impact our liquidity, the terms of the debt agreements impose significant operating and financial restrictions on us.
These restrictions could also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us
from engaging in certain transactions, including but not limited to: incurring or guaranteeing additional indebtedness; transferring or selling assets currently
held by us; and transferring ownership interests in certain of our subsidiaries. The failure to comply with any of these covenants could cause a default under
our other debt agreements. Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it on favorable terms, if any.
If the value of our property decreases, we may not be able to refinance our current debt.
All of our current debt is secured by our real and other business property. If the value of our real property decreases, we may find that banks are
unwilling to loan money to us secured by our business property. A drop in property value could also prevent us from being able to refinance that loan when
it becomes due on acceptable terms or at all.
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If our expansions into new businesses are not successful, our future results of operations and growth prospects may be materially and adversely
affected.
On January 27, 2016, we entered into a framework agreement to acquire Suzhou E-Motors which is now known as Shangchi Automobile, a specialty
electric vehicles manufacturer. Pursuant to the Call Option Agreement executed on May 2, 2016, Supplemental Agreement I signed on December 22, 2016
and Supplemental Agreement II signed on July 12, 2017, the Company acquired a 70% equity interest of Shangchi Automobile with total cash
consideration of RMB 103,200,000 (approximately $15.9 million) and a share consideration of 2,500,000 restricted shares of the Company's common
stock.
Our 70% equity interest in Shangchi Automobile comprises a 19% equity interest owned directly through Hangzhou Jiyi Investment Management Co.,
Ltd (“Jiyi”) and a 51% equity interest owned through a series of contractual agreements with the owners of Hangzhou Wangbo Investment Management
Co., Ltd (“Wangbo”). Jiyi is 100% owned through Shanghai Jiamu Investment Management Co., Ltd (“Jiamu”), which is, in turn, wholly owned by
Euroasia International Capital (“Euroasia”), a 100% owned subsidiary of the Company. These agreements include an Exclusive Management Consulting
and Technology Agreement, two Equity Pledge Agreements, two Exclusive Call Option Agreements, two Proxy Agreements and two Powers of Attorney
(collectively, the “VIE Agreements”). Pursuant to the VIE Agreements, Jiamu has the exclusive right to provide to Wangbo consulting services related to
business operations including technical and management consulting services. All the above contractual agreements obligate Jiamu to absorb a majority of
the risk of loss from Wangbo’s activities and entitle Jiamu to receive a majority of their residual returns. In essence, Jiamu has gained effective control over
Wangbo. Therefore, the Company believes that Wangbo should be considered as a Variable Interest Entity (“VIE”) under the Statement of Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation.”
The Company had originally negotiated to acquire 100% of Shangchi Automobile; however, following initial discussions, Shangchi Automobile’s
minority shareholder, Jinke, a local government-led venture capital fund, opted to retain its 30% interest.
We may face competition from existing leading players in this business. If we cannot successfully address the new challenges and compete effectively
against the existing leading players in the new businesses, we may not be able to develop a sufficiently large customer and user base, recover costs incurred
for investing in, developing and marketing new businesses, and eventually achieve profitability from these businesses, and our future results of operations
and growth prospects may be materially and adversely affected.
We face risks and uncertainties associated with our recent investment in mining and processing operations.
In January 2018, we made a purchase of an indirect 18% interest in Libo Haokun, a marble mining operating company. In November 2019, we made a
purchase of an indirect 18% interest in Fuquan Chengwang, a basalt mining company. Libo Haokun’s and Fuquan Chengwang’s mining and processing
operations are subject to a number of operating risks and hazards, some of which are beyond our control. These operating risks and hazards include: (i)
unexpected maintenance or technical problems; (ii) periodic interruptions of its mining operations due to inclement or hazardous weather conditions and
natural disasters; (iii) industrial accidents; (iv) power or fuel supply interruptions; (v) critical equipment failures; and (vi) unusual or unexpected variations
in the quarry and geological or mining conditions, such as instability of the slopes and subsidence of the working areas. These risks and hazards may result
in personal injury, damage to, or destruction of, properties or production facilities, environmental damages, business interruptions and damage to Libo
Haokun’s and Fuquan Chengwang’s business reputation. In addition, the breakdown of machinery and equipment, difficulties or delays in obtaining
replacement machinery and equipment, natural disasters, industrial accidents or other events could temporarily disrupt its operations. Any disruption for a
sustained period to the operations of Libo Haokun’s and Fuquan Chengwang’s quarry or supporting infrastructure, or any change to the natural
environment surrounding its quarry may have a material adverse effect on our investment in Libo Haokun and Fuquan Chengwang.
In addition, Fuquan Chengwang is renewing a government-issued mining permit which expired on May 20, 2019. Previously our investment
agreement states that if Fuquan Chengwang is not able to receive the renewed mining permit by June 30, 2020, we are entitled to be repaid the
consideration within 30 days, there is uncertainty that the obligator will enforce the agreement. Due to COVID-19 pandemic in early 2020, the permit
renewal process has been delayed. Accordingly, we are in the process of negotiating an investment agreement amendment to extend the renewal due date
from June 30, 2020 to December 31, 2020. While we expect the permit can be renewed by October 2020, it is possible that Fuquan Chengwang is not able
finish the renewal process timely.
We may experience increased costs or losses resulting from the hazards and uncertainties associated with mining operations.
The exploration for natural resources and the development and production of mining operations are activities that involve a high level of uncertainty.
These can be difficult to predict and are often affected by risks and hazards outside of our control. These factors include, but are not limited to:
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Industrial accidents, including in connection with the operation of mining transportation equipment and accidents associated with the preparation and
ignition of any blasting operations, milling equipment, conveyor systems and transportation of chemicals, explosions or other materials;
· Environmental hazards, including discharge of metals, concentrates, pollutants or hazardous chemicals;
· Surface or underground fires or floods;
· Unexpected geological formations or conditions (whether in mineral or gaseous form);
· Ground and water conditions;
· Fall-of-ground accidents in underground operations;
· Seismic activity; and
· Other natural phenomena, such as lightning, cyclonic or tropical storms, floods or other inclement weather conditions.
The occurrence of one or more of these events in connection with Libo Haokun’s and Fuquan Chengwang’s exploration activities and development and
production of mining operations may result in the death of, or personal injury to, its employees, other personnel or third parties, the loss of mining
equipment, damage to or destruction of mineral properties or production facilities, monetary losses, deferral or unanticipated fluctuations in production,
environmental damage and potential legal liabilities, all of which may adversely affect Libo Haokun’s, Fuquan Chengwang’s and our reputation, business,
prospects, results of operations and financial position.
Mining companies are increasingly required to consider and provide benefits to the communities and countries in which they operate, and are subject
to extensive environmental, health and safety laws and regulations.
As a result of public concern about the real or perceived detrimental effects of economic globalization and global climate impacts, businesses generally
and corporations in natural resources industries, such as Libo Haokun and Fuquan Chengwang, in particular, face increasing public scrutiny of their
activities. These businesses are under pressure to demonstrate that, as they seek to generate satisfactory returns on investment to shareholders, other
stakeholders, including employees, governments, communities surrounding operations and the countries in which they operate, benefit and will continue to
benefit from their commercial activities. Such pressures tend to be particularly focused on companies whose activities are perceived to have a high impact
on their social and physical environment. The potential consequences of these pressures include reputational damage, legal suits, increasing social
investment obligations and pressure to increase taxes and royalties payable to governments and communities.
In addition, Libo Haokun’s and Fuquan Chengwang’s ability to successfully obtain key permits and approvals to explore for, develop and operate
mines and to successfully operate in communities in China will likely depend on its ability to develop, operate and close mines in a manner that is
consistent with the creation of social and economic benefits in the surrounding communities, which may or may not be required by law. Libo Haokun’s and
Fuquan Chengwang’s ability to obtain permits and approvals and to successfully operate in particular communities may be adversely impacted by real or
perceived detrimental events associated with its activities or those of other mining companies affecting the environment, human health and safety of
communities in which we operate. Delays in obtaining or failure to obtain government permits and approvals may adversely affect Libo Haokun’s, Fuquan
Chengwang’s and our operations, including Libo Haokun’s and Fuquan Chengwang’s ability to explore or develop properties, commence production or
continue operations. Key permits and approvals may be revoked or suspended or may be varied in a manner that adversely affects Libo Haokun’s and
Fuquan Chengwang’s operations, including our ability to explore or develop properties, commence production or continue operations.
Libo Haokun’s and Fuquan Chengwang’s exploration, development, mining and processing operations are subject to extensive laws and regulations
governing worker health and safety and land use and the protection of the environment, which generally apply to air and water quality, protection of
endangered, protected or other specified species, hazardous waste management and reclamation. Libo Haokun and Fuquan Chengwang have made, and
expects to make in the future, significant expenditures to comply with such laws and regulations. Compliance with these laws and regulations imposes
substantial costs and burdens, and can cause delays in obtaining, or failure to obtain, government permits and approvals which may adversely impact Libo
Haokun’s and Fuquan Chengwang’s closure processes and operations.
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Future changes in applicable laws, regulations, permits and approvals or changes in their enforcement or regulatory interpretation could substantially
increase costs to achieve compliance, lead to the revocation of existing or future exploration or mining rights or otherwise have an adverse impact on Libo
Haokun’s, Fuquan Chengwang’s and our results of operations and financial position. Increased global attention or regulation on consumption of water by
industrial activities, as well as water quality discharge, and on restricting or prohibiting the use of hazardous substances in processing activities could
similarly have an adverse impact on Libo Haokun’s and Fuquan Chengwang’s results of operations and financial position due to increased compliance and
input costs.
Libo Haokun’s and Fuquan Chengwang’s business requires substantial capital investment and it may be unable to raise additional funding on
favorable terms.
The construction and operation of potential future mining projects and various exploration projects will require significant funding. Libo Haokun’s and
Fuquan Chengwang’s operating cash flow and other sources of funding may become insufficient to meet all of these requirements, depending on the timing
and costs of development of these and other projects. As a result, new sources of capital may be needed to meet the funding requirements of these
investments, fund its ongoing business activities and pay dividends. Libo Haokun’s and Fuquan Chengwang’s ability to raise and service significant new
sources of capital will be a function of macroeconomic conditions, future marble prices, its operational performance and its current cash flow and debt
position, among other factors. In the event of lower marble prices, unanticipated operating or financial challenges, or a further dislocation in the financial
markets as experienced in recent years, Libo Haokun’s and Fuquan Chengwang’s ability to pursue new business opportunities, invest in existing and new
projects, fund its ongoing operations, retire or service all of our outstanding debt and pay dividends could be significantly constrained, all of which could
have an adverse effect on our minority investment.
Competition from other natural resource companies may harm Libo Haokun’s and Fuquan Chengwang’s business.
Libo Haokun and Fuquan Chengwang compete with other natural resource companies to attract and retain key executives, skilled labor, contractors
and other employees. They also compete with other natural resource companies for specialized equipment, components and supplies necessary for
exploration and development. They may be unable to continue to attract and retain skilled and experienced employees, or to obtain the services of skilled
personnel and contractors or specialized equipment or supplies.
We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when
needed.
We may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking additional financing
in the immediate future, any additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may
include conditions that would restrict our freedom to operate our business, such as conditions that:
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limit our ability to pay dividends or require us to seek consent for the payment of dividends;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund
capital expenditures, working capital and other general corporate purposes; and
limit our flexibility in planning for, or reacting to, changes in our business and our industry.
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
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The loss of any of our key customers could reduce our revenues and our profitability.
Our key customers are principally third-party distributors and retail stores in the PRC. For the years ended December 31, 2019, six major customers
accounted for approximately 19%, 19%, 18%, 17%, 13% and 12% of the Company’s total sales, respectively. There can be no assurance that we will
maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all. Any
failure to pay by these customers could have a material negative effect on our company’s business. In addition, having a relatively small number of
customers may cause our quarterly results to be inconsistent, depending upon when these customers pay for outstanding invoices.
If we cannot maintain long-term relationships with these major customers, the loss of our sales to them could have an adverse effect on our business,
financial condition and results of operations.
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We rely on third-party distributors for a substantial portion of our sales, which could affect our ability to efficiently and profitably distribute and market
our products, maintain our existing markets and expand our business into other geographic markets.
Sales of our products through distributors constituted approximately 90%, 92% and 76% of our total sales in 2019, 2018 and 2017, respectively. To the
extent our distributors are distracted from selling our products or do not expend sufficient efforts in managing and selling our products, our sales will be
adversely affected. Our ability to maintain our distribution network and attract additional distributors will depend on a number of factors. Some of these
factors include: (i) the level of demand for our brand and products in a particular market; (ii) our ability to maintain current distribution relationships or
establish and maintain successful relationships with distributors in new geographic areas. These factors are partially outside our control because consumers
ultimately determine what they purchase and we cannot control the actions of our distributors. Our inability to achieve any of these factors in a geographic
distribution area will have a material adverse effect on our relationships with our third party distributors in that particular geographic area, thus limiting our
ability to maintain and expand our market, which will likely adversely affect our revenues and financial results.
We buy our supplies from a relatively limited number of suppliers, and disruption in supply may increase our production cost.
For the years ended December 31, 2019, 2018 and 2017, three major suppliers accounted for approximately 76%, 72% and 61% of the Company’s
total purchases, respectively.
The loss of any such suppliers could result in increased expenses for our company and result in adverse impact on our business, financial condition and
results of operations.
Our bank accounts are not insured or protected against loss.
We maintain our cash with various banks located in the PRC. Our cash accounts are not insured or otherwise protected. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that
particular bank or trust company.
We are subject to risks relating to the banking facilities we use to overcome cash flow issues.
We generate a large proportion of our sales revenue through wholesale channels and distribution networks (supermarkets and chain stores) requiring us
to extend net-90 day payment terms in most cases. These payment terms are difficult to negotiate given the significant bargaining power of the
counterparties to the agreements. For this reason, we rely on banking facilities to overcome cash flow shortfalls between delivery and payment collection.
Although we engage third-party debt collection agencies when required to manage counterparty risk, we cannot guarantee that we will receive payment in a
timely fashion from our customers. To the extent we fail to receive payment in time to service our banking facilities, our business to be materially
impacted.
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We are substantially dependent upon our senior management and key research and development personnel.
We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the
development of new products and the enhancement of our existing products and technologies. In particular, we rely on our CEO, Mr. Wangfeng Yan to
manage our operations to some extent. Mr. Yan has been involved in the bamboo charcoal industry by working at our subsidiaries for almost ten years. Due
to his experience in the industry in general and our company in particular for such a long period of time, he would be difficult to replace.
While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key man life insurance on any of our
senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for
senior management and our other key personnel is intense, and the pool of suitable candidates is limited. We may be unable to quickly locate a suitable
replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a
competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of
our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with
his employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any
member of our senior management or key personnel.
We compete for qualified personnel with other technology companies and research institutions. Intense competition for these personnel could cause our
compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business
will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable
to attract and retain qualified employees, we may be unable to meet our business and financial goals.
We are heavily dependent upon the services of experienced personnel who possess skills that are valuable in our industry, and we may have to actively
compete for their services.
We are heavily dependent upon our ability to attract, retain and motivate skilled personnel to serve our customers. Many of our personnel possess skills
that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some
of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially
dependent upon our ability to locate, hire, train and retain our personnel. Moreover, our pool of available labor in Lishui is limited, as Lishui is a relatively
small city in China. Accordingly, it may be difficult to recruit personnel to move to Lishui to work and to keep talented individuals from moving to other
employers who recruit them. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate
other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be
materially impaired.
Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our
business and prospects.
Our growth strategy includes building our brand, increasing market penetration of our existing products, developing new products, increasing our
targeting of the home respiratory market in China, and increasing our exports. Pursuing these strategies has resulted in, and will continue to result in
substantial demands on management resources. In particular, the management of our growth will require, among other things:
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continued enhancement of our research and development capabilities;
information technology system enhancement;
stringent cost controls and sufficient liquidity;
strengthening of financial and management controls and information technology systems; and
increased marketing, sales and support activities; and hiring and training of new personnel.
If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
We have not yet implemented advanced logistical management techniques, which may hamper our efficiency and growth.
We have not yet implemented digital logistic management solutions and have not applied any advanced management techniques, such as enterprise
resource planning or any structured logistical system and procedures, which may result in a loss of efficiency and require investment at a later stage. We
have not yet committed to implement such systems and cannot guarantee that we will do so in the near future. To the extent we do not implement such
techniques in a timely or efficient manner, we may be at a competitive disadvantage to those of our competitors who do.
Our business may be negatively affected by adverse publicity.
Failure or perceived failure by us to comply with legal, regulatory and compliance requirements could result in adverse publicity. In September 2015,
we were subject to significant negative publicity resulting from reports published by a short seller of our shares. This negative publicity resulted in
significant volatility in the trading price of our shares. Such adverse publicity could result in reputational harm, lead to increased regulatory supervision,
affect our ability to attract and retain customers, affect our ability to attract and retain key personnel, affect our ability to maintain access to the capital
markets, or have other material adverse effects on us in ways that are not predictable.
Our business may be negatively affected by low share prices in the stock market.
The trading price of our shares has been declined over the past year. And we encountered an over 90% decline in market value since 2015. The
continued decline in our share price could continue to harm investor confidence, affect our ability to retain existing investors, affect our ability to attract
potential investors, affect our ability to maintain access to the capital market, or have other material adverse effects on us in ways that are not predictable.
We may be affected by disruptions to our production facilities.
Our production facilities are subject to breakdown or failure of equipment, power supplies or processes, performance below expected levels of output
or efficiency, obsolescence, labor disputes, natural disasters and the need to comply with relevant regulatory and requirements. From time to time, we may
need to carry out planned shutdowns of our production plants for routine maintenance, statutory inspections and testing and may need to shut down various
plants for capacity expansions and equipment upgrades. Moreover, our production processes are continuously being modified and updated. As a result of
manufacturing process updates and improvements, from time to time, we may experience shutdowns, and disruptions to the operations. The occurrence of
any of the above events may cause us to stop or suspend our production operations and we may not be able to deliver the products to our customers on a
timely basis, which would have an adverse impact on its business, financial position and profitability.
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If we fail to protect our intellectual property rights, it could harm our business and competitive position.
We rely on a combination of patent, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual
property rights. We own thirteen patents in China covering our bamboo charcoal production technology.
The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our
existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may
also be challenged, invalidated or circumvented.
We also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If our
employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our
competitors.
Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and
enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or
other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation
to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation
and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which
could harm our business and competitive position.
We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a
material adverse effect on our financial condition and results of operations.
Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property
rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk of being the subject of
claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors,
many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will
prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States and other
countries in Asia. The validity and scope of claims relating to patents in our industry involve complex scientific, legal and factual questions and analysis
and, as a result, may be highly uncertain. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and
administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management
personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:
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pay damage awards;
seek licenses from third parties;
pay ongoing royalties;
redesign our branded products; or
be restricted by injunctions,
each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or
limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of operations.
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We are dependent on our brand and trademark.
We rely on our “Charcoal Doctor” brand in the marketing and distribution of our products. We believe that we have built significant goodwill in our
brand in terms of the quality of products and services and it is widely recognized by the industry in the PRC. We consider our “Charcoal Doctor” brand to
be vital in promoting product recognition and customer loyalty. Hence, if there are any major defects in our products or adverse publicity on our brand, the
goodwill in our brand will be adversely affected and our customers may lose confidence in our products. This will adversely affect our sales of products,
hence affecting our business and financial performance.
Our charcoal briquette products have relatively low technical requirements; therefore, barriers to entry are minimal.
We expect to face competition for our charcoal briquette products because competitors can create similar products at a relatively low cost because there
are minimal barriers of entry. If competitors enter our market to create similar products they may be able to do so for a much lower price. To the extent our
customers discriminate based on price, we may find that we lose market share to such producers. Moreover, we may be required to reduce our price in
order to maintain or slow loss of market share for such products. As charcoal briquette products make up a substantial percentage of our revenues, even at a
lower profit margin, the reduction of sales of such products could hurt our company.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of
China, which could reduce the demand for our products and materially and adversely affect our competitive position.
Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects
are subject to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government
continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other
government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and
foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant
growth in the past 30 years. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at
stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if
any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy, our
results of operations could be adversely affected as a result.
Labor laws in the PRC may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, which became effective on January 1, 2008. The Labor
Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it
requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor
Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-
effective manner, thus materially and adversely affecting our financial condition and results of operations.
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Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our
profitability.
We may experience barriers to conducting business and trade in our targeted markets, specifically South Korea, Japan and Russia, in the form of
delayed customs clearances, customs duties and tariffs. In addition, we may be subject to substantial taxes on profits, revenues, assets and payroll, as well
as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products,
and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.
Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC stockholders.
China passed the Enterprise Income Tax Law, or the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under
the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto
management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the
enterprise.
On April 22, 2009, the State Administration of Taxation of China, or the SAT, issued the Circular Concerning Relevant Issues Regarding Cognizance
of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the
SAT Notice 82, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or
enterprise group. Pursuant to the SAT Notice 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise
group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform
their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and
properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took effect on September 1,
2011, to provide more guidance on the implementation of SAT Notice 82 and clarify the reporting and filing obligations of such “non-domestically
incorporated resident enterprise.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration
on post-determination matters. On January 29, 2014, the SAT issued Announcement of the State Administration of Taxation on Recognizing Resident
Enterprises Based on the Criteria of de facto Management Bodies, to further clarify the reporting and filing procedure for the offshore entities controlled by
a Chinese enterprise or enterprise group and recognized as a resident enterprise.
Because THL, USCNHK and Euroasia are controlled (although indirectly) by a foreign individual, rather than by a PRC enterprise or a PRC enterprise
group, we do not believe that any of THL,USCNHK or Euroasia is a PRC resident enterprise.
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However, although both SAT Notice 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Notice 82 and SAT Bulletin 45 may reflect
the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises,
regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals. If the PRC tax authorities determine
that THL or USCNHK is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%.
Currently, we do not have any non-China source income, as we complete our sales, including export sales, in China. Second, under the EIT Law and its
implementing rules, dividends paid to us from our PRC subsidiaries would be deemed as “qualified investment income between resident enterprises” and
therefore qualify as “tax-exempt income” pursuant to the clause 26 of the EIT Law. Finally, it is possible that future guidance issued with respect to the new
“resident enterprise” classification could result in a situation in which the dividends we pay with respect to our common stock, or the gain our non-PRC
stockholders may realize from the transfer of our common stock, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC
withholding tax. The EIT Law and its implementing regulations are, however, relatively new and ambiguities exist with respect to the interpretation and
identification of PRC-sourced income, and the application and assessment of withholding taxes. If we are required under the EIT Law and its implementing
regulations to withhold PRC income tax on dividends payable to our non-PRC stockholders, or if non-PRC stockholders are required to pay PRC income
tax on gains on the transfer of their shares of common stock, our business could be negatively impacted and the value of your investment may be materially
reduced. Further, if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries in
which we have taxable income, and our PRC tax may not be creditable against such other taxes.
We may be subject to a significant withholding tax should equity transfers by our non-resident enterprises be determined to have been done without a
reasonable business purpose.
In December 2009, the State Administration of Tax in China issued a circular on strengthening the management of proceeds from equity transfers by
non-resident enterprises and requires foreign entities to report indirect sales of resident enterprises. If the existence of the overseas intermediary holding
company is disregarded due to lack of reasonable business purpose or substance, gains on such sale are subject to PRC withholding tax. Due to limited
guidance and implementation history of the circular, significant judgment is required in determining the existence of a reasonable business purpose by
considering multiple factors, such as the form and substance of the arrangement, time of establishment of the foreign entity, relationship between each step
of the arrangement, relationship between each component of the arrangement, implementation of the arrangement and the changes in the financial position
of all parties involved in the transaction. Although we believe that our transactions during all the periods presented would be determined to have reasonable
business purposes, should this not be the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial
position, results of operations and cash flows.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business.
We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements
with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of
payments by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We are in
process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly,
for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included
in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further
requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities are in accordance with
specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-
corruption law.
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However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of
our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe
criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or
that we acquire.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC
subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to
wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential
value.
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.
However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions
and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is
based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and management attention.
Historically, the principal regulation governing foreign ownership of businesses in the PRC was the Guidance Catalogue for Industrial Structure
Adjustments (the “Catalogue”). The Catalogue classified various industries into three categories: encouraged, restricted and prohibited. The Catalogue has
been replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2018), effective July 28, 2018, and amended and
restated by the 2019 version, effective July 20, 2019 (the “Negative List”). The Negative List specifies the prohibited and non-prohibited (similar to the
restricted in the Guidance Catalogue) industries for foreign investment. For the industries not covered by the Negative List, the foreign investment and the
domestic investment have equal access. Foreign investors may not invest in the prohibited industries specified by the Negative List. For the non-prohibited
industries on the Negative List, a foreign investor must obtain an investment permit. There are certain requirements on the equity ownership and the
executive officers of the foreign invested enterprises. If PRC has certain equity requirements in certain investment fields, no foreign-invested partnership
may be established. For example, pursuant to the latest Negative List, the general automobile industry falls in the prohibited industry and the percentage of
foreign ownership cannot exceed 50% (except for some categories such as electric vehicle which is not prohibited).
According to the Negative List, our charcoal products and electric vehicle products are not prohibited. Therefore, our proportion of the foreign
investment for these products may be up to 100%. However, we may also produce the traditional automobiles which fall in the prohibited industry and are
subject to the abovementioned 50% limit. In addition, we are not sure if the Negative List will change in a way that the foreign investment may be limited
or prohibited in our business.
Another example is the changes to the Chinese government’s subsidy/rebate support policies to EV manufactures. Those changes have happened on
a yearly basis and are at least partially causing delays in in our collection of the accounts receivable.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of
China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend
payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient
foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign
exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions
can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from
appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such
as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.
We are a holding company and we rely for funding on dividend payments from our subsidiaries, which are subject to restrictions under PRC laws.
We are a holding company incorporated in the British Virgin Islands, and we operate our core businesses through our subsidiaries in the PRC.
Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from these
PRC subsidiaries. If our subsidiaries incur debt or losses, their ability to pay dividends or other distributions to us may be impaired. As a result, our ability
to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC
subsidiaries calculated according to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other
jurisdictions. PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory
reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our
subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends to us. These restrictions on the availability of our
funding may impact our ability to pay dividends to our Shareholders and to service our indebtedness.
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Our business may be materially and adversely affected if any of our PRC subsidiaries declare bankruptcy or become subject to a dissolution or
liquidation proceeding.
The Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise
will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to
clear such debts.
Our PRC subsidiaries hold certain assets that are important to our business operations. If any of our PRC subsidiaries undergoes a voluntary or
involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate
our business, which could materially and adversely affect our business, financial condition and results of operations.
According to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange
Administration Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to
Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation
proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct
a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review
process undertaken by SAFE and its relevant branches in the past.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s
political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and
the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount that we receive from the
conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common shares or for other business
purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations
of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products
against products of foreign manufacturers or products relying on foreign inputs.
Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S.
dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate
and lessen intervention in the foreign exchange market.
Our trading business relies heavily on exchange rate fluctuations. We seek to match suppliers and potential purchasers, which may be located in
different geographic areas, and to lock in the exchange rates in order to ensure an appropriate profit margin on such sales. To the extent we are unable to
obtain favorable exchange rates, we may find lower profits or losses than we expect.
We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive income
(loss).” For years ended December 31, 2019, 2018 and 2017, we had adjustments of $(5,494,731), $(949,689) and $4,341,324, respectively, for foreign
currency translations. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions
may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by
PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
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If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of
your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In recent years, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and
negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity
has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance
policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly
traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these
companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the
allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business. If we become
the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to
investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to
be groundless, our company and business operations will be severely hampered and your investment in our stock could be rendered worthless.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to
penalties and limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise
adversely affect us.
On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return
Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1,
2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company
for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC, or an offshore special
purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity
interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other
material change involving a change in the capital of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC
residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are
required to have completed the relevant registration procedures with the local SAFE branch by March 31, 2006.
To further clarify the implementation of Circular 75, the SAFE issued Circular 19 on May 20, 2011. Under Circular 19, PRC subsidiaries of an
offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders
or beneficial owners who are PRC residents in a timely manner. However, on May 11, 2013, Circular 19 was annulled by Circular 21, issued by the SAFE.
Circular 21 has not yet given clear guidance as to how to complete the relevant registration procedures with the local SAFE branch.
While Ms. Yefang Zhang, a citizen of the Saint Lucia, is not required to register with the SAFE, it is not clear, especially with the annulment of
Circular 19 and the absence of replacement guidance, whether Mr. Zhengyu Wang, a PRC resident who presently owns no shares of our company needs to
register with the SAFE. In the event Mr. Zhengyu Wang receives any shares in the future and is a PRC resident at such time, he would be required to
register with the SAFE. We cannot provide any assurances that such registration will be completed in a timely manner, or at all. As advised by our PRC
legal counsel, if any future failure by any of our shareholders who are PRC residents, to comply with relevant requirements under this regulation could
subject such shareholders and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into our
PRC subsidiaries or to provide loans to our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise
adversely affect our business.
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PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds from
the offerings of any securities to make loans or additional capital contributions to our PRC operating subsidiaries.
As an offshore holding company, our ability to make loans or additional capital contributions to our PRC operating subsidiaries is subject to PRC
regulations and approvals. These regulations and approvals may delay or prevent us from using the proceeds we received in the past or will receive in the
future from the offerings of securities to make loans or additional capital contributions to our PRC operating subsidiaries, and impair our ability to fund and
expand our business which may adversely affect our business, financial condition and result of operations.
For example, the SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and
Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or Circular 142, on August 29, 2008. Under Circular 142, registered capital of a
foreign invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable
governmental authority and may not be used for equity investments in the PRC. In addition, foreign invested companies may not change how they use such
capital without the SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans.
Furthermore, the SAFE promulgated a circular on November 9, 2010, or Circular 59, which requires the authenticity of settlement of net proceeds from
offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. In addition, to strengthen
Circular 142, on November 9, 2011, the SAFE promulgated the Circular on Further Clarifying and Regulating Relevant Issues Concerning the
Administration of Foreign Exchange under Capital Account, or Circular 45, which prohibits a foreign invested company from converting its registered
capital in foreign exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying intercompany
loans, and repaying bank loans that have been transferred to a third party. Circular 142, Circular 59 and Circular 45 may significantly limit our ability to
transfer the net proceeds from offerings of our securities or any future offering to our PRC subsidiaries and convert the net proceeds into RMB, which may
adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Risks Related to Our Corporate Structure and Operation
We incur additional costs as a public company, which could negatively impact our net income and liquidity.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-
Oxley and rules and regulations implemented by the SEC and The NASDAQ Capital Market require significantly heightened corporate governance
practices for public companies. We expect that these rules and regulations to increase our legal, accounting and financial compliance costs and make many
corporate activities more time-consuming and costly.
We do not expect to incur materially greater costs as a public company than those incurred by similarly sized U.S. public companies. If we fail to
comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the
market price of our common shares could decline.
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We have guaranteed the bank loan and share repurchase obligation of related parties and share purchase obligation of an unrelated party; if any
such party fails to pay the bank loan or the share purchase obligation, our property may be subject to foreclosure or enforcement.
In March 2019, we provided a guaranty on a line of credit on behalf of a related party, Zhejiang Forasen Food Co., Ltd. (“Forasen Food”). Forasen
Food’s outstanding line of credit of RMB 10 million (approximately $1.4 million) will expire on March 4, 2022.
In connection with this guaranty, we pledged our building and land’s rights as collateral for Forasen Food's loans.
At the time we offered these guarantees, we believed Forasen Food would be able to repay (and would in fact repay) such loans and bank acceptance
notes. Forasen Food, like our Company, is controlled by Ms. Yefang Zhang. For this reason, we are aware that Forasen Food has historically had a strong
credit history with the banks with which it does business.
We also guaranteed the share repurchase obligation of a related party in 2018 and that guaranty has been replaced by a guaranty for the share purchase
obligation of an unrelated party in 2019. In May 2018, our wholly owned subsidiary Zhejiang Tantech Bamboo Technology Co., Ltd. (“Tantech Bamboo”)
signed an agreement with other co-guarantors to jointly and severally guarantee the share repurchase obligation of Forasen Group, in favor of an unrelated
third party. Such third party filed a complaint to claim a payment of RMB 29.50 million against Forasen Group, together with the guarantors on January 9,
2019. On August 30, 2019, the court issued a settlement by which another unrelated third party agreed to purchase the shares from the plaintiff by paying
RMB 90 million, and all the co-guarantors including Tantech Bamboo jointly and severally guarantee the payment obligation regarding the RMB 90
million and other possible fees, for three years from June 30, 2020, the due date of the share purchase payment obligation. The other unrelated third party
has paid RMB 32.06 million and RMB 57.94 million remains unpaid.
Accordingly, in June 2020, Lishui Jiuanju Commercial Trade Co., Ltd. (“LJC”), another related party, issued to Tantech Bamboo an anti-guaranty
guaranty to guarantee Tantech Bamboo’s potential payment obligation, and a bank statement of RMB 70 million. Therefore, our PRC counsel believes
Tantech Bamboo’s legal risk has been relieved to some extent. The company believes that it is more likely than not that LJC will perform its guaranty
obligation and Tantech Bamboo will not need to make the payment.
Entities controlled by our employees, officers and/or directors control a significant percentage of our common shares, decreasing your influence on
shareholder decisions.
Entities controlled by our employees, officers and/or directors, in the aggregate, beneficially own approximately 40.8% of our outstanding shares as of
June 30, 2020. As a result, our employees, officers and directors possess substantial ability to impact our management and affairs and the outcome of
matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert control and substantial influence over
matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power
may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium
for their shares as part of a sale of our company and might reduce the price of our common shares. These actions may be taken even if they are opposed by
our other shareholders. See “Share Ownership.”
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The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.
As a publicly listed company, we are required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters
that are material to our company and shareholders. In some cases, we need to disclose material agreements or results of financial operations that we would
not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential.
This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we are governed by U.S. laws that our
competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or
decreases our competitiveness against such companies, our public listing could affect our results of operations.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not
provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more
difficult for you to evaluate our performance and prospects.
We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are
subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we
are not required to issue quarterly reports or proxy statements. We are not required to disclose detailed individual executive compensation information.
Furthermore, our directors and executive officers are not required to report equity holdings under Section 16 of the Exchange Act and are not subject to the
insider short-swing profit disclosure and recovery regime.
As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that
select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and
anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign
private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the
same time as the information provided by U.S. domestic reporting companies.
Our directors’ and executive officers’ other business activities may pose conflicts of interest.
Our directors and executive officers have other business interests outside the company that could potentially give rise to conflicts of interest. For
example, our Chairman, Zhengyu Wang, and his wife and our director, Yefang Zhang, collectively own all of Forasen Group. The Forasen Group’s primary
business areas are investment, rubber trading, foodstuff production, and financial management. We also have historically engaged in rubber trading.
Although we have significantly reduced our trading in rubber at Tantech to immaterial levels, both businesses were for a time trading similar products. Mr.
Wang and Ms. Zhang work with the Forasen Group’s rubber trading department and other advisors to locate opportunities that meet the Forasen Group’s
investment criteria. As Tantech has significantly reduced its rubber trading activities, they anticipate that any rubber trading opportunities would be
presented to and considered by the Forasen Group rather than by Tantech.
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Yefang Zhang is also the Chairman and Chief Executive Officer of Farmmi, Inc. (“Farmmi”), another Nasdaq listed company, and Zhengyu Wang is a
director of Farmmi. Mr. Wang has historically devoted approximately 15% of his time to matters concerning Farmmi, approximately 15% of his time to
matters for Tantech, and approximately 70% of his time to matters concerning Forasen Group. As Ms. Zhang and Mr. Wang devote considerable time and
efforts to Farmmi and Forasen Group, these sort of business activities could both distract them from focusing on Tantech and pose an issue of time
commitment.
Mr. Wang and Ms. Zhang signed a Non-Competition Agreement with our company and Farmmi which provides that Mr. Wang and Ms. Zhang shall
not vote in favor or otherwise cause our Company to engage in the business that Farmmi conducts. Although, because of these non-competition
agreements, we do not believe that there are business activities of Mr. Wang and Ms. Zhang that will compete directly with our business operations, it is
possible that the enforceability of these agreements may be challenged and a conflict of interest may occur.
In addition, Forasen Group currently occupies approximately 500 square meters of our Tianning Street facility. We have not historically charged
Forasen Group for renting this office space, but plan to do so in the near future. Although we believe we engage in sound corporate governance practices,
there remains the risk that our company may be negatively affected by our directors’ or executive officers’ conflicts of interest.
An insufficient amount of insurance could expose us to significant costs and business disruption.
While we have purchased insurance to cover our certain assets and property of our business, the amounts and scope of coverage could leave our
business inadequately protected from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or
accidents or business interruption, our results of operations could be materially and adversely affected.
Risks Related to Ownership of Our Common Shares
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will
make our common shares less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an
emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that
are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an
emerging growth company for up to five years, although we could lose that status sooner if our revenues reach $1.07 billion, if we issue more than $1
billion in non-convertible debt in a three year period, or if the market value of our common shares held by non-affiliates exceeds $700 million as of any
June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if
investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as
a result, there may be a less active trading market for our common shares and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and,
therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
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If we continue to be unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in
the accuracy and completeness of our financial reports and the market price of our common shares may decline.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal
control. In addition, beginning with this annual report on Form 20-F, we are required to furnish a report by management on the effectiveness of our internal
control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we continue to identify material weaknesses in our internal control
over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over
financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market
price of our common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are
listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management
resources.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the
Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and
regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and
financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly
after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports
with respect to our business and operating results.
As a result of disclosure of information in this annual report and in filings required of a public company, our business and financial condition become
more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful,
our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time
and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results
of operations.
We also expect that being a public company and these rules and regulations make it more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more
difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee,
and qualified executive officers.
The market price of our common shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your
shares at or above the price you paid.
The trading prices for our common shares have fluctuated since we first listed our common shares. Since our common shares became listed on the
NASDAQ on March 24, 2015, the trading price of our common shares has ranged from $0.81 to $33.97 per common share, and the last reported trading
price on June 23, 2020 was $1.14 per common share. The market price of our common shares may fluctuate significantly in response to numerous factors,
many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations of investors;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint
ventures, or capital commitments;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
lawsuits threatened or filed against us; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of
equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating
performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and
adversely affect our business.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any
dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common shares if the market price of our common
shares increases.
We will incur increased costs as a result of being a public company.
As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage
U.S. securities law counsel and U.S. auditors that we did not require as a private company, and we have annual payments for listing on NASDAQ. In
addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, have required changes in corporate
governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and
to make certain corporate activities more time-consuming and costly. In addition, we incur additional costs associated with our public company reporting
requirements. While it is impossible to determine the amounts of such expenses, we expect that we incur expenses of between $500,000 and $1 million per
year that we did not experience as a private company.
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U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S.
shareholders.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or a PFIC,
for any taxable year for which either (i) at least 75% of its gross income consists of certain types of “passive income” or (ii) at least 50% of the average
value of the corporation’s assets produce, or are held for the production of, those types of passive income. For purposes of these tests, passive income
includes rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or
business) and does not include income derived from the performance of services.
If we are treated as a PFIC, U.S. Holders would ordinarily be able to mitigate certain of the negative tax consequences if they are able to make: (i) a
timely qualified electing fund (“QEF”) election; (ii) a protective QEF election; or (iii) a mark to market election with respect to the first taxable year in
which we are considered a PFIC during the U.S. Holder’s holding period in its shares.
We are not committing to provide our U.S. Holders with the information required for making a QEF election or protective QEF election. If we fail to
provide such information, a QEF election with respect to such entity generally will not be available. In such event, the rules described in the next paragraph
generally will apply.
If we are treated as a PFIC, a U.S. Holder that does not make a QEF election generally will be subject to a special tax and an interest charge upon the
sale of its shares or receipt of an “excess distribution” with respect to its shares. A U.S. Holder will be treated as receiving an “excess distribution” if the
amount of the distributions received by the U.S. Holder in any taxable year is more than 125% of the average annual distributions paid by the Company
with respect to its shares during the three preceding taxable years (or the period in which the U.S. Holder held such shares if shorter).
In addition, a portion of any gain recognized by a U.S. Holder upon the sale of our shares may be recharacterized as ordinary income. Further, any
dividends received from the Company, if the Company is treated as a PFIC, will not constitute qualified dividend income and will not be eligible for the
reduced 20% rate of tax even if such rate would be available otherwise. If a U.S. Holder holds our shares during any taxable year in which we are treated as
PFICs, such shares will generally be treated as stock in a PFIC for all subsequent years.
We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against
our company.
Our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and
substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S.,
or to enforce a judgment obtained in the U.S. against us or any of these persons.
In addition, British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may
result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United
States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin
Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S.
securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S.
securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although
the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without
retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses
suffered.
Lastly, under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of
the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the
constituent documents of the corporation, our amended and restated memorandum and articles of association. Shareholders are entitled to have the affairs
of the company conducted in accordance with the general law and the articles and memorandum.
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There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common
law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v.
Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express
dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs
of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have
persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts will
grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized
business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company;
(3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions
requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the
laws of many states in the United States.
ITEM 4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Tantech Bamboo was established in October 2002 under the trading name “Lishui Zhonglin High Tech Co., Ltd.” by its incumbent owner. Following
the establishment of the Forasen Green Energy Group, later renamed Forasen Group Ltd. (“Forasen Group”), in May 2003, 60% of THL’s shares were
acquired by the Forasen Group. A second subsidiary, Zhejiang Tantech Bamboo Charcoal Co., Ltd. (“Tantech Charcoal”), was acquired in September 2006
to manage the Forasen Group’s export business. In September 2008 a third subsidiary, Zhejiang Tantech Energy Technology Co., Ltd. (“Tantech Energy”),
was established to research and develop bamboo charcoals application as a carbon component for EDLCs. On December 14, 2017, the Company entered
into a sale agreement and related agreements to transfer its EDLC carbon business (including intellectual property rights and equipment) to Zhejiang
Apeikesi Energy Co., Ltd. (the “Buyer”), a PRC start-up company controlled by Dr. Zaihua Chen, the Company’s then Chief Technology Officer.
Following the renaming of the Forasen Group to its current name, 95% of Tantech Bamboo’s shares were acquired by USCNHK, a Hong Kong registered
company, in December 2010. In May and December 2016, Tantech Holdings (Lishui) Co., Ltd., formerly Zhejiang Tantech Bamboo Technology Co., Ltd.,
a USCNHK’s wholly owned subsidiary, acquired 100% of Tantech Bamboo’s shares from USCNHK and five individuals.
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Historical Timeline
Below is a brief timeline of key dates in our Company’s history since its formation.
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September 2001: Tantech Charcoal is established.
October 2002: Tantech Bamboo is established as “Lishui Zhonglin High Tech Co., Ltd.” with registered capital of RMB 3.15 million.
April 2003: Lishui Forasen Green Industry Group (the former name of Forasen Group Ltd (“Forasen Group”)) was established.
· May 2003: Forasen Group acquires 60% of Tantech Bamboo.
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December 2005: (1) Tantech Bamboo reorganizes its structure (a) from a limited company to a shareholder company and (b) to increase registered
capital to RMB 21 million, resulting in a decrease of Forasen Group’s interest to 41.24%; (2) Tantech Bamboo is renamed “Zhejiang Tantech
Bamboo Technology Co., Ltd.”; (3) Zhengyu Wang becomes legal representative of Tantech Bamboo.
September 2006: Tantech Bamboo acquires Tantech Charcoal by transferring shares from Forasen Group and natural shareholders to Tantech
Bamboo. As a subsidiary, Tantech Charcoal’s business scope is exporting Forasen Group’s products to a multitude of countries worldwide.
September 2007: Forasen Group’s interest in Tantech Bamboo increases to 44.25%.
January 2008: Tantech Bamboo increases its registered capital to RMB 27 million, decreasing Forasen Group’s interest to 34.41%.
July 2008 through April 2009: Several shareholders of Tantech Bamboo transfer their interests to Forasen Group, increasing its interest in Tantech
Bamboo to 51.45%.
September 2008: Tantech Energy is established and operates as subsidiary of Tantech Bamboo.
October 2008: USCNHK is established as “Raymond & O/B Raysucess Co., Limited”.
October 2009: Forasen Group is renamed “Forasen Group”.
November 2010: THL is established as “Sinoport Enterprises Limited.”
December 2010: (1) USCNHK is renamed “USCNHK Group Limited”; (2) Tantech Bamboo increases its registered capital to RMB 80 million,
increasing Forasen Group’s interest to 95%; (3) Forasen Group transfers all of its interest in Tantech Bamboo to USCNHK.
April 2013: THL is renamed “Tantech Holdings Ltd.”
· March 2015: THL completed an initial public offering of its common shares and listing on the NASDAQ Capital Market.
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April 2015: THL established a subsidiary Euroasia.
July 2015: Euroasia established a subsidiary Jiamu.
December 2015: Hangzhou Tanbo Technology Co., Ltd. was established.
February 2016: Jiamu established a subsidiary Jiyi.
April 2016: USCNHK established a new subsidiary as “Zhejiang Tantech Bamboo Technology Co., Ltd.”
· May 2016: USCNHK transferred 95% of Tantech Bamboo’s shares it owned to Zhejiang Tantech Bamboo Technology Co., Ltd.
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December 2016: Zhejiang Tantech Bamboo Technology Co., Ltd acquired the remaining 5% of Tantech Bamboo’s shares.
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· May 2017: Zhejiang Tantech Bamboo Technology Co., Ltd changes its name to Lishui Tantech Energy Technology Co., Ltd, which in turn
changed its name in July 2017 to Tantech Holdings (Lishui) Co., Ltd.
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On July 12, 2017, the Company acquired a 70% equity interest of Shangchi Automobile, formerly Suzhou E-Motors. The 70% equity interest
comprises a 19% equity interest owned directly through Jiyi and a 51% equity interest owned through a series of contractual agreement with the
owners of Wangbo.
October 2017: Euroasia established a subsidiary Euroasia New Energy Automotive (Jiangsu) Co., Ltd.
On December 14, 2017, the Company entered into a sale agreement and related agreements to transfer its EDLC carbon business (including
intellectual property rights and equipment) to Zhejiang Apeikesi Energy Co., Ltd., a PRC start-up company controlled by Dr. Zaihua Chen, our
former Chief Technology Officer.
On January 10, 2018, the Company signed a share purchase agreement with Shanghai Shicai Minerals Co., Ltd. (“Shanghai Shicai”) to acquire all
of the shares of Lishui Xincai Industrial Co., Ltd. (“Lishui XinCai”), a wholly-owned subsidiary of Shanghai Shicai, at a price of approximately
$18.2 million (or RMB 120 million). Lishui Xincai owns 18% of the equity interests in Libo Haokun, so we indirectly hold a 18% stake in Libo
Haokun.
On October 24, 2018, the Company closed Khorgas Tantech Business Service Co., Ltd. and Khorgas Yabo Software Co., Ltd.
On November 5, 2018, the Company closed Zhejiang Tantech Tourism Development Co., Ltd.
On November 12, 2018, the Company closed Zhejiang Babiku Charcoal Co., Ltd.
On November 13, 2018, the Company established Shenzhen E-Motors New Energy Sales Co., Ltd., a sales subsidiary through Shangchi
Automobile (formerly known as Suzhou E-Motors).
On June 26, 2019, the Company entered a share transfer agreement to sell all of its shares in its wholly-owned subsidiary Tantech Energy to an
unrelated third party.
● On November 29, 2019, the Company signed an investment agreement with Jingning Zhonggang Mining Co., Ltd. (“Jingning Zhonggang”) to
acquire 18% of the equity interest of Fuquan Chengwang, a wholly-owned subsidiary of Jingning Zhonggang, at a price of RMB 46.323 million,
or $6.48 million.
● On December 31, 2019, the Company’s wholly owned subsidiary Tantech Bamboo transferred all of its shares in its wholly-owned subsidiary
Tantech Charcoal to Lishui Xincai, the Company’s another wholly owned subsidiary Lishui Xincai.
● January 2020, Lishui Jikang Energy Technology Co., Ltd. was established.
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B.
Business Overview
We develop and manufacture bamboo-based charcoal products for industrial energy applications and household cooking, heating, purification,
agricultural and cleaning uses. We have grown over the past decade to become a pioneer in charcoal products industry made from carbonized bamboo. We
are a highly specialized high-tech enterprise producing, researching and developing bamboo charcoal based products with an established domestic and
international sales and distribution network. In 2017, we acquired a controlling equity interest in Suzhou E-Motors, which became known as Shangchi
Automobile in 2019, and we intend to continue to grow our business to include the manufacture and sale of electric vehicles.
We provide our charcoal products in the following areas:
We oversee a national sales network that has a presence in 17 cities throughout China. We sell approximately 95% of our products in China, and the
remaining 5% of products are sold internationally. We sell products in Japan, South Korea, Taiwan, the Middle East and Europe.
In addition to our bamboo charcoal products, we also derive revenues from our trading activities, which primarily relate to industrial purchases and
sales of charcoal.
We are headquartered in the bamboo rich southwest of Zhejiang Province, in the city of Lishui. Zhejiang province, located in southeastern coastal
China, is China’s tenth largest province in population, with 54.5 million residents, and eighth in terms of population density. The first province in China
without any counties in the poverty-county list of the central government, Zhejiang has become one of the wealthiest and most commercial provinces in
China. Its province-wide GDP of approximately RMB 5.6 trillion in 2018 places it as the fourth highest in China in absolute amount.
Lishui is a prefecture-level city located in southwest Zhejiang province. Approximately 2.7 million residents live in the city, and city-wide GDP is
approximately RMB 139.5 billion. Lishui’s primary industries include wood and bamboo production, ore smelting, textile, clothes making, construction
materials, pharmaceutical chemistry, electronic machinery and food processing. As to wood and bamboo production, approximately 69% of Lishui
prefecture is covered with forest, giving it the nickname “The Foliage Ocean of Zhejiang.”
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Zhejiang Province
City of Lishui
We rely on a combination of patent, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual
property rights. We currently own six patents in China covering our bamboo charcoal production.
For the years ended December 31, 2019, 2018 and 2017, three major suppliers accounted for approximately 76%, three major suppliers accounted for
approximately 72% and three major suppliers accounted for approximately 61% of the Company’s total purchases, respectively. Because we purchase a
material amount of our raw materials from these suppliers, the loss of any such suppliers could result in increased expenses for our company and result in
adverse impact on our business, financial condition and results of operations.
Bamboo and Bamboo Charcoal
As a company primarily focused on bamboo charcoal, our business is in a sub-part of China’s bamboo industry. Government policies that encourage
the use of bamboo also benefit the bamboo charcoal industry. Accordingly, we provide a brief overview of bamboo and those elements of China’s bamboo
industry, insofar as they have an effect on the bamboo charcoal industry in general and our company in particular.
Bamboo
Bamboo plants are some of the fastest growing plants in the world, with some varieties growing more than three feet per day. Moreover, Bamboo can
be re-grown quickly following harvesting, ensuring high frequency utilization without shortages. Unlike trees, individual bamboo culms emerge from the
ground at their full diameter and grow to their full height in a single growing season of three to four months. Over the next 2–5 years, fungus begins to
form on the outside of the culm, which eventually penetrates and overcomes the culm. Eventually the fungal growths cause the culm to collapse and decay.
As a result, bamboo culms generally have life cycles of up to ten years, at which point they must be cut down in order to preserve the environment of the
surrounding forest. Optimal quality bamboo culms for carbonization are cut at five years of age. Additional bamboo can be grown in the same area where
previous culms grew.
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Bamboo is considered environmentally friendly because it takes in substantial amounts of carbon dioxide and gives off oxygen as it grows. Indeed,
bamboo sequesters more carbon dioxide than an equivalent region of plantation trees. Moreover, harvesting of bamboo is considered more environmentally
friendly than allowing it to live through the full life cycle, as such harvesting maximizes the amount of carbon dioxide the bamboo can sequester because of
the effects of fungus noted above.
The total value of China's bamboo industry was approximately $30 billion. It employs 7.75 million people and has become a pillar industry of
development of economic society of China’s bamboo main producing area and major income source of peasants’ families. Given bamboo’s importance in
China, we believe that favorable government policies and regulations encouraging the advancement of bamboo technology in China generally will create
an environment favorable to our increased production of bamboo-based charcoal products. The Chinese government is also working to develop its bamboo
industry to meet its goals in environmental protection and green economic development, as planting bamboo is both profitable and environmentally-
friendly, according to the International Network for Bamboo and Rattan (“INBAR”). Moreover, given the central government’s goal to reduce carbon
dioxide emissions per unit of GDP by 40 to 45 percent by 2020 compared to 2005, we expect the bamboo technology industry to continue to be important
to the country’s long-term planning.
China now produces approximately 80% of the world’s bamboo and consumes approximately 60% of that production. According to statistics from
INBAR, China has more than 6 million hectares for bamboo production and over 500 bamboo species. In 2012, for example, the domestic industry was
worth $19.5 billion and employed more than 7.75 million people.
During a period of rampant deforestation, China put in place restrictions on harvesting of natural wood and encouraged the country to make more use
of bamboo. Under the National Forest Protection Program (“NFPP”), China implemented natural forest logging bans that covered 17 provinces in China.
These bands required consumers of charcoal to look to other sources for creation of charcoal than the natural trees they were most familiar with using.
During this time, bamboo charcoal became a viable alternative in the country.
Bamboo has many desirable characteristics compared to timber based products:
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Culms are ideally allowed to reach 5-7 years of maturity prior to full capacity harvesting. The clearing out or thinning of culms, particularly older
decaying culms, helps to ensure adequate light and resources for new growth;
Commercial growers can annually harvest between one-quarter and one-third of a bamboo grove that is at least three years old. Harvesting at such
rates allows continuous, sustainable harvesting;
Bamboo will re-grow from same rootstalk (rhizome);
Plant tends to be drought tolerant
Bamboo minimizes carbon dioxide gases and generates up to 35% more oxygen than an equivalent area of trees. One hectare of bamboo can
sequester 62 tons of CO2 /year, while one hectare of young forest can sequester 15 tons of CO2 /year.
The physical and environmental properties of bamboo make it an exceptional economic resource for a wide range of uses. It grows quickly and can be
harvested annually without depletion of the parent plant and without causing harvesting damage or deterioration in soil quality; in addition bamboo is very
versatile and has many uses in the construction, culinary, furniture, pulp, pharmaceutical, and textiles industries. New uses for bamboo are being developed
as we understand its biological, chemical and physical characteristics.
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According to the United Nations’ Food and Agriculture Organization the bamboo industry affects the lives of about 1.5 billion people around the
world. About 2.5 billion people in the world depend economically on bamboo, and the international trade in bamboo amounts to between $5 and $10
billion. According to the International Network for Bamboo and Rattan (INBAR), the growth of the global bamboo market was expected to reach up to
$15-20 billion/year in 2018.
There are about 39 genera of bamboo and more than 590 species in China with 5.38 million hectares of pure bamboo forest, which accounts for 25% of
the bamboo area in the world. With 5.38 million hectares of bamboo plantations and an annual increase of 100,000 hectares, China is leading the world’s
bamboo industry in its number of varieties, amount of bamboo reserves, as well as production output, said Zehui Jiang, co-chair of INBAR’s board of
trustees.
Zhejiang province is situated on the shore of the East China Sea and has about thirty genera and four hundred varieties of bamboo. Bamboo products
made there are sold all around the world, with an annual output of RMB 28 billion ($4.5 billion) in 2010. Zhejiang province has almost one fifth of the
whole bamboo forest area in China. Moreover, approximately 69% of Lishui prefecture is covered with forest, giving it the nickname “The Foliage Ocean
of Zhejiang.”
Bamboo Charcoal
Bamboo charcoal has been documented in China as early as 1486 AD during the Ming Dynasty in China. Bamboo charcoal has traditionally been used
as a heating source, in replacement of wood, coal or wood charcoal. As a source of heat, bamboo charcoal has a calorific value approximately half that of
an equivalent weight of oil, and similar to the calorific value of wood. In addition to being an efficient source of heat, bamboo charcoal is considered less
polluting than wood charcoal, because it burns more cleanly due to a lower percentage of volatile matter. Smoke and pollution in charcoal burning relate
largely to moisture content and volatile matter. While careful processing can control the moisture content, the ratio of volatile matter is affected by the
source of charcoal. Traditional wood charcoals may range between 5 – 40% volatile matter free of moisture, depending on the type of wood and the
temperature at which it is carbonized. Bamboo heating charcoal tends to be between 13 – 17% volatile matter free of moisture.
Because of the relatively higher pollution levels in wood charcoal, it is estimated that the burning of wood fuel claims the lives of an estimated 2
million people every year who inhale the smoke. Moreover, it takes between seven and ten tons of wood to produce one ton of wood charcoal, compared
with four tons of bamboo to produce one ton of bamboo charcoal.
In addition to use as a heating source, bamboo charcoal has applications as an adsorbent, deodorizer, dehumidifier, purifier and electrical conductor.
Nonactivated bamboo charcoal is a versatile mineral matter with great porosity and consequently high absorption ability. Bamboo charcoal’s porous surface
area makes it an ideal air and water purifying agent, odor absorbent, additive, dehumidifier and electromagnetic wave absorber (electromagnetic waves
from computers, mobile telephones and other electronics can be conducted through bamboo charcoal to dissipate their energy in the charcoal pores). While
wood charcoal’s surface area may be as low as 20 m 2 /g, bamboo charcoal generally ranges from 200-600 m 2 /g, and our company’s EDLC carbon has
achieved 2,200 m 2 /g.
While bamboo charcoal has a high absorptive capacity after carbonization, it becomes even more effective after activation. Activated bamboo carbon is
bamboo charcoal that has been taken through an extra step greatly increasing its absorptive abilities. Activated bamboo charcoal can be used for cleaning
the environment, absorbing excess moisture and producing medicines.
The carbonization process occurs in the absence of oxygen and produces a brown-black liquid containing more than 200 organic compounds known as
bamboo vinegar, or pyroligneous acid. Following sedimentation two distinct layers appear: a light yellow-brown liquid (clarified bamboo vinegar) which
can be refined to produce acetic acid, propionic acid, butyric acid, carbinol and organic solvents, and a viscid oily liquid (bamboo tar) containing large
amounts of phenol substances. Bamboo vinegar is found in sanitary and health products as well as a range of horticultural fertilizers and organic solutions.
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EDLC Carbon (Divested Business)
On December 14, 2017, the Company entered into a sale agreement and related agreements (the “Agreements”) to transfer its EDLC carbon business
(including intellectual property rights and equipment) to Zhejiang Apeikesi Energy Co., Ltd. (the “Buyer”), a PRC start-up company controlled by Dr.
Zaihua Chen, our former CTO. After the completion of the transactions, the Company is expected to focus its core business on the development of electric
vehicle products and traditional charcoal products. Tantech’s Board of Directors approved the terms of the sale based on a valuation report obtained by the
parties and with knowledge that Dr. Chen was the Company’s CTO during the transaction. However, as part of the transactions, Dr. Chen resigned from the
Company’s CTO position on December 31, 2017.
The decision of the Company to divest its EDLC carbon business was made based on business considerations, including the fact that (1) the company’s
EDLC carbon business had been dependent on a very limited number of customers, (2) capital constraints on additional substantial investment on
developing EDLC Carbon products, (3) a challenging market condition and unfavorable political climate and (4) the Company’s future transition focus of
its traditional charcoal business to electric vehicle business.
Pursuant to the Agreements, Tantech sold to the Buyer all of its intellectual property rights related to EDLC carbon and the equipment for R&D and
production. The Buyer paid Tantech a total purchase price of RMB 16 million. The payment will be made over 10 years. Other key terms include the
following: (a) the first payment of 28% of the total purchase price, or RMB 4.48 million, was made in 2017, consisting of RMB 3.2 million in cash
advancement and RMB 1.28 million as payment for Tantech’s EDLC carbon related IP rights; (b) the remaining balance of the purchase price will be paid
evenly over the following nine years; (c) the second payment of RMB 1.28 million of the purchase price and cash interests on the remaining cash
receivable was made in 2018; and (d) Tantech will lease its office space, including offices and EDLC carbon R&D and production facilities, to the Buyer,
subject to a concession of a free leasehold for the first two years.
Disposal of Tantech Energy
On June 26, 2019, our wholly-owned subsidiary Tantech Bamboo entered a share transfer agreement to sell all of its shares in its wholly-owned
subsidiary Tantech Energy to an unrelated third party. The consideration is RMB 6,500,000 (approximately US$ 941,000). The Company completed the
disposition process in July 2019.
39
Electric Vehicles
Pursuant to the Call Option Agreement executed on May 2, 2016, Supplemental Agreement I signed on December 22, 2016 and Supplemental
Agreement II signed on July 12, 2017, the Company acquired a 70% equity interest of Shangchi Automobile, formerly Suzhou Yimao E-Motors Co., Ltd.
The 70% equity interest include a 19% equity interest owned directly by Jiyi and a 51% equity interest owned through a series of contractual agreement
with the owners of Wangbo. Jiyi is 100% owned by Jiamu, which is, in turn, wholly owned by Euroasia International Capital (“Euroasia”), a 100% owned
subsidiary of the Company. These agreements include an Exclusive Management Consulting and Technology Agreement, two Equity Pledge Agreements,
two Exclusive Call Option Agreements, two Proxy Agreements and two Power of Attorney (collectively “VIE Agreements”). Pursuant to the above VIE
Agreements, Jiamu has the exclusive right to provide Wangbo consulting services related to business operations including technical and management
consulting services. All the above contractual agreements obligate Jiamu to absorb a majority of the risk of loss from Wangbo’s activities and entitle Jiamu
to receive a majority of their residual returns. In essence, Jiamu has gained effective control over Wangbo. Therefore, the Company believes that Wangbo
should be considered as a Variable Interest Entity (“VIE”).
Suzhou E-Motors was established in April 2011. It changed its name to Shangchi Automobile in January 2019. It develops, manufactures, and sells
specialty electric vehicles. The company also offers solar cells, lithium-ion batteries, auto parts, and electric control systems in China. Its manufacturing
facility, located in Zhangjiagang City, Jiangsu Province is 15,000 square meters. Shangchi Automobile has been approved by Ministry of Industry and
Information Technology of the People's Republic China (MIIT) as qualified to manufacture electric vehicles. It is also entitled to both central and local
government subsidies with any approved EV models. As of May 31, 2020, Shangchi Automobile has not updated the previous ten EV models and
remained one fuel vehicle model approved by MIIT.
Shangchi Automobile has to date developed a full range of electric buses and a variety of specialty vehicles. It has developed more than ten models of
electric buses, electric logistics cars, and specialty vehicles, such as high-speed brushless cleaning cars, electric cleaning cars, special emergency vehicles,
and funeral cars. The sale region for current products is mainly within Jiangsu Province where the Shangchi Automobile locates. In 2017, we sold 100
various types of vehicles, where 10 types of vehicles directly sold to Northern China, and over 90 types of vehicles were used in Northern China. In 2018,
we sold 110 logistic vehicles to Southern China. In 2019, we sold 117 electronic logistic cars in fiscal 2019 on behalf of other vehicle manufacturers for
commission income. Below are examples of the specialty vehicles produced by Shangchi Automobile.
Urban Sanitary Vehicles. The Urban Sanitary Vehicles work with high efficiencies with low operating expenses. They travel (clean) around 20~30
km/hr with fuel consumption rates approximately 3.33 km/liter. The vehicles are equipped with professional sanitary vehicle chasses, with front axle drives
& front axle steering to strengthen their operations’ stability and smoothness; the whole vehicle is made of strengthened steel plates and pipes, making it
more durable and anti-collusive.
40
Tourist Buses. The Tourist Buses are 12-meter-long and 7-meter-long lithium-battery-based buses whose interior noise is less than 76 dBs and off
vehicle acceleration noise is less than 82 dbs. Their fuel-saving rates are up to 50% and emissions rates are lowered 75%.
Logistic Vehicles. The logistic electric vehicles are 4.2-meter-long, 810 kg standard load weight fully charged vehicles. Each are a 100% electricity-
driven vehicle specially designed for logistics companies. The batteries for this vehicle can be charged and discharged quickly, and each vehicle is made of
high quality steel stamping body which is highly durable. The Internal structure and the design of the car doors are both made for the deliverers’
convenience.
41
Below are the major vehicle components we purchase for assembling the electric vehicles (“EVs”):
·
·
·
·
·
Vehicle chassis
Electric motors
Lithium-ion battery packs
Three-in-One electric control systems
Vehicle carriage
In general, the purchase of the vehicle chassis, electric motors, lithium-ion battery pack and three-in-one electric control system have covered two-
thirds of EVs’ production cost. We purchase these components from four different but well-established suppliers in China.
We currently rely on local EV distributors to sell our EVs to end-users. The primary reason for such a sales channel is the dependence on local
government subsidy policies. In general, local governments only allow the locally-licensed EV distributors to sell EV vehicles, which are entitled to EV
road permits and subsidies.
Over the years, Shangchi Automobile has had more than 20 EV core technologies and patents, including nanotechnology for raw materials for power
lithium electronics, group technology of power lithium electronics and battery management technology.
42
Our Processing Workflow
We develop and manufacture our bamboo charcoal products using the following processing workflow:
43
We develop and manufacture our electric vehicles using the following processing workflow:
Our Products
44
Before acquisition of Shangchi Automobile, we primarily produced and sold three categories of products, all of which are produced from bamboo
charcoal and bamboo charcoal byproducts. Because of the lifespan and fast growth rate of bamboo, our products are considered environmentally friendly.
Moreover, our facilities have received ISO 14001:2004 certification, which reflects our focus on measuring and managing our environmental impact.
BBQ Products
We sell pressed and formed charcoal briquettes for use in grills, incense burners, and other applications for which the primary purpose of the charcoal
is burning for heat or fuel. These products are sold in China and internationally under the Algold brand.
45
Our charcoal briquettes are processed from carbonized bamboo (as to our self-produced BBQ charcoal) and wood (as to our OEM BBQ charcoal) into
charcoal and pressed into shapes appropriate for our customers’ preferred use. These products include barbecue grill briquettes, disposable all-in-one
barbecue grills (including charcoal), and fuel for incense and tobacco burners.
We expect revenues generated from our charcoal briquette products in oversea market will increase, however we expect total revenue in our charcoal
briquette will keep current relevant level in comparison to these other segments and in absolute terms.
Charcoal Doctor Products
Our primary consumer brand is Charcoal Doctor (“Tan Boshi” or “Dr. Tan” in Chinese). In processing our charcoal products, the primary byproducts
are solid charcoal and charcoal vinegar. We make use of both the solid and liquid byproducts in our Charcoal Doctor products.
Our Charcoal Doctor brand products have been the primary source of our revenue over the last few years. Charcoal Doctor products are sold
throughout China and stocked by many supermarkets and specialty shops in Zhejiang Province and other provinces. We seek to protect and grow our
market share pricing our products aggressively, often as much as 10-15% below our competitors’ prices. Our Charcoal Doctor gross profit margins average
26%, largely due to our industrialized and automated production processes. We plan to expand product lines in the coming years to take advantage of the
many uses of bamboo charcoal and vinegar. Charcoal Doctor products can be categorized according to their physical state: liquid or solid:
Our solid charcoal products are primarily used for purification and deodorization. These consumer products are made from dry distilled carbonized
bamboo, and have the ability to absorb harmful substances and foul odors from the air, including benzene, toluene, ammonia and carbon tetrachloride. The
primary ingredient of these products, activated charcoal, is an adsorbent. Our solid Charcoal Doctor products generally fit within three categories: (1)
charcoal bags, primarily used as air purifiers and humidifiers, (2) charcoal deodorants and (3) toilet cleaning disks. Our primary Charcoal Doctor solid
products include the following:
·
·
·
·
Air purifiers and humidifiers
Automotive accessories for air purification
Underfloor humidity control
Pillows and mattresses
· Wardrobe deodorizers
· Mouse pads and wrist mats
·
·
·
·
·
Refrigerator deodorant
Charcoal toilet cleaner disks
Liquid charcoal cleaner
Shoe insoles
Decorative charcoal gifts
46
Samples of the range of solid Charcoal Doctor products are pictured below.
In addition to providing solid charcoal, the carbonization process also results in a liquid byproduct called bamboo vinegar. Bamboo vinegar is used in
disinfectants, detergents, lotions, specialized soaps, toilet cleaners and fertilizers. We have also adapted our bamboo vinegar for use in a variety of
agricultural applications:
47
·
·
·
·
·
Fruit, vegetable, and other plant fertilizers
Soil conditioners and sweeteners
Flower nutrients
Toilet cleaning liquid detergent and solid disks
Hand washing sanitation
Samples of the range of liquid Charcoal Doctor products are pictured below.
We believe liquid products are crucial to maintaining close ties with the agricultural industry, which we expect will be a key area for growth in the coming
years. We plan to expand in this area by adding production lines for daily health products, such as toilet-cleaning products, hand washing products, as well
as other everyday household items based on silver ion anti-bacterial nanotechnology.
48
We use this silver ion nanotechnology for sterilization to improve the effectiveness of our sanitation and purification products. We purchase silver ion
nano powder from third parties to add into our products. We use our own formulas for the purification and sanitation products that incorporate such powder.
We have developed two kinds of products that use our silver ion nanotechnology. Our detergent products are based on bamboo vinegar and are
supplemented by the introduction of silver ion nano powder. These products are used for washing clothes and are in the trial stage. We began trial sales of
our silver nano detergent products in Yantai (Shangdong Province), Lishui (Zhejiang Province), Chengdu (Sichuan Province) and Zhengzhou (Henan
Province) in November 2012. We have concluded our trial sales in Lishui and Chengdu (and plan to conclude sales in Yantai upon the exhaustion of current
trial sales inventory), and our preliminary conclusions are that customers liked the product but were less enthusiastic about the packaging. As a result, we
adjusted our packaging in preparation for full-scale sales. Given the investment required to improve brand awareness for our silver ion nano detergent, we
will focus first on Zhengzhou before beginning to plan either the expansion plan or the timeline for such expansion into other cities in China. At the same
time as we are selling such products under our Charcoal Doctor brand name in China, we are also in discussions to sell such products to one distributor in
Dubai, who would then re-brand the products for resale in local markets in Africa and the Middle East.
Our silver ion bamboo charcoal bag products are used for odor absorption and air purification. We combine our charcoal powder products with silver
ion nano powder to achieve a charcoal bag that may be stored in a wider variety of locations. If our traditional bags are stored in conditions that are too
damp and warm, mold or mildew may grow. Our silver ion nano products are able to fight the growth of mold and mildew, allowing them to be used in
damp conditions without problem. We have begun to promote and sell limited numbers of such bags in connection with our sales of traditional charcoal
bags. We are promoting these bags in anticipation of adding such products to our portfolio of products for sale in supermarkets and other stores. Our
customer stores typically invite us to apply in June or July to update the products we will offer for sale in their stores, and we are required to pay a fee for
shelf space at such time. Accordingly we plan to increase demand for our silver ion nano products in anticipation for adding them to the list of products we
sell this year. As we will make these silver ion nano charcoal bags available everywhere we offer our traditional charcoal bags, we will leverage our
existing sales and distribution channels to introduce these products to the market.
Raw Materials
Our primary raw material is bamboo charcoal. Each year, we purchase bamboo charcoal locally that has been prepared to our specifications from
between 15 and 20 suppliers located in and around Lishui. The majority of such purchases comes from approximately four suppliers. In recent years, due to
the rising awareness of environmental protection, the Zhejiang province is taking a series of measures to improve water environment, which has led to a
massive closure of small-sized bamboo charcoal manufacturers. In addition, we are unable to purchase wood charcoal briquettes from our prior fiscal
year’s second largest supplier, Tahe Xingzhongda Carbon Co. in 2016, due to shortage of supply. However, we have taken actions to remedy such matters,
in particular to our primary raw material, bamboo charcoal. Therefore, we do not expect any shortage supply from bamboo charcoal in coming years.
We also purchase bamboo vinegar for use in our liquid products. Our bamboo vinegar suppliers in some but not all cases are the same as our bamboo
charcoal suppliers. As the supply of bamboo vinegar is directly related to the supply of bamboo charcoal, we believe we have a steady supply of bamboo
vinegar given the prevalence of bamboo in the Lishui area. Accordingly, we do not anticipate any lack of availability of bamboo vinegar for our liquid
products.
49
We purchase wood charcoal briquettes from a supplier in Heilongjiang province for use in our OEM BBQ charcoal products. As such products have
low technical requirements and are typically used for heating and cooking purposes, we have found that competing on price makes purchasing wood-based
charcoal for such purposes suit our customers’ requirements. Our primary source for wood charcoal briquettes, which we rebrand under our Algold brand
for sale in China, is Tahe Xingzhongda Carbon Co. in Daxing Anling, Heilongjiang province. In 2016, we were unable to purchase raw material from Tahe
Xingzhongda Carbon Co. It caused major decline in our domestic charcoal briquettes sale. While we have adjusted our purchasing strategies to look for
alternatives. However, due to tightening environmental control in local authority, we expect the cost of wood charcoal briquettes would increase in the
coming years.
In addition to our primary raw materials, we also purchase small amounts of other raw materials, such as silver ion nano powder, fabric for charcoal
bags, packaging materials, and coconut charcoal. We do not anticipate any difficulty in replacing the suppliers of any of such minor raw materials.
The prices of our primary raw materials have not historically been volatile. We have generally experienced differences in price of less than 5% over the
course of a year for our primary raw materials.
Electric Vehicles
Shangchi Automobile does not produce major vehicles components directly from raw material. In general, Shangchi Automobile purchases major parts
directly from four major suppliers. The suppliers for parts are shown below:
·
·
·
Beijing National Energy Battery Technology Co., Ltd — Lithium-ion battery cells
Dongfeng Xiangyang Travel Vehicle Co., Ltd — Vehicle chassis
Suzhou Greencontrol Transmission Technology Co., Ltd — Electric motors
· Wuhan Hiconics Power Technology Co., Ltd — Three-in-One electric control systems
Distribution Channels and Methods of Competition
International Markets and Customers
Our bamboo charcoal and bamboo charcoal byproducts are also sold directly or indirectly through distributors to international markets. Such exported
products include bamboo vinegar, bamboo charcoal and purification product. The majority of our export items are for non-energy use. After pivoting our
business focus in 2017, less than 1% of our direct sales are currently international. Including business conducted with domestic distributors. However, we
estimate that with respect to our household products that the percentage of goods sold for export is approximately 5%, with the majority destined for Japan,
South Korea and Taiwan.
50
Domestic Markets and Customers
Currently, our consumer products and specialty electric vehicles are sold via our distributors’ networks. In addition, we have a logistics center in Lishui
and relationships with third-party warehousing companies in Hangzhou, Jinan, Shanghai and Zhengzhou. Starting from 2016, we have been selling our
products mainly through distributors instead of operating logistics and warehousing facilities internally. In addition, we have significantly cut our sales to
supermarket customers.
We are in the process of expanding our product line to include toilet cleaning and kitchen cleaning products, among others. We believe there will be a
high demand for these types of products because of growing awareness of cleanliness and environmental protection, as well as antibacterial products and
disinfectants. In addition, we are in the process of restructuring our distribution network in an effort to cut both overall time and costs relating to the sale
cycle.
Geographic Distribution of Revenues
Beginning in 2017, our charcoal products are sold via distributors instead of direct distribution to supermarkets and chain stores. As all of our sales are
completed in China, with title transferring to our customers in the country, we estimate most of our products are sold and used in China. We have divested
our EDLC line of business, which had contributed greatly to our international sales.
51
Electric Vehicles
Supported by the Chinese government’s endorsement and driven by its focus on petroleum resource independence, environmental protection and the
“Made in China 2025” industrial upgrade, we believe the electric vehicle sector is the most promising segment in the Chinese auto industry. China has
become the largest new energy vehicle market in the world. According to a central government forecast, China’s new energy vehicle sales are projected to
grow to 2.1 million units in 2020, and its penetration is expected to reach 7% of vehicle sales by 2020.
Our specialty vehicles have a variety of uses in many areas. Each of these vehicles integrate the advanced technology of mechanical, electronic,
hydraulic, chemical, environmental protection and other fields into a special vehicle chassis to realize its specific function. Specialty vehicles are widely
used in the highway transportation, engineering construction, oil fields, mines, electricity, telecommunications, postal, medical, environmental sanitation,
agriculture, water conservancy, aviation, food, public security, fire protection, justice and national defense construction markets.
In general, our EV product faces two group of competitors: manufacturers of conventional fuel vehicles and EV manufactures. In terms of competitors
specializing in conventional fuel vehicles, many of them are much larger in terms of size, have greater manufacturing capabilities, and have larger customer
bases than we do. However, the conventional fuel vehicle manufacturers face many challenges, including environmental pollution and energy scarcity,
which provides great opportunities for the rapid development of the EV industry in China. In addition, conventional fuel vehicle manufacturers have begun
focusing their attention on developing and producing EV, and we expect that we may face tougher competition in the future from these manufacturers.
There are many companies in China that engage in the research, production and distribution of electric vehicles. Competition within the electric
vehicle market is intense as we have to compete with many domestic and global companies, established and new EV manufactures, some of which have
greater brand recognition and resources than we do. As a brand new player in the Chinese electric vehicle industry, we hope our focus on developing
specialty vehicles might give us advantages in a niche market, rather than facing strong competition from similar vehicles on the consumer vehicle market.
Methods of Competition
The primary market for our Charcoal Doctor line of products is household hygiene use. Our air purification, deodorizing, and other health promoting
products such as our charcoal pillow, cater to a niche but growing market of health-conscious customers. Customers in this sector have a particular affinity
to brands. Notwithstanding this loyalty, product-switching costs are low, so manufacturers must compete on price.
We conducted a marketing survey in Guangzhou in October 2013 for our charcoal bag products. According to the survey, we found that a decrease in
package weight of 10% or an increase in price of 5% resulted in a loss of sales of less than 1%, showing that the market could absorb minor changes. By
contrast, when the price increase reached 10% or the package weight decrease reached 15%, we saw that 30% of respondents were willing to choose
alternate brands or forego a purchase. We further found that for cleaning and purification products, 85% of respondents cared about design attractiveness
and approximately 65% made purchasing decisions based on attractiveness, causing us to conclude that demand for our products is more heavily influenced
by such products than by minor (but not major) economic fluctuations.
52
Because the household hygiene sector has enjoyed relatively strong growth in the last few years as a result of increases in disposable urban income and
an increased awareness of healthy lifestyle products, we have focused on growing our market share in this industry. In order to do this, compete by pricing
our products aggressively, often at a discount of 10 – 20% below our competitors. In addition, we pride ourselves on providing a high quality product, so
that our customers believe they have received value for the price they pay.
With regard to household carbonized bamboo products, the Charcoal Doctor brand is one of the largest and most famous. Our Charcoal Doctor brand
name has been recognized as a “China Well-known Brand” by the China Brand Strategy Management Association, and our products have been recognized
as a “Zhejiang Famous Forest Product” by the Zhejiang Famous Forest Product Affirmation Committee and have been awarded “The Fifth China Yiwu
International Forestry Product Expo Gold Award” by the Fifth China Yiwu International Forestry Product Expo Committee. Moreover, the 2014 – 2018
China Bamboo Charcoal Products Market Research and Corporate Strategy Analysis Report notes high brand recognition for Charcoal Doctor products in
China.
The industry is geographically concentrated in the South East of China in the provinces of Anhui, Zhejiang and Fujian where bamboo is more
prominent, the bamboo charcoal industry is also fragmented since it is subject to relatively low barriers of entry; low initial capital expenditure, low
technical requirements (excluding high end EDLC carbon compounds), highly homogenous products and few substitutes.
We face competition from a number of companies operating in the vicinity. Many of these companies have similar profiles in terms of size, number of
employees and product ranges. One of the largest competitors is Zhejiang Maitanweng Ecology Development Co. Ltd., a local company also from Zhejiang
Province.
Zhejiang Maitanweng has the largest franchise in the industry with a presence in over 100 cities in China. Like our Company, Zhejiang Maitanweng has
an extensive product portfolio of 200 household, automotive and health related bamboo charcoal-based products.
Jie Jie Gao Charcoal is another company with a similar product portfolio. Also located in the Lishui vicinity, it also holds many awards, and its
products are stocked by Walmart, Hualian, Century Mart and other supermarkets like our products are. Jie Jie Gao is also one of the founding members of
INBAR — International Network for Bamboo and Rattan.
Due to product homogeneity and low barriers to entry branding is an important differentiator in the industry. We are not aware of any foreign
competitors in this specific segment.
Awards and Recognition
The Company is fully ISO 9000 and ISO 14000 certified and has received a number of national, provincial and local honors, awards and certifications
for its quality products and scientific research efforts:
2004
·
Lishui High-Tech Product Company Certification for its Bamboo Vinegar
2005
·
·
Zhejiang Province High Tech Product Award for its Bamboo Vinegar
Zhejiang Science and Technology Award (Third Class) for R&D of a continuous distillation process during the bamboo carbonization process
53
2006
·
·
·
·
2007
·
·
·
2008
Zhejiang Science and Technology Award (Third Class) for its Liquid Bamboo Vinegar Products
Forestry Industry Award for Excellence in Forestry — Liquid Bamboo Vinegar Products (6th Anniversary)
Lishui City Forestry Industry Key Enterprise in Forestry Award
Liandu District High Tech Prize (Second Class) for R&D in Carbonization of Bamboo
Zhejiang New Forestry High Tech Company Industrialization Project Award for R&D efforts in super capacitors using bamboo charcoal
Zhejiang Provincial-Level Key Enterprise in Forestry Award
Lishui Science and Technology Award (First Class) for its Liquid Bamboo Vinegar Products
·
Official China High Tech Industry Enterprise Certificate (this award entitles the company to preferential enterprise income tax rates of 15% rather
than 25%)
2009
·
·
2011
·
·
2012
National Torch Plan Project Certificate for Liquid Bamboo Products
National Science and Technology Progress Award (Second Class) for Bamboo Carbonization
Zhejiang Science and Technology Award (Second Class) for its Activated Carbon Production Technology and Equipment Research
Garden Unit Recognition for beautification and ecological efforts
·
Lishui City Recognition for Patent Grants
2013
·
Zhejiang Province High Technology Enterprise Recognition
2014
·
Lishui City Doctoral Working Station
Research and Development
We are committed to researching and developing applications of bamboo charcoal and activated bamboo charcoal. We believe scientific and
technological innovations will help our Company achieve its long-term strategic objectives. R&D is an integral part of our operations and the crux of its
competitive advantage and differentiation strategy.
54
Our R&D team is well educated and has far-reaching research capabilities. The R&D team has 3 dedicated researchers and analysts focusing on
Charcoal Doctor product development and applications. Quality control is an important aspect of the team’s work and ensuring quality at every stage of the
process has been a key driver in maintaining and developing brand value for the Company.
We regularly collaborate with a number of top domestic universities and institutions for the advancement of bamboo charcoal research and process
technology. Current efforts and collaborations cover a wide range of areas including but not limited to: bamboo vinegar applications, bamboo yield and
quality improvements, bamboo’s natural characteristics, bamboo carbonization process optimization and engineering initiatives to optimize and integrate
production processes. It is through these collaborations that the company has managed to secure important breakthroughs resulting in proprietary
knowledge and patents. Research has been carried out in cooperation with the following notable institutions:
·
·
·
China National Bamboo Research and Development Center
Zhejiang University of Agriculture and Forestry
Zhejiang Academy of Forestry & Zhejiang Forestry Institute
Our Research Projects
We have led or participated in numerous scientific projects that have led to important technological breakthroughs and advances. However in
December 2017, we have transferred all EDLC research projects to Zhejiang Apeikesi Energy Co., Ltd, a PRC start-up company controlled by Dr. Zaihua
Chen, our former Chief Technology Officer.
Project Description
Time Period
Project Level
Technological innovations to achieve productive annual capacity of 3,000
metric tons of EDLC carbon
12/08-12/17
Central Government funded high-tech industrial
project
Bamboo carbonization technology R&D for tobacco product
manufacturing
Development of dry distillation of bamboo wood
Technological innovations to be able to produce bamboo vinegar in a
continuous process
12/07-6/10
6/07-5/09
4/06-4/08
Zhejiang Provincial Government funded scientific
agricultural project
Central government funded high-tech agricultural
project
Zhejiang Provincial Government funded scientific
agricultural project
Technological innovations to achieve productive annual capacity of 300
metric tons of EDLC carbon
1/06-12/07
Central Government funded high-tech industrial
project
Bamboo vinegar spontaneous combustion automation production
technology
Bamboo R&D for lithium-ion battery anodes
8/04-12/06
8/04-2/06
Central Government funded high-tech agricultural
project
Zhejiang Provincial Government funded scientific
project
The research and demonstration for technology of agricultural waste
carbonization and low ignition point molding charcoal fuel preparation
01/16-12/18
Zhejiang Provincial Government directly funded
scientific project
Demonstration and promotion of green combustible carbon manufacturing
technology using epicarps residue
15/08-12/17
Central Government funded forestry technology
promotion project
55
During the years ended December 31, 2019, 2018 and 2017, we spent $327,260, 386,628 and $627,577, respectively, on R&D. Because we
discontinued our EDLC carbon business, our R&D expense has decreased accordingly.
Our Patents
We rely on our technology patents to protect our domestic business interests and ensure our position as a bamboo carbon technology pioneer in our
industry. We have placed a high priority on the management of our intellectual property. Some products that are material to our operating results
incorporate patented technology. Patented technology is critical to the continued success of our products. However, we do not believe that our business, as a
whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon any particular
patent. We currently hold five patents on charcoal products and seventeen patents on electric vehicles as of April 30, 2020.
Patents on Charcoal Products
Patent Description
Biomass acaricide with gasified tar for
organic pesticides
Methods for water and bamboo vinegar
refining
A Filling and fixing device for Bottles of
Plant nutrient solution
Laundry detergent bottles
Refrigerator deodorant box
Holder
Patent
Type
Application
Expiration
Patent Number
Tantech Bamboo Invention
Jan. 24,2006
Jan. 23, 2026
ZL 200610049234.0
Tantech Bamboo Invention
Nov. 13, 2003
Nov. 12, 2023
200310116248.6
Tantech Bamboo Utility Model
Tantech Bamboo Design
Tantech Bamboo Design
Dec. 30, 2015
Jun. 28, 2013
Jun. 28, 2013
Dec. 29,2025
Jun. 27, 2023
Jun. 27, 2023
201521127995.4
201330292120.X
201330291808.6
56
Patents on Electric Vehicles
Patent Description
Road Sweeper
Car Break Pad
A radiator brake disc for easy installation
A Pure Electric Express Logistics Delivery
Vehicle
An Electric EVA Type Instrument Panel
Structure
A safe body structure of EVA electric vehicle
Holder
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Patent
Type
Patent for
Invention
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
An environmentally friendly electric road
sweeper
Shangchi
Automobile
EVA electric vehicle body structure with
reduced wind resistance
Welding device for electric bus
Brake test bench of electric bus
A painting device for electric bus
Electric bus brake
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Electric bus tire disassembly and installation
equipment
Shangchi
Automobile
Assembly equipment for glass parts of electric
bus
Shangchi
Automobile
Speedometer inspection table of electric bus
An auxiliary anti-slip device for electric bus
An impact window breaker for electric bus
Shangchi
Automobile
Shangchi
Automobile
Shangchi
Automobile
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
Utility
Mode
57
Application
Expiration
Patent Number
Aug 28, 2012
Aug 27, 2022
ZL201210311790.6
April 1, 2017
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ZL201721371604.2
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201820864875.X
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ZL201820811968.6
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ZL201920299127.6
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ZL201920305206.3
REGULATIONS
We are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the
principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of
the PRC include intellectual property, competition, taxation, anti-money laundering and anti-corruption.
Investment Direction Regulations
On March 27, 2011, the National Development and Reform Commission (“NDRC”) issued the Guidance Catalogue for Industrial Structure
Adjustments (2011 edition), which was amended on February 16, 2013. This Catalogue is an important basis for the government to guide investment
direction, promote technology innovation and industrial upgrading. Pursuant to relevant laws and regulations, in line with the promotion of energy
conservation and green industry initiatives, the approval authorities will strictly control energy-intensive, polluting and natural resources industries, such as
projects in low-end, capacity-redundant and over-expansion projects. Environmental protection departments and other departments with jurisdiction will
also review such projects for compliance with applicable criteria.
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The Catalogue divided industries into three categories: “encouraged,” “restricted,” and “eliminated” for investment. Industries not listed in the
Catalogue are generally deemed as falling into a fourth category, “permitted.”
The Catalogue has been replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2018), effective July 28,
2018, and amended and restated by the 2019 version, effective July 20, 2019 (the “Negative List”). The Negative List specifies the prohibited and non-
prohibited (similar to the restricted in the Catalogue) industries for foreign investment. For the industries not covered by the Negative List, the foreign
investment and the domestic investment have equal access. Foreign investors may not invest in the prohibited industries specified by the Negative List. For
the non-prohibited industries on the Negative List, a foreign investor must obtain an investment permit. There are certain requirements on the equity
ownership and the executive officers of the foreign invested enterprises. If PRC has certain equity requirements in certain investment fields, no foreign-
invested partnership may be established.
According to the Negative List, our charcoal products do not fall under the prohibited industries.
Given the Chinese government’s move toward more environmentally friendly initiatives, we believe the bamboo industry, and in particular, the
bamboo charcoal industry, are poised to grow, both for heating and cooking purposes and also for charcoal byproduct uses for cleaning, purification and
deodorization.
According to the Negative List, foreign investors may invest fully in our electric vehicle products. Nevertheless, as we may also produce other
automobile products, we still keep our VIE structure designed under the Catalogue which did not allow more than 50% of foreign investment in the general
automobile industry.
Chinese Central Government Subsidy Support Policies for EV Manufacturers
On September 13, 2013, the Chinese Ministry of Finance, the Chinese Ministry of Science and Technology, the Chinese Ministry of Industry and
Information Technology, and the Chinese National Development and Reform Commission issued a joint announcement that in order to promote the
development, sale and use of alternative energy vehicles, Chinese government will continue to provide a manufacturing rebate for qualifying alternative
energy vehicles sold. The Chinese central government subsidy support policies, or rebate policies, have been changing every year. For example, the
Chinese central government subsidy support policies effective as of January 1, 2017, called for a 20% of reduction in central government subsidies per
electric car in 2017 from its 2016 level and the total local government subsidy matched to be not more than 50% of the total central government subsidies
per electric car. The reduction of subsidies from both the central government and local governments inevitably increased the costs to the consumers to
purchase our EVs, which caused temporary pressure for us to expand our EV sales. The change in subsidy payment methods in 2017 from paid-in-advance
to paid post-sale and further delay in releasing subsidy payments for the EVs manufactured and sold in the prior years also caused the potential delay in
collection of the accounts receivable from our business partners, which temporarily increased the pressure on our working capital for continuing operations.
Since 2018, the rebate policies required all the EVs manufactured since 2016 to install the national platform so the government could monitor the mileage
and other information. Accordingly, we installed the platform on our EVs manufactured since 2016. Since 2019, the rebate policies required the battery
capacity attenuation can’t exceed 20%.
Intellectual Property Rights Regulations
The State Council and the National Copyright Administration, or the NCAC, have promulgated various rules and regulations relating to the protection
of software in China. Under these rules and regulations, software owners, licensees and transferees may register their rights in software with the NCAC or
its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners,
licensees and transferees are encouraged to go through the registration process to enjoy the better protections afforded to registered software rights.
On March 1, 2009, the MIIT promulgated the Administrative Measures on Software Products, or the Software Measures, which replaced the original
Administrative Measures on Software Measures promulgated by MIIT in October 2000, to regulate software products and promote the development of the
software industry in China. Pursuant to the Software Measures, software products which are developed in China and registered with the local provincial
government authorities in charge of the information industry and filed with MIIT may enjoy the relevant encouragement policies. Software developers or
producers may sell or license their registered software products independently or through agents. Upon registration, the software products will be granted
registration certificates. Each registration certificate is valid for five years and may be renewed upon expiration.
The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001 and 2013 respectively, with its implementation rules adopted in 2002 and revised
in 2014, protects registered trademarks. The PRC Trademark Office of the State Administration for Industry and Commerce, or the SAIC, handles
trademark registrations and grants a protection term of ten years to registered trademarks.
The MIIT amended its Administrative Measures on China Internet Domain Names in 2004. According to these measures, the MIIT is in charge of the
overall administration of domain names in China. The registration of domain names in PRC is on a “first-apply-first-registration” basis. A domain name
applicant will become the domain name holder upon the completion of the application procedure.
Regulations on Tax
Our business operations are governed primarily by tax laws in the PRC. A description of the material tax consequences applicable to holders of our
common shares may be found in the section titled “Item 10. Additional Information.-E. Taxation.” For more information regarding the impact of the PRC
Enterprise Income Tax Law, see “Risk Factors — Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign
exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be
made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or
registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account,
such as a capital increase or foreign currency loans to our PRC subsidiaries.
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In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise
of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on
November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from
foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable
government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the
RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without
SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct
Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special
purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the
reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise
to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in
different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign
Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the
administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks
shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its
branches.
In July 2014, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate the business and capital
operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration
Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas, or Circular 36, on August 4, 2014. This circular
suspends the application of Circular 142 in certain areas and allows a foreign-invested enterprise registered in such areas to use the Renminbi capital
converted from foreign currency registered capital for equity investments within the PRC.
On March 30, 2015, SAFE released the Notice on the Reform of the Management Method for the Settlement of Foreign Exchange Capital of Foreign-
invested Enterprises, or Circular 19, which has made certain adjustments to some regulatory requirements on the settlement of foreign exchange capital of
foreign-invested enterprises, lifted some foreign exchange restrictions under Circular 142, and annulled Circular 142 and Circular 36. However, Circular 19
continues to, prohibit foreign-invested enterprises from, among other things, using Renminbi fund converted from its foreign exchange capitals for
expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises.
On June 19, 2016, SAFE issued the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control
over Foreign Exchange Settlement of Capital Accounts, or Circular 16, which took effect on the same day. Compared to Circular 19, Circular 16 not only
provides that, in addition to foreign exchange capital, foreign debt funds and proceeds remitted from foreign listings should also be subject to the
discretional foreign exchange settlement, but also lifted the restriction, that foreign exchange capital under the capital accounts and the corresponding
Renminbi capital obtained from foreign exchange settlement should not be used for repaying the inter-enterprise borrowings (including advances by the
third party) or repaying the bank loans in Renminbi that have been sub-lent to the third party.
SAFE Circular 37
In July 2014, SAFE issued SAFE Circular 37, which supersedes SAFE Circular 75, and requires that PRC citizens or residents must register with the
relevant local SAFE branch before making capital contribution to any offshore entity directly established or indirectly controlled by that PRC citizen or
resident for the purpose of investment or financing and with onshore or offshore assets or equity interests legally owned by that PRC citizen or resident. In
addition, the SAFE registrations are required to be updated with local SAFE branch with respect to that offshore special purpose company in connection
with the change of its basic information, such as its company name, business term, shareholding by individual PRC citizens or residents, merger, or
division and, with respect to the individual PRC citizens or residents in case of any increases or decreases of capital in that offshore special purpose
company, or share transfers or swaps by the individual PRC citizens or residents
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Share Option Rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters
involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch.
In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans
of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share
options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain
a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to
conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas
institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We will make
efforts to comply with these requirements.
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC,
as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation
regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as
determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are
required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered
capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal
years may be distributed together with distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All
employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the
imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law, employers in China must provide employees with welfare schemes covering pension
insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
C. Organizational structure
Below is a chart representing our current corporate structure as of December 31, 2019:
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Below is a chart representing our current corporate structure as of June 25, 2020:
In the above charts, we provide the English names of our corporate entities. As to THL and USCNHK, the English names are the legal names of the
entities. As to the other corporate entities, their legal names are in Chinese, and the English translations are provided as courtesy translations.
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Our registered agent in the British Virgin Islands is Offshore Incorporations Limited. Our registered office and our registered agent’s office in the
British Virgin Islands are both located at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
Tantech Holdings Ltd. (“THL”)
THL was incorporated on November 9, 2010 under the BVI Companies Act, 2004 as a company limited by shares under the name “Sinoport
Enterprises Limited.” On April 15, 2013, Sinoport Enterprises Limited changed its name to “Tantech Holdings Ltd.” At the time of its formation, THL was
authorized to issue 50,000 common shares with a par value of $1.00 per share. On November 19, 2010, THL issued 50,000 shares to its sole shareholder,
Forasen Energy Co., Ltd, now named “Tanbsok Group Limited.”
On November 25, 2014, in contemplation of the initial public offering of its common shares, THL effected a simultaneous (a) 1,000-for-1 split of its
common shares and (b) pro-rata redemption for par value and cancellation of 600 of such shares (30,000,000 in total). This transaction was accomplished in
this way for several business reasons: (1) we wanted to maintain $50,000 in aggregate share capital; (2) in anticipation of the offering, we desired to
increase the total number of common shares and reduce their per-share price to a level consistent with the targeted offering price in the offering; and (3)
prior to completion of the recapitalization, we had issued all of the shares we were authorized to issue and needed to create authorized but unissued shares
by repurchasing a portion of such authorized and outstanding shares.
Upon completion of these transactions, THL was authorized to issue 50,000,000 common shares, $0.001 per share, of which 20,000,000 are issued and
outstanding. At formation, THL had one director, Dehong Zhang, a citizen of China. On June 21, 2013, Yefang Zhang, a citizen of the St. Lucia, was also
appointed as a director of THL. In June 2014, THL appointed three independent directors, all citizens of the PRC: Hongdao Qian, Shudong Wang and
Wencai Pan.
On March 24, 2015, THL completed an initial public offering of 1,600,000 common shares.
On March 1, 2016, THL completed a private placement of 1,693,000 common shares.
On September 29, 2017, THL completed a private placement of 891,307 common shares.
On September 28, 2018, THL completed an issuance of 150,000 common shares.
On March 23, 2020, THL completed an issuance of 35,592 common shares.
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USCNHK Group Limited (“USCNHK”)
USCNHK was formed on October 17, 2008 under the Companies Ordinance (Chapter 32) of Hong Kong under the name “Raymond & O/B Raysucess
Co., Limited.” On December 2, 2010, Raymond & O/B Raysucess Co., Limited changed its name to “USCNHK Group Limited.” USCNHK’s authorized
share capital is HKD 10,000, and the company has issued 10,000 shares, par value HKD 1.00 per share, to its sole shareholder, THL. USCNHK has one
director, Dehong Zhang, a citizen of the China. On June 21, 2013, Yefang Zhang, a citizen of the St. Lucia, was also appointed as a director of USCNHK.
Tantech Holdings (Lishui) Co., Ltd. (“Lishui Tantech”)
Lishui Tantech was formed on April 7, 2016 as Lishui Tantech energy technology Co., Ltd. On May 17, 2017, it changed its name to Lishui Tantech
Energy Technology Co., Ltd., and on July 7, 2017 changed its name again to Tantech Holdings (Lishui) Co., Ltd. Lishui Tantech’s authorized share capital
is RMB 200 million, of which USCNHK owns 100% interest. Lishui Tantech is organized as a limited liability company under PRC law. Lishui Tantech
has one director, Zhengyu Wang, who is a PRC citizen.
Lishui Xincai Industrial Co., Ltd. (“Lishui Xincai”)
Lishui Xincai was formed on December 14, 2017 by an unrelated third party. Its authorized share capital is RMB 5 million. On December 25, 2017,
the third party transferred its shares in Lishui Xincai to Lishui Tantech. Since then, Lishui Xincai has been Lishui Tantech’s wholly owned subsidiary.
Lishui Xincai is organized as a limited liability company under PRC law. Lishui Xincai has one director, Wangfeng Yan, who is a PRC citizen.
Zhejiang Tantech Bamboo Charcoal Co., Ltd. (“Tantech Charcoal”)
Tantech Charcoal was formed on September 5, 2002. Tantech Charcoal’s authorized share capital is RMB 3.5 million, of which Lishui Xincai owns
100%. Lishui Xincai purchased the equity interest from Tantech Bamboo on December 31, 2019. Tantech Charcoal is organized as a limited liability
company under PRC law. Tantech Charcoal has two directors, Fengwang Yan and Xuefen Zhang, who are PRC citizens.
Lishui Jikang Energy Technology Co., Ltd. (“Jikang Energy”)
Jikang Energy was formed on January 2, 2020. Jikang Energy’s authorized share capital is RMB 5 million, of which Lishui Xincai owns 100%. Jikang
Energy is organized as a limited liability company under PRC law. Jikang Energy has one director, Wangfeng Yan, who is a PRC citizen. Jikang Energy is a
holding company and does not conduct any substantial business.
Hangzhou Tanbo Technology Co., Ltd. (“Tanbo Tech”)
Tanbo Tech was formed on December 8, 2015. Tanbo Tech’s authorized share capital is RMB 10 million, of which Tantech Bamboo owns 100%. Tanbo
Tech is organized as a limited liability company under PRC law. Tanbo Tech has one director, Zhengyu Wang, who is a PRC citizen.
Zhejiang Tantech Bamboo Technology Co., Ltd. (“Tantech Bamboo”)
Tantech Bamboo was formed on October 23, 2002 under the name “Lishui Zhonglin High-Tech Co., Ltd.” (Chinese:丽水中林高科有限公司). On
December 31, 2005, Tantech Bamboo changed its name to “Zhejiang Tantech Bamboo Technology Co., Ltd.” Tantech Bamboo’s authorized share capital is
RMB 80 million, of which Lishui Tantech owns 100% interest. Tantech Bamboo has one director, Zhengyu Wang, who is a PRC citizen.
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EAG International Vantage Capitals Limited (“Euroasia”)
Euroasia was formed on April 27, 2015. Its share capital was HKD $10,000. It was organized as a limited company in Hong Kong, of which THL
owns 100%. Euroasia has one director, Yefang Zhang, who is a citizen of Saint Lucia. In our previous reports, we called it Euroasia International Capital
Co., Ltd., which is the English translation of its Chinese name 欧亚通国际资本有限公司.
Euroasia New Energy Automotive (Jiangsu) Co., Ltd. (“Euroasia New Energy”)
Euroasia New Energy was formed on October 24, 2017. Its authorized share capital is USD 30.1 million, of which Euroasia owns 100%. It is
organized as a limited liability company under PRC law. Euroasia New Energy has one director, Mingqin Dong, who is a PRC citizen.
Shanghai Jiamu Investment Management Co. Ltd. (“Jiamu”)
Jiamu was formed on July 14, 2015. Its authorized share capital is RMB 500,000, of which Euroasia owns 100%. It is organized as one-person limited
company (Taiwan,Hong Kong & Macao invested) under PRC law. Jiamu has one director, Zhengyu Wang, who is a PRC citizen.
Hangzhou Wangbo Investment Management Co. Ltd. (“Wangbo”)-VIE
Wangbo was formed on February 2, 2016. Its authorized share capital is RMB 500,000. Henglong Chen and Zhengyu Wang, as the original
shareholders, held 5% and 95% shares respectively. On June 6, 2017, Henglong Chen transferred his 5% shares to Wangfeng Yan. On December 4, 2019,
Zhengyu Wang transferred his 95% shares to his daughter Xinyang Wang. The legal representative is Wangfeng Yan.
Hangzhou Jiyi Investment Management Co. Ltd. (“Jiyi”)
Jiyi was formed on February 2, 2016. Its authorized share capital is RMB 500,000, of which Jiamu holds 100%. It is organized as a limited liability
company under PRC law. It has one director, Zhengyu Wang, who is a PRC citizen.
Shangchi Automobile Co., Ltd. (“Shangchi Automobile”), formerly known as Suzhou E-Motors
On July 12, 2017, the Company acquired 70% of the equity interest of Suzhou Yimao E-Motors Co., Ltd., which changed its name to Shangchi
Automobile in January 2019 from its original shareholder. Shangchi Automobile is a specialty electric vehicles and battery manufacturer based in Zhang Jia
Gang City, Jiangsu Province, China. After the acquisition, the Company owns a 100% equity interest of EAG International Vantage Capitals Limited, a
Hong Kong limited company (“Euroasia”) and its wholly owned subsidiary Jiamu, which further owns 100% equity interest of Jiyi. Jiyi owns a 19% of
equity interest of Shangchi Automobile. In addition, Jiamu entered into a series of contractual agreements with the owners of Wangbo, which owns 51% of
the equity interests of Shangchi Automobile. The latest agreements include an Exclusive Management Consulting and Technology Agreement, two Equity
Pledge Agreements, two Exclusive Call Option Agreements, two Proxy Agreements and two Power of Attorney (collectively, the “VIE Agreements”).
Pursuant to the above VIE Agreements, which are described in further detail below, Jiamu has the exclusive right to provide Wangbo consulting
services related to business operations including technical and management services. Taken together, the VIE Agreements obligate Jiamu to absorb a
majority of the risk of loss from Wangbo’s activities and entitle Jiamu to receive a majority of their residual returns. In essence, Jiamu has gained effective
control over Wangbo. Therefore, the Company believes that Wangbo should be considered as a Variable Interest Entity (“VIE”) under the Statement of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”. As a result, the Company ultimately
controls a 70% equity interest of Shangchi Automobile and the accounts of Shangchi Automobile are consolidated into those of the Company. Euroasia,
Jiamu, Jiyi and Wangbo are all investment holding companies with no significant business activities. (collective “E-Motor Holdings”).
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Contractual Arrangements
We have chosen to use contractual relationships in our corporate structure because direct investment by foreign-owned companies in the automobile
industry is restricted to own no more than 50% of equity.
Historically, the principal regulation governing foreign ownership of businesses in the PRC was the Foreign Investment Industrial Guidance Catalogue,
effective as of April 10, 2015 (the “Catalogue”). The Catalogue classified various industries into three categories: encouraged, restricted and prohibited.
Tantech is engaged in business in industries where direct foreign investment over 50% was expressly prohibited: automobile industry.
Due to the previous regulations on foreign ownership of PRC businesses, Jiamu and Wangbo entered into a series of contractual arrangements, also
known as VIE Agreements. The variable interest entity, or VIE, agreements are designed to provide Jiamu with the power, rights and obligations equivalent
in all material respects to those it would possess as the sole equity holder of its controlled company, including absolute control rights and the rights to the
assets, property and revenue of Wangbo. Our PRC counsel has advised that the VIE agreements constitute valid and binding obligations of the parties to
such agreements and are enforceable and valid in accordance with the laws of the PRC.
However, the Catalogue has been replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2018), effective
July 28, 2018, and amended and restated by the 2019 version, effective July 20, 2019 (the “Negative List”). The Negative List specifies the prohibited and
non-prohibited (similar to the restricted in the Catalogue) industries for foreign investment. For the industries not covered by the Negative List, the foreign
investment and the domestic investment have equal access. According to the Negative List, our new energy automobile products under Shangchi
Automobile are not prohibited. Nevertheless, we have decided to keep the VIE structure as Shangchi Automobile may also produce traditional automobile
products.
The VIE Agreements, entered into as of July 13, 2017 and renewed effective December 10, 2019 because of the Wangbo shareholder change, are
described below and consist of an Exclusive Management Consulting and Technology Agreement, two Equity Pledge Agreements, two Exclusive Call
Option Agreements, two Proxy Agreements and two Power of Attorney. As an overview, these agreements taken together are designed to allow Jiamu to
manage the operations of Wangbo and to receive all of the net income of Wangbo in return.
The following is a summary of the common contractual arrangements that provide us with effective control of our VIE and that enable us to receive
substantially all of the economic benefits from its operations.
Exclusive Management Consulting and Technology Agreement
This Exclusive Management Consulting and Technology Agreement (the “Service Agreement”) was made and entered into by Jiamu and Wangbo.
Pursuant to terms and condition of the Service Agreement, Wangbo appointed Jiamu as its exclusive service provider providing comprehensive
management consulting, technical supporting, intellectual property license and other relevant services, including all services within the primary business of
Wangbo and decided necessary from time to time by Jiamu, including, (1) management consulting, (2) technical support and (3) intellectual property.
Wangbo agreed to accept consulting and services provided by Jiamu and not to acquire, directly or indirectly, the same or similar consulting and/or services
as set in the Service Agreement from any third party, except with Jiamu’s prior written consent. Both parties agree that Jiamu can designate other parties to
provide Wangbo with services and/or support stated in the Service Agreement.
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Exclusive Call Option Agreement
Two Exclusive Call Option Agreements (the “Call Option Agreements”) were entered. One was entered into by and among (a) Jiamu, (b) Wangbo and
(c) Xinyang Wang, 95% shareholder of Wangbo. The other one was entered into by and among (a) Jiamu, (b) Wangbo and (c) Wangfeng Yan, 5%
shareholder of Wangbo. Xinyang Wang and Wangfeng Yan are Wangbo Shareholders.
Pursuant to the Call Option Agreement and as permitted by the applicable laws of the People’s Republic of China, the parties have agreed that, at the
exercise of such purchase option by Jiamu, (i) the Wangbo Shareholders will transfer all of their shares of Wangbo to Jiamu, or (ii)Wangbo will transfer its
assets to Jiamu. To conduct the abovementioned share transfer and assets transfer, Wangbo and the Wangbo Shareholders irrevocably grant Jiamu an
exclusive and unconditional asset purchase right and share purchase right, respectively.
Equity Pledge Agreement
Two Equity Pledge Agreements (the “Pledge Agreements”) were made and entered into by and among Jiamu as pledgee, Wangbo, and each of the
Wangbo shareholders. The Wangbo Shareholders pledged all current and future shares of Wangbo held by such Wangbo Shareholders to Jiamu, in order to
guarantee that Wangbo and/or the Wangbo Shareholders will fulfill their respective responsibilities and obligations, and will ensure that Jiamu is able to
obtain all rights and interests under the (a) Exclusive Management Consulting and Technology Agreement and any supplemental agreements (if any)
between Jiamu and Wangbo; (b) Exclusive Call Option Agreements and any supplemental agreements (if any) among Jiamu, Wangbo and the Wangbo
Shareholders; and (c) Proxy Agreements and any supplemental agreements (if any) among Jiamu, Wangbo and the Wangbo Shareholders.
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Proxy Agreement
Two Proxy Agreements (the “Proxy Agreements”) were made and entered by and among Jiamu as trustee, the Wangbo Shareholders as trustors and
Wangbo. Under the Proxy Agreements, the Wangbo Shareholders irrevocably authorized Jiamu or its designated person (such as director or successor or
liquidator of Jiamu) to solely exercise such Wangbo Shareholders’ voting rights in Wangbo under the law and bylaws of Wangbo as representative,
including, without limitation (a) convene, convoke and attend shareholders’ meeting of Wangbo as representative of the Wangbo Shareholders; (b) submit
proposals to Wangbo’s board of directors as representative of the Wangbo Shareholders; (c) vote on any matters to be deliberated at the shareholders’
meeting of Wangbo; (d) sign on minutes of Wangbo’s shareholder meetings; (e) exercise other voting rights of shareholders under Wangbo’s bylaws; (f)
submit relevant documents to industrial and commercial registration offices and other government authorities concerned in order to performance or
guarantee this contract as representative of the Wangbo Shareholders; and (g) sign share transfer agreements or other relevant documents, deal with official
documents, registration, records or other procedures in order to enable share transfer under the Call Option Agreement take effect.
Power of Attorney
The Powers of Attorney were made and entered into by Wangbo Shareholders and Mr. Wangfeng Yan. Pursuant to the Powers of Attorney, Xinyang
Wang and Wangfeng Yan designated Mr. Zhengyu Wang to exercise their rights under the Proxy Agreements on behalf of them.
Shenzhen Yimao New Energy Sales Co., Ltd.
On November 13, 2018, we established Shenzhen Yimao New Energy Sales Co., Ltd., a sales subsidiary of Shangchi Automobile.
D.
Property, Plants and Equipment
There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We were granted
land use rights for our facilities in Lishui City, which extend until 2052. Following is a list of our properties:
Location
Address
Land Use Expiration/Lease
Term
No. 888 Tianning Street, Lishui City, Zhejiang Province
Hangzhou, Zhejiang No. 508 Wen San Road, Room 1106
Lishui, Zhejiang
Hangzhou, Zhejiang Fl 9, 459 Qianmo Rd, Binjiang District
Hangzhou, Zhejiang No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City January 1, 2020 to December 31, 2020
Zhangjiagang, Jiangsu No. 4 Bridge, 204 Way, Yeyu Town
Shenzhen, Guangdong
June 7, 2051
December 18, 2052
Orally agreed to extend to August 9, 2020
August 10, 2019 to August 9, 2020
November 12, 2019 to November 11, 2020
Suite 510, Floor 5, Tower B, Zhongshe Square,
1028 Buji Rd, Luohu District
Space
Ground
Floor
Area
118 m2
15,208 m2 13,755 m2
357 m2
400 m2
12,904 m2
26,580 m2 26,580 m2
120 m2
Currently, household products are sold via our sales and distribution networks located in 17 cities (Changchun, Changsha, Chengdu, Chongqing,
Fuzhou, Guangzhou, Hangzhou, Harbin, Jinan, Lanzhou, Lishui, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou). We do not own or lease
locations in Shenyang, Tianjin, Yantai, Taiyuan, Zhengzhou, Changsha, Fuzhou or Lanzhou. In addition, we have logistics centers in Lishui and
relationships with third-party warehousing companies in Hangzhou, Jinan, Shanghai and Zhengzhou.
68
Fixed assets at our properties consist of office equipment at all of our locations and, at our Lishui properties, equipment for the carbonization and
processing of charcoal, both for our household goods products and for our EDLC carbon. This equipment includes furnaces, boilers, mixers, kilns/ovens,
jet mills, pulverizers, chemical analytic equipment, generators, briquette hydraulic powder molding machines, carbon activation and pickling tanks, belt
dryers, air compressors, bamboo vinegar refining equipment, container production lines, hot acid/water washing equipment and automatic packing
machines.
All of our real property and fixed assets are encumbered by secured loans from our creditors. Tantech Bamboo granted the encumbrances on our
properties at the Tianning Industrial Zone facility. We have relocated our facilities from our facility on Tianning Street to a new, larger facility on Cen Shan
Road. Forasen Group currently occupies approximately 500 square meters of our Tianning Street facility as its office. We have not historically charged
Forasen Group for renting this office space.
None of our property is affected by any environmental issues that may affect our use of the property. At present, our plans to further develop, expand or
improve these properties are funded through proceeds from our initial public offering and through our operating cash flows.
Shangchi Automobile, formerly Suzhou Yimao, has a manufacturing facility, located in Zhangjiagang City, Jiangsu Province, of 26,580 square meters.
Images of Shangchi Automobile’s facilities are presented below:
69
Images of our facilities are presented below:
Productive Capacity
We currently produce all of our charcoal products at our Shuige Industrial Zone facility in Lishui. Our facilities in Hangzhou and our Tianning facility
in Lishui are used for general office and administration purposes.
Shuige Industrial Zone facility
The following is a map of our Shuige Industrial Zone facility, which displays the building numbers referred to in the below tables describing the
productive uses of such facility.
70
Non-production properties:
Functional uses and location
Office administration, training, product display and so on (First through
Area
(m2)
Actual
used
area (m2)
Reserved
area (m2)
Space
utilization
Reserved purpose
fourth floors of building No. 1)
4,478
3,359
1,120
75% Additional offices
New product
development team,
EDLC research and
development center
27.8%
100% N/A
Research and development center (Fifth and sixth floors of building No. 1
and building 11)
Employee dorms (Building No. 9, 10)
Other (boiler room, guard room, waste water processing and so on)
(Building No. 13 through 16)
4,027
7,182
1,120
7,182
2,907
None
218
218
None
100% N/A
We currently reserve 4,478 m2 for office administration, training and product display purposes, of which 3,359 m2 are currently used. We have
reserved 1,120 m 2 for additional office space.
Our research and development center consists of 4,027 m2, of which we use 1,120 m2 at present. We plan to use the additional space on the sixth floor
of our Shuige Industrial Zone facility for our new product development team when our needs exceed the space provided on the fifth floor, but we do not
have a specific time or plan in place for expanding such team. Until recently when we decided to divest our EDLC business, we had planned to use the
balance of space devoted to this purpose to implement an EDLC research and development center.
We use 218 m2 for general facility purposes, including our boiler room, guard room and other similar purposes.
Our employee dorms cover 7,182 m2 , all of which is in use.
Production properties:
Functional uses and
location
Barbecue charcoal production line
(Building No. 2)
Solid deodorant and purification
product production line (Building
No. 3, half of building No. 4)
Liquid household hygiene product
and bamboo vinegar product
production line (Half of building
No. 4)
EDLC carbon production line
(Building No. 5, 6, 7, 8, 9)
Area
(m 2 )
Actual
used
area
(m 2 )
Reserved
area
(m 2 )
Space
utilization
Current
capacity
(metric
tons) (1)
Actual
productivity
(metric
tons)
Capacity
utilization
11,854
5,927
5,927
50%
1,000
309
30.9%
Reserved
purpose
Installation of equipment for
production expansion
10,984
10,984
0
100%
20,000
20,949
104.7%(2) N/A
3,440
1,720
1,720
50%
5,000
4,091
82.0%
9,098
3,473
5,625
38.2%
500
304
60.8%
Installation of a new production
line
Build a production line for 1,000
additional tons of EDLC carbon
capacity
71
(1) All of our production capacity rates assume 250 working days per year, 8 hours per day. We believe we can increase the number of days worked per
year or number of hours worked per day to increase our production capacities if we choose to do so in the future.
(2) We exceeded 100% utilization rate by operating this production line in excess of the assumed capacity rates.
We have reserved 11,854 m2 of our Shuige Industrial Zone facility for our barbecue charcoal production line, and currently use 5,927 m2 of this area.
The remaining 5,927 m2 is reserved for a future production line. In our existing barbecue charcoal production line, we have a current capacity of
approximately 1,000 tons per year, and we produced 340 tons of BBQ charcoal in 2015, a capacity utilization rate of 34%.
We have reserved 10,984 m2 of our Shuige Industrial Zone facility for our solid deodorant and purification product production line. We currently use
all of the space. In our existing Charcoal Doctor solid product production line, we have a current capacity of approximately 20,000 tons per year, and we
produced 21,500 tons of Charcoal Doctor solid product in 2015, a capacity utilization rate of 107.5%. We exceeded 100% utilization by operating this
production line in excess of the assumed capacity rates. If we choose to increase our production capacity in the future, we would need to replace existing
production lines with more efficient lines or to expand our space, as we have not reserved space for additional production lines.
We have reserved 3,440 m2 of our Shuige Industrial Zone facility for our liquid household hygiene product and bamboo vinegar product production
line, of which we currently use 1,720 m2 . The remaining 1,720 m2 is reserved for installation of a new production line. In the existing production line, we
have a current capacity of approximately 5 million units per year, and we produced 3.6 million units of our liquid products in 2015, a capacity utilization
rate of 72%.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
None.
72
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this annual report on Form 20-F. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this
annual report on Form 20-F, particularly in “Risk Factors.”
A. Operating Results
Overview of Company
Traditionally, we have been a specialized manufacturer of bamboo charcoal based products with primary business focus in consumer products and low
emission BBQ charcoal. We conduct our operations in China through our wholly owned subsidiary, USCNHK in Hong Kong and its majority-owned
Chinese subsidiary, Tantech Bamboo. Tantech Bamboo is engaged in the production and distribution of consumer products.
Through Tantech Bamboo’s wholly-owned Chinese subsidiaries, Tantech Charcoal and Zhejiang Babiku Charcoal Co., Ltd. (“Tantech Babiku” or
“Babiku”), we conduct trading business, including the export of charcoal products; and through Tantech Bamboo’s wholly-owned Chinese subsidiary,
Tantech Energy, we manufacture low emission BBQ charcoal. Our subsidiary Tantech Energy was engaged in the manufacturing of Electric Double-Layer
Capacitor (“EDLC”) carbon. On December 14, 2017, the Company entered into a sale agreement and related agreements to transfer its EDLC carbon
business (including intellectual property rights and equipment) to Zhejiang Apeikesi Energy Co., Ltd. (the “Buyer”), a PRC start-up company controlled by
Dr. Zaihua Chen, our former CTO.
In the fourth quarter of 2015, we registered two Chinese subsidiary companies, Lishui Zhongzhu Charcoal Co., Ltd. (“Lishui Zhongzhu” or
“Zhongzhu”) and Hangzhou Tanbo Tech Co., Ltd. (“Tanbo Tech” or “Tanbo”). Lishui Zhongzhu is engaged in the production and sales of active charcoal
and other products. Tanbo Tech explores business opportunities outside Lishui area.
On June 26, 2019, the Company entered a share transfer agreement to sell all of its shares in Tantech Energy to an unrelated third party. The
consideration is RMB 6,500,000 (approximately US$941,000). The Company completed the disposition process in July 2019.
Due to business strategy change. the Company closed Lishui Zhongzhu and Tantech Babiku during the year ended December 31, 2018. As a result,
together with Tantech Energy, the assets and liabilities for these discontinued entities were reported as components of total assets and liabilities separate
from those balances of the continuing operations. At the same time, the results of all these discontinued operations, less applicable income taxes (benefit),
were reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
On December 31, 2019, Tantech Bamboo transferred all of its shares in its wholly-owned subsidiary Tantech Charcoal to Lishui Xincai.
On January 2, 2020, Lishui Jikang Energy Technology Co., Ltd. (“Jikang Energy”) was established as a wholly owned subsidiary of Lishui Xincai with
authorized share capital of RMB 5 million. Jikang Energy is a holding company and does not conduct any substantial business.
On January 3, 2020, Tantech Bamboo transferred all of its shares in its wholly-owned subsidiary Tanbo Tech to Lishui Xincai.
73
On January 13, 2020, Lishui Tantech transferred all of its shares in its wholly-owned subsidiary Tantech Bamboo to Jikang Energy.
After the above transfers, Tantech Bamboo becomes the wholly-owned subsidiary of Jikang Energy. Jikang Energy, Tanbo Tech and Tantech Charcoal
become the wholly-owned subsidiaries of Lishui Xincai.
On July 12, 2017, the Company acquired 70% of the equity interest of Suzhou Yimao E-Motors Co., Ltd., which became known as Shangchi
Automobile in 2019 from its original shareholder. Shangchi Automobile is a specialty electric vehicles and battery manufacturer based in Zhang Jia Gang
City, Jiangsu Province, China. After the acquisition, the Company owns a 100% equity interest of Euroasia International Capital Co., Ltd., a Hong Kong
limited company (“Euroasia”) and its wholly owned subsidiary Jiamu, which further owns 100% equity interest of Jiyi. Jiyi owns a 19% of equity interest
of Shangchi Automobile. In addition, Jiamu entered into a series of contractual agreements with the owners of Wangbo, which owns 51% of the equity
interests of Shangchi Automobile. These agreements include a Technical Consultation and Services Agreement, a Business Cooperation Agreement, an
Equity Pledge Agreement, a Share Disposal Agreement and a Voting Rights Proxy Agreement (collectively, the “VIE Agreements”).
Pursuant to the above VIE Agreements, which are described in further detail below, Jiamu has the exclusive right to provide Wangbo consulting
services related to business operations including technical and management services. Taken together, the VIE Agreements obligate Jiamu to absorb a
majority of the risk of loss from Wangbo’s activities and entitle Jiamu to receive a majority of their residual returns. In essence, Jiamu has gained effective
control over Wangbo. Therefore, the Company believes that Wangbo should be considered as a Variable Interest Entity (“VIE”) under the Statement of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”. As a result, the Company ultimately
controls a 70% equity interest of Shangchi Automobile and the accounts of Shangchi Automobile are consolidated into those of the Company. Ouyatong,
Jiamu, Jiyi and Wangbo are all investment holding companies with no significant business activities (collective “E-Motor Holdings”).
As of December 31, 2019, the Company had three reporting segments including consumer product segment, trading segment and electric vehicle
segment.
Our consumer products include purification and deodorization products, cleaning products and barbecue charcoals designed for domestic market.
Purification and deodorization products and cleaning products are sold under the brand name “Charcoal Doctor” and include air purification products,
deodorizer and bamboo vinegar. Cleaning products include kitchen and bathroom cleaning products, personal care products and liquid detergents.
Consumer products accounted for 93.0%, 70.9% and 81.6% of the total revenue for the years ended December 31, 2019, 2018 and 2017, respectively.
The largest category of our consumer products is purification and deodorization products. Made from dry distilled carbonized bamboo, our purification
and deodorization products have the ability to absorb harmful substances and air-borne odors, including benzene, formaldehyde, ammonia and carbon
tetrachloride. These products also come in many shapes and varieties for a multitude of purposes including pillows, cushion insoles, wrist pads, clothes
hangers and other products. Bamboo vinegar is an additive that can be used in food processing, medical and hygiene products and fertilizer. Although it
currently only accounts for a small portion of our revenue, bamboo vinegar products are crucial for us to maintain close ties with the agricultural industry
which we believe will be a key area for growth in the coming years. Cleaning products, including disinfectants, detergents, lotions, specialized soaps and
toilet cleaners are relatively new in our consumer products but provide us another opportunity for growth. Purchased from third parties and sold through
our distribution channel, barbecue charcoals designed for China’s domestic market have also been a key source of revenue for us in recent years.
74
Our trading business was mainly related to the export of charcoal products. We established Tantech Charcoal as a trading company for the export of our
charcoal products in order to avoid mixing our export sales and our production businesses. Production businesses that are combined with export businesses
typically have a higher tax rate than we pay by separating these businesses. By separating the trading business from the production business, we enjoy tax
incentives and more streamlined operations. Because of our experience in trading charcoal and in order to improve our cash flows, we also engaged in
rubber trading through this entity until September 2013. The profit of our trading business has been relatively low, and in September 2013, we started
phrasing out our trades of rubber. While we may have sporadic trades of rubber in the future and while we are still authorized to engage in rubber trading, it
will not be a focus of our Company.
We are in the process to transform our business to specialty electric vehicles (EVs) market. However, we expect our sales of consumer products will
stabilize in the coming years with the brand awareness and establishment for our bamboo charcoal products. Our acquisition of Shangchi Automobile
completed in the second quarter of 2017 and we will focus on developing and selling specialty EVs. If our expansions into new businesses are not
successful, our future results of operations and growth prospects may be materially and adversely affected. We are otherwise unaware of any specific
known trends, uncertainties or events that are reasonably likely to have a material effect on our sales or revenue of consumer products. Our revenue from
our trading segment is unlikely to increase significantly in future years. If we cannot increase our consumer products and electric vehicle revenues or find
new business opportunities to continue the growth, our total revenue may be decreasing.
Factors Affecting Our Results of Operations
Government Policy May Impact our Business and Operating Results
We have not seen any impact of unfavorable government policy upon our business in recent years. However, our business and operating results will be
affected by China’s overall economic growth and government policy. Unfavorable changes in government policies could affect the demand for our products
and could materially and adversely affect our results of operations. Our bamboo charcoal based consumer products are currently not subject to the
government restrictions, however, any future changes in the government’s policy upon bamboo charcoal industry may have a negative effect on the supply
of our raw materials.
Price Inelasticity of Raw Materials May Reduce Our Profit
As a specialized manufacturer of bamboo charcoal based products, we rely on the continuous and stable supply of bamboo charcoal to ensure our
operation and expansion. Although bamboo (and as a result bamboo charcoal) is a renewable supply, price inelasticity at any given time may increase the
likelihood of bidding wars, resulting in an increase in raw material prices and thus reduce our profit. In addition, as we are competing based upon low price,
we will risk losing customers by increasing our selling prices.
Competition in Consumer Product
Our products face competition from other producers. In our consumer product segment, we face competition from a number of companies that have
similar product portfolios. Many of such competitors’ products are not bamboo-based; instead, we compete based on our products’ functional use. Many
such competitors are able to provide functionally similar products without relying on bamboo or bamboo charcoal components.
75
Although our Charcoal Doctor brand is one of the largest and most famous in the charcoal bag and bamboo charcoal market, the bamboo charcoal
based consumer product industry is relatively fragmented and subject to relatively low barriers of entry.
Our Charcoal Doctor air purification products compete with products from charcoal-based competitors such as Zhejiang Maitanweng Ecological
Development Co., Ltd., Zhejiang Jiejiegao Charcoal Industry Co., Ltd., and Quzhou Modern Charcoal Industry, Co., Ltd.
Our Charcoal Doctor toilet cleaner competitors include non-charcoal-based competitors such as SC Johnson & Son (Shanghai) Inc. (which makes the
Mr. Muscle brand in China), Blue Moon Chinese Co., Ltd., Shanghai White Cat Group Ltd., Beijing Green Umbrella Chemical Co., Ltd. and Weilai
(Guangzhou) Consumer products Co., Ltd.
Our BBQ charcoals also face competition from similar products that are not made of bamboo-based charcoal. For example, our Algold grand shisha
charcoal competes with Shaxian Jinlu Charcoal Factory. While our shisha charcoal is a popular bamboo-charcoal based product, the competitor product is
more popular but not bamboo-charcoal based. Our other key international competitors in this area include Haiwan International Trading Co., Ltd.,
Nanxiong Guizhu Charcoal Co., Ltd. and Shaoguan Libao Daily Sundry Co., Ltd. In addition to these companies, we compete domestically with Fujian
Zhuhai Charcoal Co., Ltd., Jiangshan Green Charcoal Co., Ltd., Pujiang Fuli Bamboo & Wood Co., Ltd. and Sanhe Senyuan Charcoal Co., Ltd.
Some of our Products are Subject to Cyclical Sales.
Our BBQ charcoal products and solid bamboo charcoal products are subject to cyclical sales. We typically see our highest sales of BBQ charcoal
products in April and May and then again between August and October. The first peak marks our customers’ preparation for the summer outdoor barbeque
season, and the second peak is related to their purchase of our BBQ charcoal products for heating and cooking indoors in the colder months.
The peak season for our solid bamboo charcoal products is between October and November, and sales are lowest in February and March as a result of
Chinese New Year, as consumers tend to purchase such products prior to the holiday, rather than after.
While we have seen higher sales near the end of the year for our liquid products, we believe our sales volume for such products is too low to consider
such fluctuations cyclical. As such products are primarily for export, demand for our liquid products is most likely to be affected by seasonal and other
fluctuations in the purchasing country rather than in China.
Notwithstanding the effects of seasonality, we believe the key drivers for us to maintain a competitive position in the market and positive financial
performance continue to be brand recognition, product innovation and the application of new technology.
COVID-19
Our operations are affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was declared a
pandemic by the World Health Organization. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses. Our business
has been negatively impacted by the COVID-19 coronavirus outbreak to certain extent.
From late January 2020 to the middle of February 2020, the Company had to temporarily suspend our manufacturing activities due to government
restrictions. During the temporary business closure period, our employees had very limited access to our manufacturing facilities and the shipping
companies were not available and as a result, the Company experienced difficulty delivering our products to the customers on a timely basis. In addition,
due to the COVID-19 outbreak, some of the customers or suppliers may experience financial distress, delay or default on their payments, reduce the scale
of their business, or suffer disruptions in their business due to the outbreak. Any increased difficulty in collecting accounts receivable, delayed raw
materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could
negatively impact our results of operations.
76
In light of the current circumstances and available information, the Company estimated that for the period from January to May 2020, the Company’s
revenues for consumer product segment could be approximately 20% lower as compared to the same period of last year, however, the sales for trading
segment increased due to the significant increased demand for bamboo charcoal used for air purification and sanitation products.
As of the date of this filing, the COVID-19 coronavirus outbreak in China appears to have slowed down and most provinces and cities have resumed
business activities under the guidance and support of the government. However, there is still significant uncertainty regarding the possibility of a second
wave of infections, and the breadth and duration of business disruptions related to COVID-19, which could continue to have material impact to the our
operations.
Results of Operation
The following table summarizes the selected results of our operation during the fiscal years ended December 31, 2019 and 2018, respectively, and provides
information regarding the dollar and percentage increase or (decrease) during such years.
(All amounts, other than percentages, in thousands of U.S. dollars)
2019
2018
Dollars in
thousands
$
49,230
43,253
5,977
As a
percentage
of sales
revenue
As a
percentage
of sales
revenue
Dollars in
thousands
Dollar ($)
Increase
(Decrease)
Percentage
Increase
(Decrease)
100% $
87.9%
12.1%
29,561
21,532
8,029
100% $
72.8%
27.2%
19,669
21,721
(2,052)
66.5%
100.9%
(25.6)%
320
4,655
8,481
1,103
327
14,886
0.7%
9.5%
17.2%
2.2%
0.7%
30.2%
320
4,972
-
-
387
5,679
1.1%
16.8%
-
-
1.3%
19.2%
-
(317)
8,481
1,103
(60)
(9,207)
0.0%
(6.4)%
-%
-%
(15.5)%
162.1%
Statement of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses
Selling expenses
General and administrative expenses
Impairment of goodwill
Impairment of intangible asset
Research and development expenses
Total operating expenses
Income (loss) from operations
(8,909)
(18.1)%
2,350
7.9%
(11,259)
(479.1)%
Other income (expenses)
Interest income
Interest expense
Other income
Total other income (expense)
Income (loss) before income taxes
Provision for income taxes
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Net income (loss) attributable to common
stockholders of Tantech Holding Inc.
53
(443)
4
(386)
(9,295)
364
(9,659)
(299)
(9,958)
0.1%
(0.9)%
0.0%
(0.8)%
(18.9)%
0.7%
(19.6)%
(0.6)%
(20.2)%
57
(626)
247
(322)
2,028
1,031
997
83
1,080
0.2%
(2.1)%
0.8%
(1.1)%
6.9%
3.5%
3.4%
0.3%
3.7%
(4)
(183)
(243)
(64)
(7.0)%
(29.2)%
(98.4)%
19.9%
(11,323)
(667)
(558.3)%
(64.7)%
(10,656)
(382)
(11,038)
(1,068.8)%
(460.2)%
(1,022.0)%
$
(6,356)
(12.9)% $
1,977
6.7% $
(8,333)
(421.5)%
77
The following table summarizes the results of our operation during the fiscal years ended December 31, 2018 and 2017, respectively, and provides
information regarding the dollar and percentage increase or (decrease) during such years.
(All amounts, other than percentages, in thousands of U.S. dollars)
2018
2017
Statement of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Dollars in
thousands
$
29,561
21,532
8,029
As a
percentage
of sales
revenue
As a
percentage
of sales
revenue
Dollars in
thousands
Dollar ($)
Increase
(Decrease)
Percentage
Increase
(Decrease)
100% $
72.8%
27.2%
42,298
31,742
10,556
100% $
75.0%
25.0%
(12,737)
(10,210)
(2,527)
320
4,972
387
5,679
1.1%
16.8%
1.3%
19.2%
731
4,626
628
5,985
1.7%
10.9%
1.5%
14.1%
(411)
346
(241)
(306)
(30.1)%
(32.2)%
(23.9)%
(56.2)%
7.5%
(38.4)%
(5.1)%
Income from operations
2,350
7.9%
4,571
10.8%
(2,221)
(48.6)%
Other income (expenses)
Interest income
Interest expense
Other income
Total other income (expense)
Income before income taxes
Provision for income taxes
Net income from continuing operations
Net income from discontinued operations
Net income
Net income attributable to common stockholders
57
(626)
247
(322)
2,028
1,031
997
83
1,080
0.2%
(2.1)%
0.8%
(1.1)%
6.9%
3.5%
3.4%
0.3%
3.7%
19
(551)
436
(96)
4,475
1,528
2,947
66
3,013
-%
(1.3)%
1.0%
(0.2)%
10.6%
3.6%
7.0%
0.2%
7.1%
38
(75)
(189)
(226)
(2,447)
(497)
(1,950)
17
(1,933)
200%
13.6%
(43.3)%
235.4%
(54.7)%
(32.5)%
(66.2)%
25.8%
(64.2)%
of Tantech Holding Inc.
$
1,977
6.7% $
3,767
8.9% $
(1,790)
(47.5)%
Revenues: revenues increased by approximately $19.6 million, or 66.5%, to approximately $49.2 million in fiscal 2019 from approximately $29.6
million in fiscal 2018. The increase was mainly attributable to the significant increase of our consumer products because of change of our sales strategy to
lower the selling price in order to gain more market share. The revenue from our trading segment was decreased because we terminated sales cooperative
agreement with one large sales channel which had negative impact of the sales in trading segment. We also had much less revenue from electric vehicle
(“EV”) segment as compared to 2018 due to no active productions during fiscal 2019. We decided to pause EV productions as our costs would not be
covered when we are not able to receive the government rebates to EV manufacturers timely because of the much stricter new government rebate policy
issued in 2019.
Revenues: revenues decreased by approximately $12.7 million, or 30.1%, to approximately $29.6 million in fiscal 2018 from approximately $42.3
million in fiscal 2017. The decrease was mainly attributable to the significant decrease of our consumer products due to change of our business strategy.
The revenue from our trading segment was increase due to higher demands. We also had less revenue from electric vehicle (“EV”) segment as compared to
2017.
78
Consumer product segment
Our consumer product segment is the largest among our three segments. Our revenue from consumer products was primarily generated through the
sales of our purification and deodorization products and cleaning products and barbecue charcoals designed for the domestic market. Our consumer
products are considered to be environmentally friendly not only because of the lifespan and fast growth rate of bamboo, but also the minimum waste in the
process of producing our products. In addition, our products feature a high raw material utilization rate and have met the standards set for designation of
“environmentally friendly” enterprises by the Chinese Society for Environmental Sciences. Moreover, our facilities have received ISO 14001:2004
certification, which reflects our focus on measuring and managing our environmental impact.
A study conducted in Shanghai’s Lianhua Supermarket found that, given equivalent products, 85% of the consumers preferred environmentally
friendly products and were willing to pay prices up to 5% higher than traditional products. We anticipate that growing consumer preferences for
environmentally friendly products over traditional household cleaning products and increasing consumer awareness of our brand as an “environmentally
friendly” enterprise will drive revenue from our consumer products in the coming years.
Revenues from consumer product segment increased by $23.4 million, or 104.5%, to $45.8 million for fiscal 2019 from $22.4 million for the prior
fiscal year. The gross margin of consumer product segment decreased from 35.9% in fiscal 2018 to 12.4% in fiscal 2019. The increase in our revenue from
consumer product segment in 2019 was mainly because we changed our sales strategy to lower the sales price in order to increase the competitive
advantages and increase the sales volume, which resulted in a much higher increase in sales volume but with lower profit margin.
Revenues from consumer product segment decreased by $9.5 million, or 29.8%, to $22.4 million for fiscal 2018 from $31.9 million for the prior fiscal
year. The gross margin of consumer product segment increased from 25.7% in fiscal 2017 to 35.9% in fiscal 2018. The decrease in our revenue from
consumer product segment in 2018 was due to the following reasons. First, as a result of the increasing competition from E-commerce and change of
shopping habits among younger consumers, people are increasingly buying consumer products online with unknown brands in order to save money.
Therefore, orders from the Company’s customers for its consumer products decreased considerably. Second, in 2018, the Company reduced the cooperation
with certain supermarket customers with low selling price and unfavorable profit margin. And third, in response to market competition, the Company also
reduced the selling for non-popular products with lower gross margin. The overall decrease in the Company’s revenue from consumer product segments
reflected the above factors.
Trading segment
Revenue from our trading segment was approximately $3.4 million in fiscal 2019, a decrease of 10.5% from $3.8 million in fiscal 2018. The decrease
was mainly attributed to we terminated sales cooperative agreement with one large sales channel due to very low gross margin. As a result, even with
deceased sales volume, we were able to sell for higher selling price which led to much higher gross profit and gross margin in our trading segment in fiscal
2019 as compared to fiscal 2018. The gross margin of trading segment increased from 12.9% in fiscal 2018 to 32.8% in fiscal 2019.
Revenue from our trading segment was approximately $3.8 million in fiscal 2018, an increase of 106% from $1.9 million in fiscal 2017. Starting in
fiscal 2017, the Company focused on promoting “Charcoal Doctor” products in the market. As a result, our domestic sales of “Charcoal Doctor” products
increased significantly. The decline in gross margin in fiscal 2018 comparing to fiscal 2017 was due to the fact that almost all our sales were made to
domestic market which have lower margins.
79
Electric Vehicle (“EV”) segment
On July 12, 2017, the Company completed the acquisition of 70% of the equity interest of Suzhou E-Motors, which became known as Shangchi
Automobile in 2019, a specialty electric vehicles and power batteries manufacturer based in Zhang Jia Gang City, Jiangsu Province, People’s Republic of
China. The Company believes that the acquisition brings new advanced technologies and economic synergies in electric vehicle market and broaden the
Company’s customer base and cross-selling opportunities.
The revenue for our EV segment was approximately $0.03 million in fiscal 2019 with a negative gross margin. The revenue was all from the
commission income in connection to the 117 electronic logistic cars the Company sold on behalf of other manufacturers in fiscal 2019. The Company is
eligible for a government manufacturing rebate on each qualifying electric bus sold. The government manufacturing rebates are typically provided to
eligible alternative energy automobile manufacturers after sales are finalized and paperwork regarding the eligible mileages is submitted. We have been
experiencing delays of government rebate processing time and reduction of the amount of government rebates on eligible vehicles. Accordingly, we paused
our production of electric vehicles in 2019. The revenue for our EV segment was approximately $3.4 million in fiscal 2018 with negative gross margin of
14.7%. The Company sold 110 electronic cars in fiscal 2018.
Cost of revenues:
Our cost of revenues increased by approximately $21.7 million or 100.9% to approximately $43.2 million in fiscal 2019 from approximately $21.5
million in fiscal 2018. As a percentage of revenues, the cost of revenue increased to 88% in fiscal 2019 from 73% in fiscal 2018.
The increase in cost of revenues as a percentage of revenues in fiscal 2019 was mainly attributable to the increased cost of revenues from our consumer
products segment due to higher sales volume with lower average selling price.
Our cost of revenues decreased by approximately $10.2 million or 32.2% to approximately $21.5 million in fiscal 2018 from approximately $31.7
million in fiscal 2017. As a percentage of revenues, the cost of revenue decreased to 73% in fiscal 2018 from 75% in fiscal 2017.
The decrease in cost of revenues as a percentage of revenues in fiscal 2018 was mainly attributable to the lower cost of revenues from our consumer
products and EV segment due to lower sales. On the other side, the cost of revenue for trading segment increased to be in line with the increased sales.
Gross profit:
Our gross profit decreased by approximately $2.0 million, or 25.6% to approximately $6.0 million in fiscal 2019 from approximately $8.0 million in
fiscal 2018. The gross profit margin was 12.1% in fiscal 2019, as compared to 27.2% in fiscal 2018. On segment basis, gross margins for consumer
product, trading and EV segments were 12.4%, 32.8%, and (2,740.4)%, respectively, for fiscal 2019, compared to 35.9%, 12.9%, and (14.7)%. respectively,
for fiscal 2018. The significant decrease of gross margin for EV segment was because we only earned commission income in connection to the 117
electronic logistic cars sold on behalf of other vehicle manufacturers in fiscal 2019. The decrease in overall gross margin was primarily attributable to the
lower selling price related to consumer product segment in fiscal 2019, compensated by higher selling price for our trading segment.
Our gross profit decreased by approximately $2.5 million, or 23.9% to approximately $8.0 million in fiscal 2018 from approximately $10.5 million in
fiscal 2017. The gross profit margin was 27.2% in fiscal 2018, as compared to 25.0% in fiscal 2017. On segment basis, gross margins for consumer
product. Trading and EV segment were 35.9%, 12.9%, and (14.7)%, respectively, for fiscal 2018, compared to 25.7%, 22.8% and 22.6%. respectively, for
fiscal 2017. The decrease in gross margin was primarily attributable to the lower selling price related trading segment and our EV segment in fiscal 2018.
80
Selling expenses:
Selling expenses were approximately $0.3 million in fiscal 2019 and approximately $0.3 million in fiscal 2018. As a percentage of sales, our selling
expenses were 0.7% of revenues in fiscal 2019, as compared to 1.1% of revenues in fiscal 2018.
Selling expenses decreased by approximately $0.4 million to approximately $0.3 million in fiscal 2018 compared to approximately $0.7 million in
fiscal 2017. As a percentage of sales, our selling expenses was 1.1% of revenues in fiscal 2018, as compared to 1.7% of revenues in fiscal 2017. The
decrease of the selling expenses was mainly attribute to the decreased sales.
General and administrative expenses:
Our general and administrative expenses decreased by approximately $0.3 million or 6.4%, to approximately $4.6 million in fiscal 2019 from
approximately $4.9 million in fiscal 2018. As a percentage of revenues, general and administrative expenses decreased to 9.5% in fiscal 2019, compared to
16.8% in fiscal 2018. The decrease was primarily attributable to the following factors:
· Property insurance expenses were decreased by approximately $0.3 million as compared to fiscal 2018;
· Maintenance and repair expenses were decreased by approximately $0.3 million for as compared to fiscal 2018;
Offset by:
· The decreased consulting expenses of approximately $0.3 million as compared to fiscal 2018.
Our general and administrative expenses increased by approximately $0.3 million or 7.5%, to approximately $4.9 million in fiscal 2018 from
approximately $4.6 million in fiscal 2017. As a percentage of revenues, general and administrative expenses increased to 16.8% in fiscal 2018, compared to
10.9% in fiscal 2017. The slight increase was primarily attributable to the following factors:
·
We recorded approximately $2.1 million as bad debt expenses for accounts receivable, advances to suppliers and other receivable. In fiscal 2017,
we recorded bad debt expense related to accounts receivable by approximately $2.6 million, but decreased the bad debt expenses related to advance
to suppliers by $1.0 million; and
· We also recorded approximately $0.7 million as inventory reserve.
Impairment of goodwill
The Company wrote off the goodwill $8.5 million which is mainly attributable to the acquisition of Shangchi Automobile (formerly known as Suzhou
E-Motors) in fiscal 2017 due to sluggish business operations and continuous losses incurred.
81
Impairment of intangible asset
For the year ended December 31, 2019, the Company recorded an impairment of $1.1 million for the licenses and permit resulted from the acquisition
of Shangchi Automobile (formerly known as Suzhou E-Motors) in fiscal 2017.
Research and development expenses
Research and development expenses decreased by $0.1 million, or 15.5%, to $0.3 million in fiscal 2019 from $0.4 million in fiscal 2018. The decrease
was primarily due to less R&D activities during fiscal 2019 as we had limited activities for our electric vehicle segment.
Research and development expenses decreased by $0.2 million, or 38.4%, to $0.4 million in fiscal 2018 from $0.6 million in fiscal 2017. The decrease
was primarily due to less R&D activities during fiscal 2018 due to change of business strategies.
Total operating expenses
Total operating expenses increased by $9.2 million, or 162.1%, to $14.9 million for fiscal 2019 from $5.7 million in fiscal 2018, which was mainly due
to an increase of approximately $9.6 million in impairment of goodwill and intangible asset for fiscal 2019 compared to fiscal 2018.
Total operating expenses decreased by $0.3 million, or 5.1%, to $5.7 million for fiscal 2018 from $6.0 million in fiscal 2017, which was mainly due to
a decrease of approximately $0.2 million in general and administrative expenses and approximately $0.2 million on R&D expenses, and offset by the
increase of selling expenses of approximately $0.1 million for fiscal 2018 compared to fiscal 2017.
Interest expenses
Our interest expenses decreased by approximately $0.19 million, or 29.2% to approximately $0.44 million in fiscal 2019, from approximately $0.63
million in fiscal 2018. As the outstanding days of short-term bank loans in fiscal 2019 are less than that in fiscal 2018, we had less interest expenses
accrued for bank loans in fiscal 2019 compared to fiscal 2018.
Our interest expenses increased by approximately $0.08 million, or 13.6% to approximately $0.63 million in fiscal 2018, from approximately $0.55
million in fiscal 2017. As the outstanding days of short-term bank loans in fiscal 2018 are more than that in fiscal 2017, we had more interest expenses
accrued for bank loans in fiscal 2018 compared to fiscal 2017.
Other Income
Other income was $nil in fiscal 2019 and approximately $0.2 million in fiscal 2018. Other income generated in fiscal 2018 was primarily related to the
consulting fee that we charged to a third-party company using our patent in its production of doors with air treatment functionality.
Other income was approximately $0.2 million in fiscal 2018 and $0.4 million in fiscal 2017. Other income was primarily related to the consulting fee
that we charged to a third party company using our patent in its production of doors with air treatment functionality.
82
Income before income taxes from continuing operations
Our loss before income tax from continuing operations was approximately $9.3 million in fiscal 2019, a decrease of approximately $11.3 million
compared to income of approximately $2.0 million in fiscal 2018. The increase was primarily attributable to an increase of approximately 9.2 million in
operation expenses compared to fiscal 2018.
Our income before income tax from continuing operations was approximately $2.0 million in fiscal 2018, a decrease of approximately $2.5 million
compared to income of approximately $4.5 million in fiscal 2017. The decrease was primarily attributable to a decrease of approximately 2.5 million in
gross profit compared to fiscal 2017.
Provision for income taxes
Our provision for income taxes was approximately $0.4 million in fiscal 2019, a decrease of approximately $0.7 million or 64.7% from approximately
$1.0 million in fiscal 2018. The decrease was mainly due to significant losses before income taxes from continuing operations in fiscal 2019 comparing to
fiscal 2018.
Our provision for income taxes was approximately $1.0 million in fiscal 2018, a decrease of approximately $0.5 million or 32.5% from approximately
$1.5 million in fiscal 2017. The decrease was mainly due to lower income before income taxes from continuing operations in fiscal 2018 comparing to
fiscal 2017. The Company provided full valuation allowance in fiscal 2018 on bad debt reserves due to uncertainties in realizing those tax benefits in
future.
Net income (loss) from discontinued operations
As of December 31, 2019, we closed Tantech Babiku and Lishui Zhongzhu, and we also sold Tantech Energy because of business strategy change. The
net loss for these discontinued operations was approximately $0.3 million in fiscal 2019 compared to a net income approximately $0.08 million in fiscal
2018 There was a net income of approximately $0.07 million in fiscal 2017.
Net income attributable to common stockholders
Our net loss attributable to common stockholders was approximately $6.3 million in fiscal 2019, a decrease of approximately $8.3 million from net
income attributable to common stockholders approximately $2.0 million in fiscal 2018. The decrease was attributable to the factors described above.
Our net income attributable to common stockholders was approximately $2.0 million in fiscal 2018, a decrease of approximately $1.8 million from
approximately $3.8 million in fiscal 2017. The decrease was attributable to the factors described above.
83
B. Liquidity and Capital Resources
We are a holding company incorporated in the British Virgin Islands. We may need dividends and other distributions on equity from our PRC
subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least
10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective
registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and
bonus funds at their discretion. These reserves are not distributable as cash dividends.
We have relied on direct payments of expenses by our subsidiaries (which generate revenues), to meet our obligations to date.
For the years ended December 31, 2019, the Company had a significant increase in revenue from its consumer product segment. To react to this
competition, the Company closed Liushui Zhongzhu and Tantech Babiku during Fiscal 2018 and also sold Tantech Energy as one of the moves for business
strategy changes. All of these events had and will continue to have significant impact on the Company’s operations.
For its consumer product sector, the Company significantly cut its sales to supermarket customers because of long-aged accounts receivable from these
supermarket customers as online shopping has become increasingly popular. The Company has been experiencing longer sales and collection periods while
pushing back on the delivery of raw materials for production. That leads to higher balances of accounts receivable and advances to suppliers as compared
to prior years. Meanwhile, the newly acquired EV sector is also experiencing delays of government rebate processing time and reduction of the amount of
government rebates on eligible vehicles due to recent policy changes.
Due to a successful equity financing which resulted in net proceeds of $5.6 million in September 2017, the Company still had approximately $12.4
million cash on hand as of December 31, 2019. Although the Company maintains a positive working capital as of December 31, 2019 and generated
positive cash flows from its continued operations during the year ended December 31, 2019, the future operations of the Company depend on whether or
not the Company can successfully collect its accounts receivable and utilize its advances, as well as how the change of government policies affect its new
EV business. Without additional equity financing, the Company may heavily rely on bank borrowings or shareholder/related party loans to fund its working
capital needs. As of December 31,2019 and 2018, the Company had a short-term loan balance of approximately $6.9 million and $7.7 million, respectively.
In addition, the Company had bank acceptance note payable balance of approximately $0.2 million and $2.1 million as of December 31, 2019 and 2018,
respectively. Any failure to renew these bank borrowings upon their maturities could have an adverse impact on the Company’s operations.
The Company currently plans to fund its operations mainly through cash flow from its operations, renewal of bank borrowings, additional equity
financing and the continuing financial support by its shareholders and its affiliates controlled by its principal shareholder, if necessary, in the near future to
ensure sufficient working capital. The Company has implemented a stricter policy on sales to supermarkets and less credible customers and continues to
improve its collection efforts on accounts with outstanding balances. The Company is actively working with other customers and suppliers and expects to
fully collect or utilize the rest of prepayment balance in 2019.
84
The Company is also working closely with the local government to speed up the collection process of the outstanding government rebate balance in
2020. With disposal of its EDLC business and placing focus on manufacturing of more marketable consumer products, the Company is shifting its strategy
to cut back costs and ensure profitability. Although the Company is currently not generating net income from its EV sector, it has been focusing on
reducing the costs and expenses and developing other non-rebate alternative energy products. The Company plans to fund this sector through additional
private placement and continued support from the parent company even without timely receipt of government rebate. The principal shareholder of the
Company, along with the affiliated entity, Forasen Group, has made pledges to provide financial support to the Company whenever necessary.
Based on its current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity for the
Company to meet its future liquidity and capital requirements for at least next twelve months from the date of this report.
Further, although instruments governing the current debts incurred by our PRC subsidiaries do not have restrictions on their abilities to pay dividend or
make other payments to us, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on earnings
from our PRC subsidiaries and its ability to pay dividends out of its earnings. We cannot assure you that our PRC subsidiaries will generate sufficient
earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and
expenses or declare dividends.
As of December 31, 2019, we had cash and cash equivalents of approximately $12.6 million. Our current assets were approximately $68.2 million and
our current liabilities were approximately $19.1 million, which resulted in a current ratio of 3.6:1, increased from 3.2:1 in fiscal 2018. Total shareholders’
equity as of December, 31 2019 was approximately $94.5 million.
Our accounts receivable turnover in days were 269 days and 477 days for fiscal 2019 and 2018, respectively. Although we typically do not grant
special payment terms to our customers, some of our customers, who are large retailers and wholesale chains, tend to require longer payment terms but are
unlikely to default. The instances of slow payments and long-aging receivables may have negative impact on our short-term operating cash flow and future
liquidity. We periodically review our accounts receivable and allowance level in order to ensure our methodology used to determine allowances is
reasonable and accrued additional allowances if necessary. We have recently put a lot of efforts into accounts receivable collection through tightening our
customer credit policy and strengthening monitoring of uncollected receivables. If the Company has difficulty collecting, the following steps will be taken,
including but not limited to: cease any additional shipments to the customers, visit the customers to request payments on past due invoices, and if
necessary, take legal recourse. If all of these steps are unsuccessful, management will determine whether or not the receivable will be reserved or written
off.
For the accounts receivable from continuing operations, the Company provided bad debt allowance of $5.7 million against the aged accounts
receivable balances. Subsequent to December 31, 2019 and through June 23, 2020, the Company collected $13.0 million or 29% of the accounts receivable
balance from continuing businesses as of December 31, 2019.
As of December 31, 2019 and 2018, the Company had significant advances to suppliers of approximately $13.1 million and 14.4 million, respectively.
In order to ensure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders.
Due to recent tighten environmental protection policies in China, many smaller suppliers have gone out of business. The Company monitors the advances
to suppliers account and the allowance level periodically in order to ensure the related allowance is reasonable. We have since enhanced our collections or
realization on advance to suppliers through tightening vendor prepayment policy and strengthening monitoring of unrealized prepayment. If the Company
has difficulty collecting, the following steps will be taken: cease additional purchases from these suppliers, visit the suppliers to request return of the
prepayments promptly, and if necessary, take legal recourse. If all of these steps are unsuccessful, management will determine whether or not the
prepayment will be reserved or written off.
85
The following table sets forth summary of our cash flows for the fiscal years indicated:
(All amounts in thousands of U.S. dollars)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Operating Activities
2019
2018
2017
14,696 $
(5,930)
(5,460)
(530)
2,776
9,870
12,646 $
14,665 $
(17,995)
(810)
391
(3,749)
13,619
9,870 $
2,151
(3,493)
8,336
424
7,418
6,201
13,619
$
$
Net cash provided by operating activities was approximately $14.7 million in fiscal 2019, compared to cash provided by operating activities of
approximately $14.7 million in fiscal 2018. The change in net cash provided by operating activities was primarily attributable to the following factors:
·
·
·
·
·
Non cash adjustment of $13.7 million, which primarily consisted of $9.6 million impairment of goodwill and intangible assets, $1.3 million bad
debt provision for accounts receivable and $1.0 million inventory provision
The company received $9.0 million from disposition subsidiary.
An increase of $6.2 million in customer deposits received for future customer orders
A reduction of $1.6 million on manufacturing rebate receivable due to collection
Net cash flow provided by operation activities from discontinued operation amounted to $4.6 million
Offset by the impacts from the following factors:
·
·
An increase of $9.9 million in accounts receivable due to more sales in fiscal 2019
The Company had a net loss of $9.6 million in fiscal 2019, decreased by $10.7 million compared to fiscal 2018.
Net cash provided by operating activities was approximately $14.7 million in fiscal 2018, compared to cash provided by operating activities of
approximately $2.3 million in fiscal 2017. The increase in net cash provided by operating activities was primarily attributable to the following factors:
·
·
a reduction in accounts receivable of approximately $10.3 million due to collection efforts.
In fiscal 2018, the Company provided bad debt reserve for accounts receivable of approximately $0.9 million, bad debt reserve for advance to
supplier of approximately $0.8 million, and bad debt reserve for other receivables and due from related parties of approximately $0.4 million. The
Company also had an inventory reserve of approximately $0.7 million in fiscal 2018.
Offset by the impacts from the following factors:
·
·
the Company had a net income of $1.1 million in fiscal 2018, decreased by $1.9 million compared to fiscal 2017.
a reduction of accounts payable of approximately $2.8 million and an increase of advance to suppliers of approximately $2.0 million in fiscal
2018.
86
Net cash used in investing activities was $5.9 million for fiscal 2019, compared to net cash used in investing activities of $18.0 million in fiscal 2018.
The decrease in net cash used in investing activities in fiscal 2019 was primarily attributable the payment of $6.7 million paid to acquire 18% of the equity
interest of Fuquan Chengwang, a wholly-owned subsidiary of Jingning Zhonggang. The net cash used in investing activities in fiscal 2018 was primarily
attributable the payment of $17.4 million paid for acquisition of all of the shares of Lishui Xincai, a wholly-owned subsidiary of Shanghai Shicai.
Net cash used in investing activities was $18.0 million for fiscal 2018, compared to net cash used in investing activities of $3.5 million in fiscal 2017.
The increase in net cash used in investing activities in fiscal 2018 was primarily attributable the payment of $17.4 million paid for acquisition of all of the
shares of Lishui Xincai Industrial Co., Ltd. (“Lishui XinCai”), a wholly-owned subsidiary of Shanghai Shicai, The net cash used in investing activities in
fiscal 2017 was primarily attributable to $4.5 million paid for acquisition of Shangchi Automobile.
Net cash used in financing activities was $5.5 million for fiscal 2019, compared to net cash used in financing activities of $0.8 million for fiscal 2018.
Net cash used in financing activities for fiscal 2019 primarily due to net repayment of approximately $2.8 million for third party, repayment of
approximately $1.8 million for bank acceptance notes payable, and net repayment of $0.4 million of related parties.
Net cash used in financing activities was $0.8 million for fiscal 2018, compared to net cash provided by financing activities of $8.3 million for fiscal
2017. Net cash used in financing activities for fiscal 2018 primarily due to net proceeds of approximately $2.4 million received from bank loans, proceeds
of approximately $2.4 million from third party, offset by net repayment of $4.6 million of bank acceptance note payable.
Our primary source of cash is currently generated from the sales of our products and bank borrowings. In the coming years, we will be looking to other
sources, such as raising additional capital by issuing shares of our common stock to meet our cash needs. While facing uncertainties in regards to the size
and timing of capital raise, we expect to be able to meet our working capital and capital expenditure requirements by using our cash on hand, cash flows
from operations and bank borrowings in the next twelve months.
Loan Facilities
As of December 31, 2019, the balance of our bank loans was approximately $6.9 million. Our outstanding balance of bank acceptance notes was $0.2
million as of December 31, 2019.
As of December 31, 2019, the details of all our short-term bank loans are as follow:
No.
1
2
Type
Short-term bank loan
Short-term bank loan
3
Short-term bank loan
Contracting Party
Bank of China
Bank of China
Shanghai Pudong
Development Bank
Valid Date
February 27, 2019
March 18, 2019
Duration
Amount
12 months $
12 months
1,436,000
2,696,808
November 04, 2019
6 months $
2,728,400
87
All above loans were fully repaid upon maturity, and the Company was able to renew the loans as follows:
On January 6, 2020, Tantech Bamboo entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow approximately $2.6
million (RMB 17.78 million) for six months with annual interest rate of 5.88%. The purpose of the loan was to fund working capital needs. The loan was
collateralized by building and land use right of Tantech Bamboo with maximum guaranteed amount up to approximately $3.9 million (RMB25,960,000).
The loan was also guaranteed by three related parties, Zhengyu Wang, Chairman of the Board and previous CEO of the Company and his wife, Yefang
Zhang and Lishui Jiuanju Trading Co., Ltd., the president of which was also the present CEO and previous COO of the Company.
On January 6,2020, Tantech Charcoal entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow approximately $1.4
million (RMB 10 million) for one year with annual interest rate of 4.30%. The purpose of the loan was for working capital needs. The loan was guaranteed
by Tantech Bamboo, two individual related parties, Zhengyu Wang and Yefang Zhang and a third party, Zhejiang Meifeng Tea Industry Co., Ltd. The loan
was also collateralized by two properties owned by Zhengyu Wang and Yefang Zhang.
On April 27, 2020, Tantech Bamboo entered into a short-term loan agreement with Shanghai Pudong Development Bank to borrow approximately $2.7
million (RMB 19 million) for one year with fixed annual interest rate of 4.785%. The purpose of the loan is to fund working capital needs. The loan was
guaranteed by three related parties, Zhengyu Wang, Chairman of the Board and previous CEO and his wife, Yefang Zhang and Forasen Group Co., Ltd., a
company owned by Zhengyu Wang and Yefang Zhang.
Although we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, we
believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least for the next twelve
months. We will consider additional borrowing or public offering based on our working capital needs and capital expenditure requirements. There is no
seasonality of our borrowing activities.
Statutory Reserves
Under PRC regulations, all our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with
PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves
until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the
Company and can be used to make up cumulative prior year losses.
Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions,
the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have these restrictions on our
net assets as of December 31, 2019 and December 31, 2018. We are also a party to certain debt agreements that are secured with pledges on our real
property in Shuige Industrial Zone facility located in Lishui, China. But such debt agreements do not restrict our net assets and instead only impose
restrictions on the pledged property.
The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of
restricted net assets as a percentage of consolidated net assets, as of December 31, 2019 and December 31, 2018.
Statutory Reserves
Total Restricted Net Assets
Consolidated Net Assets
Restricted Net Assets as Percentage of Consolidated Net Assets
88
As of
December 31,
2019
6,379,276
6,379,276
94,532,261
$
$
$
$
$
$
6.7%
As of
December 31,
2018
6,461,788
6,461,788
109,985,014
5.9%
Total restricted net assets accounted for approximately 6.7% of our consolidated net assets as of December 31, 2019. As our subsidiaries usually set
aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses, we
believe the potential impact of such restricted net assets on our liquidity is limited.
Total restricted net assets accounted for approximately 5.9% of our consolidated net assets as of December 31, 2018. As our subsidiaries usually set
aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses, we
believe the potential impact of such restricted net assets on our liquidity is limited.
Capital Expenditures
We had capital expenditures of $6.8 million, $18.3 million and $5.4 million for the years ended December 31, 2019, 2018 and 2017, respectively for
the addition and renovation of our workshops and office buildings; purchasing of equipment in connection with our business activities.
We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from
our subsidiaries’ operations to fund our capital commitments in the past and anticipate using such funds and proceeds received from our initial public
offering, our secondary offering and other sources to fund capital expenditure commitments in the future.
E. Off-balance Sheet Arrangements
We provided a guaranty on behalf of Forasen Group’s outstanding line of credit of RMB 57,070,000 (equivalent to $8,195,252) by pledging our
building with a net book value of approximately $6.4 million as the collateral for the loan and notes. The guaranty will be expired on July 23, 2020. As of
today, no additional guarantee was made by the Company.
Except for the above-mentioned guaranty, we have not entered into any other financial guarantees or other commitments to guarantee the payment
obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as
shareholder’s equity, or that are not reflected in our consolidated financial statements.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”),
which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any
related disclosures. Although there was no material changes made to the accounting estimates and assumptions in the past three years, we continually
evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions
that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual
results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make
significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated
financial condition and results of operations.
89
Discontinued operation
In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a
component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-
20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to
approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported
as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued
operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as
components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
Use of Estimates
In preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as
the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include the fair value
estimates used in the purchase price allocation, the useful lives of property and equipment; allowances pertaining to the allowance for doubtful accounts
and advances to related parties and suppliers; the valuation of inventories; and the realizability of deferred tax assets.
Business Combinations
Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net
tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the
date of acquisition.
Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective
approach. Revenues for the year ended December 31, 2019 were presented under ASC 606, and revenues for the years ended December 31, 2017 were not
adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. There is no adjustment to the opening balance of retained earnings at
January 1, 2018 since there was no change to the timing and pattern of revenue recognition upon adoption of ASC 606. Under ASC 606, revenue is
recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an entity expects
to be entitled to in exchange for those goods or services.
The Company’s revenues are primarily derived from the following sources:
Sales of products: The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time the product is delivered to the
customer and control is transferred (point of sale).
90
Commission income: The Company acts as an agent without assuming the risks and rewards of ownership of the goods and reports the revenue on a
net basis. Revenue is recognized based on the completion of the contracted service.
Government manufacturing rebate income: The Company is eligible for a government manufacturing rebate on each qualifying electric bus sold. The
government manufacturing rebates are recognized as part of revenue when sales are finalized, amount of rebates can be reasonably estimated and collection
is assured. The collectability of rebates can be assured as long as the sales are deemed qualifying based on the criteria set by the government.
Revenue is reported net of all value added taxes. The Company does not routinely permit customers to return products and historically, customer
returns have been immaterial.
Long term investments
The Company accounts for investment in equity investees over which it has significant influence but does not own a majority of the equity interest or
lack of control using the equity method. For investment in equity investees over which the Company does not have significant influence or the underlying
shares the Company invested in are not considered in-substance common stock and have no readily determinable fair value, the cost method accounting is
applied.
The Company records the equity method investments at historical cost and subsequently adjusts the carrying amount each period for share of the
earnings or losses of the investee and other adjustments required by the equity method of accounting. Dividends received from the equity method
investments are recorded as reductions in the cost of such investments. The Company records the cost method investments at historical cost and
subsequently record any dividends received from the net accumulated earnings of the investee as income. Dividends received in excess of earnings are
considered a return of investment and are recorded as reductions in the cost of the investments.
Investment in equity investees are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its
carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Group reviews several factors to
determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of
the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold
the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Recent accounting pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting
standards that are issued.
91
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU
2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit
losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is
currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings
for adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate
resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Company does not
believe this guidance has a material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05— Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act
(the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and
Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits
and may additionally have international tax consequences for many companies that operate internationally. The Company does not believe this guidance
has a material impact on its consolidated financial statements.
On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-
Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-
07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing),
with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if
the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing
model for nonemployee awards. The new standard is effective for us on January 1, 2019. Early adoption is permitted, including in interim periods, and
should be applied to all new awards granted after the date of adoption. The Company does not believe this guidance has a material impact on its
consolidated financial statements.
In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework
Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value
measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any
removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted
on a prospective basis. The Company does not expect this guidance will have a material impact on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under
Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and
purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. The Company is currently
evaluating the effect of adopting this ASU on the Group’s financial statements.
92
Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the
consolidated financial position, statements of operations and cash flows.
F. Tabular Disclosure of Contractual Obligations
Below is a table setting forth all of our contractual obligations as of December 31, 2019, which consists of our short-term loan agreements, loans from
third parties and due to related parties:
Contractual Obligations
Short-Term Debt Obligations
Bank Acceptance Notes Payable
Due to third parties
Due to related parties
Total
G. Safe Harbor
Total
6,861,208 $
205,520
287,200
1,626,120
8,980,048 $
$
$
Less than
1 year
Payment Due by Period
1 – 3
years
3 – 5
years
More than
5 years
6,861,208 $
205,520
287,200
1,626,120
8,980,048 $
- $
-
-
-
- $
- $
-
-
-
- $
-
-
-
-
-
See “Special Note Regarding Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following table provides information regarding our executive officers and directors as of June 30, 2020:
Name
Wangfeng Yan
Weilin Zhang
Mingqin Dong
Zhengyu Wang
Yefang Zhang
Wencai Pan
Hongdao Qian
Shudong Wang
Position(s)
Age
43
51
30
51
53
43
56
70
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Chairman of Board of Directors
Director
Director (Independent)
Director (Independent)
Director (Independent)
93
Wangfeng Yan has served as our Chief Executive Officer since December 2019. He was our Chief Operating Officer from March 2018 to December
2019. Mr. Yan joined Tantech Holdings (Lishui) Co., Ltd. (formerly Zhejiang Tantech Bamboo Technology Co., Ltd.) (“Tantech Bamboo”) as a member of
the production staff in August 2010 and rose to serve as the head of production managers. Prior to being appointed as Chief Operating Officer, Mr. Yan was
in charge of production management for Tantech Bamboo and Tantech Energy. In these capacities, Mr. Yan contributed to the “Dr. Charcoal” brand sales
channel development. In June 2010, Mr. Yan earned a Bachelor’s Degree in Engineering from Zhejiang Sci-tech University in Hangzhou.
Weilin Zhang has served as our Chief Financial Officer since July 2019. Prior to being appointed as CFO, Mr. Zhang has been serving as the CFO of
Forasen Group Ltd. Co. since October 2018 and was its CFO from March 2008 and June 2013. From July 2013 to September 2018, he was the general
manager of Zhejiang Juma Valve Ltd. Co. Currently he is a director of Zhejiang Juma Valve Ltd. Co. He graduated from Zhejiang Province Finance
Institute in 1989 and studied accounting at Beijing Industry and Commerce College from 2004 to 2008.
Mingqin Dong has served as our Chief Operating Officer since December 2019. He has been the Chairman and the general manager of Shangchi
Automobile, our 70% owned subsidiary, since June 2017. From August 2013 to June 2017, Mr. Dong was a project manager of us. In June 2013, Mr. Dong
earned his Bachelor’s Degree in Computer and Science Technology from Heilongjiang International University.
Zhengyu Wang is a seasoned veteran in business and high-tech agricultural products. He founded Tantech Bamboo in October 2002 (then known as
Lishui Zhonglin High Tech Co., Ltd.) and he has served as Chairman and CEO ever since. From November 1998 until April 2003, he was General Manager
of Lishui Forasen Foodstuff Co., Ltd. Prior to that, from 1994 to 1997, he served as General Manager of Lishui Jingning Huali, Co., Ltd. From 1990 to
1994, he served as a board member of the Lishui Farmer’s Economic Committee. In addition to his efforts with our Company, Mr. Wang also manages the
business operations of Forasen Group, a company he owns with his wife and our director, Ms. Yefang Zhang. Forasen Group is a PRC company with
several subsidiaries that are engaged in a variety of businesses, including without limitation rubber trading, mushroom sales, biomass power generation,
and marketing. In addition, since February 2017, Mr. Wang has served as a director of Farmmi, Inc., another Nasdaq listed company since February 2018.
He has been the executive director and/or general manager of various subsidiary companies under us and charcoal business related companies. Mr. Wang
has also been the Chairman of Daxing’anling Hualin Investment Management Ltd. Co. since November 2011 and Daxing’anling Forasen Energy
Technology Ltd. Co. since March 2009, and the executive director and general manager of Harbin Forasen Energy Technology Ltd. Co. since
December 2013, and of Hangzhou Xinying Industrial Co., Ltd. since December 2013. He earned his Bachelor’s Degree in Biology from Zhejiang
University in Hangzhou, China in June 1990. He has been appointed as a director because, as our founder, he has significant experience in leading and
advising our Company and understands our industry.
94
Yefang Zhang has been in leadership roles for over a dozen years. She then helped to found Forasen Group Co., Ltd in October 2002 and has served as
a Board member since then. Since July 2015, she has been Chairwoman and CEO of Farmmi, Inc., another Nasdaq listed company. From 1997 until 2002,
she worked as General Manager at Zhejiang Forasen Food Co., Ltd. From 1994 to 1997, she served as Vice General Manager of Lishui Jingning Huali Co.,
Ltd. From 1991 to 1994, she was a teacher at Wenzhou Huangtan Middle School. From 1990 to 1994, she served on the board of Lishui Farmer’s
Economic Committee. In addition to her efforts with our Company, Ms. Zhang also manages the business operations of Forasen Group, a company she
owns with her husband and our Chairman, Mr. Zhengyu Wang. Forasen Group is a PRC company with several subsidiaries that are engaged in a variety of
businesses, including without limitation rubber trading, mushroom sales, biomass power generation, and marketing. She earned her Bachelor’s Degree in
Geography from Wenzhou Teacher’s College in July 1991. We have appointed Ms. Zhang to be a director due to her strong understanding of our industry
and business.
Wencai Pan has been our director since 2014. He has served as the CFO of Shandong Xiangrui Pharmacy Co. Ltd., which was listed in the US under
SMSA Treemont Acquisition Corp. from 2011 through present. From 2007 through 2010, Mr. Pan was the China controller for Aramex Express Logistics
Services (Shanghai) Co. Ltd., a global logistics and transportation company from 2007 to 2010, as controller for its China operations and was based out of
Shanghai. During 2006, Mr. Pan had been employed as a consultant by the Centergate Securities Bankruptcy Committee, which was set up by the China
Securities Regulatory Commission, where he assisted on bankruptcy audits on Centergate Securities Ltd. Co. Previously, Mr. Pan served as the finance
manager for Shera International Limited, a technology product development, production and distribution company, from 2004 until the end of 2005 and
was based out of Shanghai. Mr. Pan was employed as an internal auditor by Valley National Bank, located in Wayne, New Jersey, U.S., from 2003 to 2004.
None of Mr. Pan’s previous employers is a parent, subsidiary or other affiliate of the Company. Mr. Pan obtained a Masters in Professional Accountancy
from The University of Utah, in 2003. In 1998, Mr. Pan received a bachelor’s degree in Economics from The University of International Business &
Economics, Beijing, China. Mr. Pan passed the Chinese CPA exam in 1997 and passed the Uniform CPA exam in the United States in 2002. We have
chosen Mr. Pan to serve as a director because of his experience with US GAAP and with United States compliance issues.
Hongdao Qian has been our director since 2014. He has been a Professor on the faculty of the Guanghua Law School at Zhejiang University since
September 2005. His research, writing and teaching focuses on corporate governance, economic analysis of law and Western jurisprudence. Prior to joining
Guanghua Law School, Mr. Qian was a Professor at the Institute of Law, China Academy of Social Sciences; a Lecturer in Economics at Peking University
and a Prosecutor in the People’s Procuratorate of Zhejiang Province. Mr. Qian was a visiting scholar at Waseda University in Japan, Stanford University in
California and both Oxford and Cambridge Universities in England. Since July 2017, he has been an independent director of Farmmi, Inc, another Nasdaq
listed company. He currently serves as Vice Chairman of the Chinese Society of Comparative Law, Executive Subeditor of the China Academic Yearbook
and President of the China Rule of Law Research Institute, where he has organized a team of scholars to create China’s first Rule of Law index using
empirical methods. Mr. Qian earned his bachelor of law from Jilin University in 1986, his master of law from North-West University of Politics and Law in
1994 and his doctor of law from Peking University in 1997. We have chosen Mr. Qian to serve on our Board of Directors because of his expertise in
economics and law.
Shudong Wang has been our director since 2014. He was the department director at the China National Bamboo Research Center from 1996 through
his retirement in 2012. He earned his bachelor’s degree in forestry from Northeast Forestry University in Heilongjiang in 1976. He once served as deputy
director of Bamboo Branch of the Academic Committee of China Forestry. He has also served as executive director of South-South Cooperation
Association and the Center of China International Exchange. He is a science advisor to the State Forestry Bureau. We selected Mr. Wang to serve on our
Board of Directors because of his expertise in the bamboo industry in China.
B. Compensation
EXECUTIVE COMPENSATION
Our compensation committee approves our salary and benefit policies. Before our initial public offering, our board of directors determined the
compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers’
to our success. Each of the named officers are measured by a series of performance criteria by the board of directors, or the compensation committee on a
yearly basis. Such criteria are set forth based on certain objective parameters such as job characteristics, required professionalism, management skills,
interpersonal skills, related experience, personal performance and overall corporate performance.
95
The board of directors makes an independent evaluation of appropriate compensation to key employees, with input from management. The board of
directors has oversight of executive compensation plans, policies and programs.
Summary Compensation Table
The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named executive
officers for services rendered to us for the years ended December 31, 2019, 2018 and 2017.
Wangfeng Yan(3)
Former Chief Operating Officer and current Chief
Executive Officer
Zhengyu Wang(4)
Former Chief Executive Officer
Weilin Zhang(5)
Current Chief Financial Officer
Jing Jin(6)
Former Chief Financial Officer
Mingqin Dong(7)
Current Chief Operating Officer
Zaihua Chen(8)
Chief Technical Officer
Fiscal
Year
Salary
($)
Bonus
($) (1)
2019
26,536
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
21,911
—
32,132
35,054
35,054
21,911
—
—
24,000
48,000
48,000
2,191
—
—
—
—
26,291
All Other
Compensation
($) (2)
Total
($)
820
27,356
678
—
994
1,084
1,084
678
—
—
—
—
—
67.8
—
—
—
—
813
22,589
—
33,126
36,138
36,138
22,589
—
—
24,000
48,000
48,000
2,259
—
—
—
—
27,104
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) No officer received a bonus in 2019, 2018 and 2017.
(2) Consists of social security payments required under Chinese law. Although we also reimburse the referenced individuals for reasonable expenses,
such reimbursements do not, in the aggregate, exceed $10,000 for any individual in any year presented and are not considered perquisites because
they are integrally and directly related to the performance of such recipients’ jobs.
(3) Effective December 6, 2019, Wangfeng Yan resigned as Chief Operating Officer and was appointed as Chief Executive Officer.
(4) Effective December 6, 2019, Zhengyu Wang resigned as Chief Executive Officer.
(5) Effective July 1, 2019, Weilin Zhang was appointed as Chief Financial Officer.
(6) Effective July 1, 2019, Jing Jin resigned as Chief Financial Officer.
(7) Effective December 6, 2019, Mingqin Dong was appointed as Chief Operating Officer.
(8) Effective December 6, 2019, Zaihua Chen resigned as our Chief Technical Officer
Director Compensation
The following section presents information regarding the compensation paid during fiscal 2019 to members of our Board of Directors who are not also
our employees (referred to herein as “Non-Employee Directors”). As of December 31, 2019, we had four such directors, Ms. Yefang Zhang, Mr. Wencai
Pan, Mr. Shudong Wang and Mr. Hongdao Qian.
We may also provide stock, option or other equity-based incentives to our directors for their service. We also plan to reimburse our directors for any
out-of-pocket expenses incurred by them in connection with their services provided in such capacity.
96
The following table presents information regarding the compensation of our non-employee directors for fiscal 2019. Compensation for our Chairman
and former Chief Executive Officer, Mr. Zhengyu Wang, is reflected above in the Summary Compensation Table rather than below.
Fees earned
or paid
in cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-equity
Incentive
Plan Compensation
($)
Changes in Pension
Value and
Nonqualified
Deferred
Compensation
($)
All other
Compensation
($)
0
10,800
7,835
7,835
$
$
$
$
0
0
0
0
$
$
$
$
0
0
0
0
$
$
$
$
0
0
0
0
$
$
$
$
0
0
0
0
$
$
$
$
0
1,200
1,200
1,200
$
$
$
$
Total
($)
0
12,000
9,035
9,035
Name
Yefang Zhang
Wencai Pan
Shudong Wang
Hongda Qian
$
$
$
$
C. Board Practices
See information provided in response to Item 6.A. above as to the current directors.
Election of Officers
Our executive officers are elected by, and serve at the discretion of, our board of directors. Our chairman of the Board of Directors, Zhengyu Wang is
married to one of our other directors, Yefang Zhang. Other than this relationship, there are no familial relationships among any members of the Board of
Directors.
Board of Directors and Board Committees
Our board of directors currently consists of five (5) directors. A majority of our Board of Directors is independent, as such term is defined by The
NASDAQ Capital Market.
A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director
in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the
directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s
interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A
director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so
interested and may vote on such motion.
Mr. Wangfeng Yan currently holds the position of Chief Executive Officer. Mr. Zhengyu Wang currently holds the position of Chair of the Board. The
board of directors believes that that separating the roles of Chief Executive Officer and Chairman of the board of directors is in the best interests of the
Company and its shareholders. Separating such roles allows our Chief Executive Officer to focus completely on operations and corporate strategy
execution. We do not have a lead independent director, and we do not anticipate having a lead independent director because we will encourage our
independent directors to freely voice their opinions on a relatively small company board. The Board of Directors makes all relevant Company decisions. As
a smaller company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight
matters.
97
Board Committees
We have established three standing committees under the board: the audit committee, the compensation committee and the nominating committee. The
audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements of our
company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also
administers our incentive compensation plans and equity-based plans (but our board will retain the authority to interpret those plans). The nominating
committee of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations to the
board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and
experience when nominating directors.
Wencai Pan qualifies as an audit committee financial expert and is the chair of the audit committee. Shudang Wang is the chair of the compensation
committee. Hongdao Qian is the chair of the nominating committee. Wencai Pan, Shudong Wang and Hongdao Qian serve on all three committees, and
each is an independent director.
Duties of Directors
Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a
duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care
to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. We have the right to seek damages if a
duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
·
·
·
·
appointing officers and determining the term of office of the officers;
authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
exercising the borrowing powers of the company and mortgaging the property of the company;
executing checks, promissory notes and other negotiable instruments on behalf of the company; and
· maintaining or registering a register of mortgages, charges or other encumbrances of the company.
Interested Transactions
A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is
interested. We require directors to promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a
transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a
written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company
and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be
necessary to give special notice relating to any particular transaction.
Remuneration and Borrowing
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or
prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or
committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The
compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may
exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures,
debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
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Qualification
There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a
general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.
Director Compensation
All directors hold office until the next annual meeting of shareholders at which directors are re-elected or until their successors have been duly elected
and qualified. Our Chairman, Zhengyu Wang, is married to our Director, Yefang Zhang. Officers are elected by and serve at the discretion of the Board of
Directors. Employee directors do not receive any compensation for their services. Non-employee directors are entitled to receive up to $30,000 per year for
serving as directors and may receive incentive security grants from our company. In addition, non-employee directors are entitled to receive reimbursement
of their actual travel expenses for each Board of Directors meeting attended.
Limitation of Director and Officer Liability
Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith
with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of
officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to
provide indemnification against civil fraud or the consequences of committing a crime.
Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees,
and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative
proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to
indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal
proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities
laws.
We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and
against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings.
We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings,
the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted
honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was
unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings
by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in
good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be
indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the
proceedings.
99
We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and
incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the
liability as provided in our amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our
company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, nor has any been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final
order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in
“Related Party Transactions,” our directors and officers have not been involved in any transactions with us or any of our affiliates or associates which are
required to be disclosed pursuant to the rules and regulations of the SEC.
D. Employees
OUR EMPLOYEES
As of May 31, 2020, we employ a total of 39 full-time employees in the following functions (except the employees at Shangchi Automobile):
Lishui & Hangzhou
Department
Senior Management
Human Resource & Administration
Finance
Research & Development
Production & Procurement
Sales & Marketing
Total
Number of Employees
May 31,
2020
December 31,
2019
December 31,
2018
December 31,
2017
5
7
6
3
14
4
39
5
7
6
3
14
4
39
5
10
8
3
36
5
67
5
14
12
3
42
7
83
Below is information specifically for our Shangchi Automobile subsidiary.
Shangchi Automobile
Department
Senior Management
Human Resource & Administration
Finance
Research & Development
Production & Procurement
Sales & Marketing
Total
Number of Employees
May 31,
2020
December 31,
2019
3
7
3
8
8
2
31
3
7
3
8
8
3
32
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work
stoppages.
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We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are
required by PRC law to cover employees in China with various types of social insurance. In 2019, 2018 and 2017, we contributed approximately $42,000,
$47,000 and $123,000, respectively, to the employee benefit plans and social insurance. The effect on our liquidity by the payments for these contributions
is immaterial. We believe that we are in material compliance with the relevant PRC employment laws.
Employment Agreements
Each employee is required to enter into an employment agreement. Accordingly, all of our employees, including management, have executed their
employment agreements. Our employment agreements with our executives provide the amount of each executive officer’s salary and establish their
eligibility to receive a bonus.
101
Our employment agreements with our executive officers generally provide for a salary to be paid monthly. The agreements also provide that executive
officers are to work full time for our company and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations
and our internal work policies. The employment agreements also provide that we will pay for all mandatory social security programs for our executive
officers in accordance with PRC regulations. Our executive officers are subject to keep trade secrets confidential. In addition, our employment agreements
with our executive officers prevent them from rendering services for our competitors for so long as they are employed.
Other than the salary, bonuses, equity grants and necessary social benefits required by the government, which are defined in the employment
agreements, we currently do not provide other benefits to the officers. Our executive officers are not entitled to severance payments upon the termination of
their employment agreement or following a change in control.
We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance or change
of control benefits to our named executive officers.
Under Chinese law, we may terminate an employment agreement without penalty by providing the employee thirty days’ prior written notice or one
month’s wages in lieu of notice if the employee is incompetent or remains incompetent after training or adjustment of the employee’s position in other
limited cases. If we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for
each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where the
employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us.
Wangfeng Yan
We entered into an employment agreement with our Chief Executive Officer, Mr. Wangfeng Yan, effective December 6, 2019 . Under the terms of that
employment agreement, Mr. Yan is entitled to the following:
· Base compensation of RMB 200,000 payable in 12 equal monthly installments of RMB 15,000 each and RMB 20,000 year-end bonus.
· Reimbursement of reasonable expenses incurred by Mr. Yan.
Mr. Yan’s employment agreement is scheduled to expire on December 5, 2022.
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Weilin Zhang
We entered into an employment agreement with our chief financial officer, Mr. Weilin Zhang, effective July 1, 2019. Under the terms of that
employment agreement, Mr. Zhang is entitled to the following:
· Base compensation of RMB 300,000 payable in 12 equal monthly installments of RMB 25,000 each.
· Reimbursement of reasonable expenses incurred by Mr. Zhang.
Mr. Zhang’s employment agreement is scheduled to expire on June 30, 2022.
Mingqin Dong
We entered into an employment agreement with our Chief Operating Officer, Mr. Mingqin Dong, effective December 6, 2019. Under the terms of that
employment agreement, Mr. Dong is entitled to the following:
· Base compensation of RMB 180,000 payable in 12 equal monthly installments of RMB 15,000 each.
· Reimbursement of reasonable expenses incurred by Mr. Dong.
Mr. Dong’s employment agreement is scheduled to expire on December 5, 2022.
103
E. Share ownership
The following table sets forth information with respect to beneficial ownership of our common shares as of June 30, 2020 by:
· Each of our directors and named executive officers; and
· All directors and named executive officers as a group.
The number and percentage of common shares beneficially owned are based on 28,888,834 common shares outstanding as of June 30, 2020
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our common shares.
Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with
respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage ownership of such
person, common shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of
June 30, 2020 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise
indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for
all common shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the
care of our Company at Tantech Holdings (Lishui) Co., Ltd., No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province 323000,
People’s Republic of China. As of June 30, 2020, we had thirteen shareholders of record.
Named Executive Officers and Directors
Directors and Named Executive Officers:
Wangfeng Yan, CEO
Weilin Zhang, CFO
Mingqin Dong, COO
Zhengyu Wang (2), Chairman
Yefang Zhang (2), director
Wencai Pan, independent director
Shudong Wang, independent director
Hongdao Qian, independent director
All directors and executive officers as a group (eight (8) persons)
Amount of
Beneficial
Ownership(1)
Percentage
Ownership(2)
—
—
—
11,780,000
11,780,000
—
—
—
—
0.0%
0.0%
0.0%
40.8%
40.8%
0.0%
0.0%
0.0%
0.0%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common
shares.
(2) The number of our common shares outstanding used in calculating the percentage for each listed person includes the common shares underlying
options held by such person to the extent such options are exercisable within 60 days of the date hereof. The sole shareholder of Tanbsok Group Ltd is
Ms. Yefang Zhang, who is the director of our company and the spouse of our Chairman and founder, Mr. Zhengyu Wang. By virtue of this relationship,
Mr. Wang may be deemed to share beneficial ownership of the shares of our company held by Tanbsok Group Ltd with Ms. Zhang.
Options
Incentive Securities Pool
We have established a pool for shares and share options for our employees. As of the date of this report, this pool contain shares and options to
purchase 2,160,000 of our common shares, equal to 10% of the number of common shares outstanding as of the public offering.
104
Any options granted will vest at a rate of 20% per year for five years and have a per share exercise price equal to the fair market value of one of our
common shares on the date of grant. We expect to grant shares and/or options under this pool to certain employees. We have not yet determined the
recipients of any such grants.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth information with respect to beneficial ownership of our common shares as of June 30, 2020 by:
· Each person who is known by us to beneficially own 5% or more of our outstanding common shares.
The number and percentage of common shares beneficially owned are based on 28,888,834 common shares outstanding as of June 30, 2020.
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our common shares.
Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with
respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage ownership of such
person, common shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of
June 30, 2020 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise
indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for
all common shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the
care of our Company at Tantech Holdings (Lishui) Co., Ltd., No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province 323000,
People’s Republic of China.
Shareholders
Tanbsok Group Ltd (2)
Amount of Beneficial
Ownership(1)
Percentage
Ownership(2)
11,780,000
40.8%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common
shares.
(2) Tanbsok Group Ltd holds one hundred percent of our issued and outstanding shares prior to our initial public offering. The sole shareholder of Tanbsok
Group Ltd is Ms. Yefang Zhang, who is a director of our company and the spouse of our Chairman and founder, Mr. Zhengyu Wang. By virtue of this
relationship, Mr. Wang may be deemed to share beneficial ownership of the shares of our company held by Tanbsok Group Ltd with Ms. Zhang.
B. Related party transactions
In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we describe transactions
since January 1, 2013, to which we have been a participant, in which the amount involved in the transactions is material to us or the related party.
Since the beginning of 2013, we have had transactions with the following related parties:
· Zhengyu Wang
· Yefang Zhang
· Wangfeng Yan
· Henglong Chen
· LiShui JiuAnJu Commercial Trade Co., Ltd.
· Forasen Group Co., Ltd.
105
· Zhejiang Forasen Food Co., Ltd.
· Hangzhou Sigma Trading Co., Ltd.
· Hong Kong Clean Energy Ltd.
Summary of Status of Related Party Transactions
Given the number of related transactions, we believe it is helpful to provide an overview of the largest amount outstanding for each of the related party
transactions described here during the periods covered that is material to us or the related party. For more details, please refer to note 14 of the financial
statements for the years ended December 31, 2019 and 2018.
As to all related party transactions that are loans, we disclose them below without regard to whether such loans is material. All such related party loans
carried no interest and were repayable upon demand, with no periodic payments required. The other details regarding such loans are described for each
such loan.
These related parties fall within two categories: those who are shareholders, officers and directors of THL and/or Tantech Bamboo, and those who are
related to Forasen Group Co., Ltd. All amounts described in this section are unsecured, interest-free and due on demand.
Shareholders, Officers, Directors and Employees of THL and Tantech Bamboo
Before the IPO, THL was owned entirely by Tanbsok Group Ltd., the sole shareholder of which is Ms. Yefang Zhang, the spouse of our Chairman of
Board of Directors, Mr. Zhengyu Wang.
THL owns 100% of USCNHK, and USCNHK owns 100% of Lishui Tantech which in turn owns 100% of Tantech Bamboo.
In June 24, 2016, Lishui Tantech has entered into an equity purchase agreement with the previous holders of 5% interest of Tantech Bamboo, to
purchase the 5% interest of Tantech Bamboo for 1,018,935 shares of THL. The purchase was completed in December 2016.
Dr. Henglong Chen is the original shareholder of Shangchi Automobile (formerly known as Suzhou E-Motors). The Company acquired his 70% equity
interest in Shangchi Automobile and issued 2,500,000 restricted shares of Tantech’s common stock to him in connection with the acquisition of Shangchi
Automobile. As of December 31, 2019 and 2018, Dr. Henglong Chen and his affiliates advanced $932,616 and $1,227,773 to the Company for its working
capital purpose, respectively.
For the year ended December 31, 2017, the Company borrowed $1,537,000 from Mr. Yulong Chen, a shareholder of the Company for working capital
purpose. The balance was fully repaid during the year ended December 31, 2018.
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Lishui JiuAnJu Commercial Trade Co., Ltd. (“LJC”)
Wangfeng Yan and Dexian Zhang (Yefang Zhang’s brother) each own 50% of the equity of LJC. Although LJC’s name shares “JiuAnJu” in common
with a third-party debtor, ZheJiang JiuAnJu Environment Protection Co., Ltd., this entity is unrelated to LJC or its shareholders. Prior to September 11,
2011, LJC was an unrelated party owned by Yonghong Wu. At that time, LJC was a customer of our company and distributed our products for sale.
Although the terms of such sales were generally interest-free 60 days net payment, LJC became delinquent in its payments to our company and accrued a
significant account payable to our company. In order to protect our company from the risk of default by LJC, Zhengyu Wang personally loaned Mr. Zhang
and Mr. Yan RMB 10 million to purchase all of the equity of LJC from Ms. Wu and assume the liabilities of LJC. In the event Mr. Zhang and Mr. Yan fail
to repay Mr. Wang upon demand, Mr. Wang has the right to obtain ownership of LJC.
Forasen Companies
Mr. Zhengyu Wang and Ms. Yefang Zhang each own 50% of the equity of Forasen Group Co., Ltd. (“Forasen Group”). Moreover, 95% of Tantech
Bamboo was previously owned by Forasen Group, rather than USCNHK. Forasen Group owns part of the equity of Zhejiang Forasen Food Co., Ltd.
(“ZFF”) and Forasen Group previously owned all of the equity of Hangzhou Sigma Trading Co., Ltd. (“HST”).
As of December 31, 2019 and 2018, the Company borrowed $693,504 and $874,402 from Forasen Group and its affiliates, controlled by Mr. Zhengyu
Wang, Chairman and previous CEO of the Company, for working capital purpose.
Other Related Parties
Hong Kong Clean Energy Ltd. (“HKCE”) is a company registered in Hong Kong and is wholly owned by Mr. Zhengyu Wang. Before December 2014,
our company owed HKCE $120,000, representing the payment made by HKCE on the company’s behalf.
107
Settlement of Related Party Balances
On March 20, 2013, USCNHK paid RMB 115,520,000 (approximately $18.5 million) to Forasen Group for the acquisition of Tantech Bamboo.
Among the amount being paid, RMB 37,635,136 (equivalent of approximately $6.1 million) was borrowed from Mr. Zhengyu Wang. On September 20,
2013, USCNHK, Mr. Wang and Forasen Group reached an agreement in which Mr. Wang forgave the borrowing from USCNHK and the Company agreed
to offset such borrowing against the receivables from Forasen Group for RMB 37,635,136 (equivalent of approximately $6.1 million). The settlement
decreased the Company’s “due from related parties” balances by approximately $6.1 million and decreased its additional paid-in capital account by the
same amount. As of December 31, 2014, the Company settled all related party balances.
Future Related Party Transactions
Our Corporate Governance Committee of our Board of Directors (which consists solely of independent directors) will approve all future related party
transactions.
C.
Interests of experts and counsel
Not applicable for annual reports on Form 20-F.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
See information provided in response to Item 18 below.
We incorporate by reference in the Registration Statement on Form F-3 (File No. 333- 213240) our consolidated balance sheets as of December 31,
2019 and 2018, and the related consolidated statements of operations and comprehensive income, changes in equity and cash flows for each of the years in
the three-year period ended December 31, 2019, which appears in this Annual Report on Form 20-F.
Legal and Administrative Proceedings
We may be involved from time to time in litigation, claims or other disputes in the ordinary course of business regarding, among other things, contract
disputes with our customers, copyright, trademark and other intellectual property infringement claims, consumer protection claims, employment related
cases and other matters in the ordinary course of our and disputes between our merchants and consumers. We may also be involved in litigation, regulatory
investigations or inquiries and administrative proceedings that may not necessarily arise from our ordinary course of business, such as securities class
action lawsuits and investigations or inquiries by securities regulators.
Dividend Policy
Since our inception, we have not declared or paid any dividends on our ordinary shares. We have no present plan to pay any dividends on our
ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand
our business.
Any future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including
our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of
directors may deem relevant.
B.
Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING.
A.
Offer and listing details
Our common shares have been listed on the NASDAQ Capital Market since March 24, 2015 under the symbol “TANH.” The table below shows, for
the periods indicated, the high and low market prices for our shares.
Annually:
2015 (from March 24, 2015)
2016
2017
2018
2019
2020 (through May 31, 2020)
Quarterly:
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Market Price Per Share
Low
High
$
$
$
$
$
$
$
$
$
$
33.97 $
5.89 $
4.37 $
3.72 $
2.55 $
1.83 $
2.80 $
3.72 $
2.87 $
1.85 $
3.12
1.88
1.15
1.25
1.40
0.81
2.45
2.72
1.25
1.55
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
First Quarter
Second Quarter (through May 31, 2020)
Monthly:
2019
December
2020 (through May 31, 2020)
January
February
March
April
May
$
$
$
$
$
$
$
$
$
$
$
$
1.83 $
1.62 $
1.63 $
2.55 $
1.83 $
1.24 $
2.55 $
1.83 $
1.57 $
1.26 $
1.24 $
1.08 $
1.50
1.43
1.40
1.42
0.81
0.90
1.54
1.43
1.00
0.81
0.92
0.95
108
B.
Plan of distribution
Not applicable for annual reports on Form 20-F.
C.
Markets
Our common shares are listed on the NASDAQ Capital Market under the symbol “TANH.”
D.
Selling shareholders
Not applicable for annual reports on Form 20-F.
E.
Dilution
Not applicable for annual reports on Form 20-F.
F.
Expenses of the issue
Not applicable for annual reports on Form 20-F.
ITEM 10.
ADDITIONAL INFORMATION.
A.
Share capital
Not applicable for annual reports on Form 20-F.
B.
Memorandum and articles of association
We incorporate by reference the description of our Memorandum and Articles of Association, as currently in effect in the British Virgin Islands, set
forth in our registration statement on Form F-1, declared effective on March 18, 2015 (File No. 333-198788).
C.
Material contracts
Other than as otherwise disclosed previously, we did not have any other materials contracts.
D.
Exchange controls
Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign
exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be
made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or
registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account,
such as a capital increase or foreign currency loans to our PRC subsidiaries.
109
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise
of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on
November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from
foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable
government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the
RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without
SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct
Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special
purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the
reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise
to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in
different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign
Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the
administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks
shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its
branches.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the
relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
In July 2014, SAFE issued SAFE Circular 37, which supersedes SAFE Circular 75, and requires that PRC citizens or residents must register with the
relevant local SAFE branch before making capital contribution to any offshore entity directly established or indirectly controlled by that PRC citizen or
resident for the purpose of investment or financing and with onshore or offshore assets or equity interests legally owned by that PRC citizen or resident. In
addition, the SAFE registrations are required to be updated with local SAFE branch with respect to that offshore special purpose company in connection
with the change of its basic information, such as its company name, business term, shareholding by individual PRC citizens or residents, merger, or
division and, with respect to the individual PRC citizens or residents in case of any increases or decreases of capital in that offshore special purpose
company, or share transfers or swaps by the individual PRC citizens or residents.
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC,
as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation
regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as
determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are
required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered
capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal
years may be distributed together with distributable profits from the current fiscal year.
110
E.
Taxation
The following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax consequences related to an investment in our common
shares. It is directed to U.S. Holders (as defined below) of our common shares and is based upon laws and relevant interpretations thereof in effect as of the
date of this annual report, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in
our common shares, such as the tax consequences under state, local and other tax laws.
The following brief description applies only to U.S. Holders (defined below) that hold common shares as capital assets and that have the U.S. dollar as
their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this annual report and on U.S.
Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof
available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax
consequences described below.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares
and you are, for U.S. federal income tax purposes,
·
·
·
·
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any
state thereof or the District of Columbia;
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all
substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
WE URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
People’s Republic of China Enterprise Taxation
The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the
amount of dividends, if any, we are ultimately able to pay to our shareholders. Our company pays a 17% value added tax and EIT rates of 15% for Tantech
Bamboo and 25% for Tantech Charcoal. Tantech Bamboo pays a lower EIT rate than Tantech Charcoal because Tantech Bamboo has been certified as high
technology companies and thus enjoys a preferable rate. If this favorable EIT rate were to be terminated or Tantech Bamboo was to fail to qualify to receive
these rates, they would be subject to taxation at the standard EIT rate of 25% for enterprise income taxes, unless we were otherwise to qualify for a
decreased tax rate.
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British Virgin Islands Taxation
Under the BVI Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from British Virgin
Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not liable to the British Virgin Islands for
income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends
paid by a company incorporated or re-registered under the BVI Act.
There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act.
In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the
British Virgin Islands.
United States Federal Income Taxation
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
banks;
financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to mark-to-market;
U.S. expatriates;
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction;
persons that actually or constructively own 10% or more of our voting shares;
persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or
persons holding our common shares through partnerships or other pass-through entities.
Prospective purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as
well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.
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Taxation of Dividends and Other Distributions on our Common Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the
common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date
of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received
from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends are taxed at the lower capital gains rate applicable to
qualified dividend income, provided that (1) the common shares are readily tradable on an established securities market in the United States, or we are
eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are
not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and
(3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, common shares are considered for purpose of clause (1)
above to be readily tradable on an established securities market in the United States if they are listed on the NASDAQ Capital Market. You are urged to
consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our common shares, including the effects of any
change in law after the date of this annual report.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as
discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross
amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our
common shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income
tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to the extent the amount of the distribution exceeds
your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles.
Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable
return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Common Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other
taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the
common shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the
common shares for more than one year, you will generally be eligible for reduced tax rates. If capital gains preferential rates are amended, such gains
would be taxable at the personal income rates then in place. The deductibility of capital losses is subject to limitations. Any such gain or loss that you
recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.
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Passive Foreign Investment Company
We believe that we are not a passive foreign investment company for U.S. federal income tax purposes for the year ended December 31, 2017, but we
cannot be certain whether we will be treated as a passive foreign investment company for any future taxable year. PFIC status is a factual determination for
each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
·
·
at least 75% of its gross income is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that
produce or are held for the production of passive income (the “asset test”).
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which
we own, directly or indirectly, at least 25% (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the
value of our assets for purposes of the asset test will generally be determined based on the market price of our common shares, our PFIC status will depend
in large part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us to become a
PFIC. If we are a PFIC for any year during which you hold common shares, we will continue to be treated as a PFIC for all succeeding years during which
you hold common shares.
However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to
the common shares.
If we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the common shares, unless you make a
“mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions
you received during the shorter of the three preceding taxable years or your holding period for the common shares will be treated as an excess distribution.
Under these special tax rules:
·
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·
the excess distribution or gain will be allocated ratably over your holding period for the common shares;
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as
ordinary income, and
the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for
such years, and gains (but not losses) realized on the sale of the common shares cannot be treated as capital, even if you hold the common shares as capital
assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment
discussed above. If you make a mark-to-market election for the common shares, you will include in income each year an amount equal to the excess, if any,
of the fair market value of the common shares as of the close of your taxable year over your adjusted basis in such common shares. You are allowed a
deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the taxable year. However,
deductions are allowable only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable years.
Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated
as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss
realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains
previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or loss amounts. If you make a
valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that
the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our
Common shares” generally would not apply.
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The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15
days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including the NASDAQ Capital Market. If the common shares are regularly traded on the NASDAQ Capital Market and if you are a holder of common
shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax
treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income
for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is
available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S.
Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If
you hold common shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions
received on the common shares and any gain realized on the disposition of the common shares.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and the elections
discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject to
information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S.
Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or
who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification
on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information
reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability,
and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S.
Internal Revenue Service and furnishing any required information.
H.
Documents on display
We are subject to the information requirements of the Exchange Act. In accordance with these requirements, the Company files reports and other
information with the SEC. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web
site at http://www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC.
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I.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to excess cash invested in short-term instruments with original maturities of less than a year and
long-term held-to-maturity securities with maturities of greater than a year. Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates, or we may suffer losses in principal if we have to sell securities that have declined in market value due to
changes in interest rates. We have not been, and do not expect to be, exposed to material interest rate risks, and therefore have not used any derivative
financial instruments to manage our interest risk exposure.
As of December 31, 2019, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of
bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our company would have
been RMB 0.5 million ($0.1 million) lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and
loan receivables.
We had no short-term investments and long-term held-to-maturity investments as of December 31, 2019.
Foreign Exchange Risk
Our functional currency is the RMB, and our financial statements are presented in U.S. dollar. The RMB depreciated from 2014 through the end of
2016, but has appreciated approximately 20% against the U.S. dollar since the beginning of 2017. Any appreciation or depreciation in the value of RMB
relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our business or
results of operation.
Currently, our assets, liabilities, revenues and costs are mainly denominated in RMB. However, we may generate revenues denominated in U.S. dollar,
and our offering was in U.S. dollar. Therefore, a portion of our cash and cash equivalents and short-term financial assets are denominated in U.S. dollar.
Our exposure to foreign exchange risk primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against
U.S. dollar may materially affect our earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars in
the future. We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive
income (loss).” For years ended December 31, 2019, 2018 and 2017, we had adjustments of $(5,494,731), $(949,689) and $4,341,324, respectively, for
foreign currency translations. See “Risk Factors — Risks Related to Doing Business in China — Fluctuations in exchange rates could adversely affect our
business and the value of our securities.”
Commodity Risk
As a developer and manufacturer of bamboo-based charcoal products, our Company is exposed to the risk of an increase in the price of raw bamboo
and, as a result, bamboo charcoal. We historically have lacked an ability to pass on price increases to customers, but we have not entered into any contract
to hedge any specific commodity risk. Moreover, our Company does not purchase or trade on commodity instruments or positions; instead, it purchases
commodities (bamboo charcoal and wood-based charcoal) for use.
In summer 2012, we faced a supply shortage based on local government initiatives to reduce the risk of fire caused by charcoal. As a result, the local
government in Daxing Anlin, where one of our main wood-based OEM BBQ charcoal suppliers is located, restricted the production of charcoal during
June, July and August 2012. At that time, our stock of OEM BBQ charcoal was insufficient to avoid demand pressures. We have viewed this temporary
shortage as an isolated event and do not expect it to recur in the future. If, however, this belief is incorrect, the absence of hedging could exacerbate our
commodity risk.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
With the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and 12.D.4, this
Item 12 is not applicable, as the Company does not have any American Depositary Shares.
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PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
We do not have any material defaults in the payment of principal, interest, or any installments under a sinking or purchase fund.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
See “Item 10.B—Additional Information—Memorandum and Articles of Association—Common Shares” for a description of the rights of securities
holders, which remain unchanged.
ITEM 15.
CONTROLS AND PROCEDURES.
(a)
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated
and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures as of the end of the period covered by this report were not effective as of December 31, 2019.
(b)
Management’s Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting (“ICFR”) is a process that is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States and includes those policies and procedures that:
● Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
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Under the supervision and with the participation of our management, we conducted an assessment of the effectiveness of our system of ICFR as of
December 31, 2019, the last day of our fiscal year of 2019. This assessment was based on the framework established in the Internal Control Integrated
Framework issued by the committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on such evaluation, our
management, including the CEO and CFO, has concluded that the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act of 1934) were not effective as of December 31, 2019.
Management’s assessment of the ineffective internal control over financial reporting as of December 31, 2019 considered the following factors:
the number of inadequate skilled accounting personnel who are either qualified as Certified Public Accountants in the U.S. or who have received
education from U.S. institutions or other educational programs that would provide enough relevant education relating to U.S. GAAP;
·
lack of adequate knowledge of SEC rules; and
the impact of adjustments proposed by our independent auditors during our review and annual audit processes that, if not posted, may have on the
overall financial statements.
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·
Based on the above factors, management concluded that we did not maintain effective internal control over financial reporting as of December 31,
2019 because our accounting staff continues to lack sufficient U.S. GAAP experience and requires further substantial training. These material weaknesses
existed as of December 31, 2018 and had not yet been fully remediated as of December 31, 2019.
We reviewed the result of management’s assessment with the Audit Committee of our Board of Directors.
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(c)
Attestation report of the registered public accounting firm.
Not applicable.
(d)
Changes in internal control over financial reporting.
There have been no changes in the Company’s ICFR identified in connection with the above evaluation that occurred during the last fiscal year that
have materially affected, or are reasonably likely to materially affect, the Company’s ICFR, other than the following:
· We continued to enforce the plan for remediation of the material weaknesses in ICFR as outlined in the Form 20-F for the year ended December 31,
2016, continued to improve internal control over financial reporting and conducted timely self-assessment.
· We completed a thorough review of the processes and procedures in the Company’s financial reporting related to the areas where the material
weaknesses existed and made necessary changes to streamline our processes.
Despite the material weaknesses and deficiencies reported above, our management believes that our consolidated financial statements included in this
report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report.
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ITEM 15T.
CONTROLS AND PROCEDURES.
Not applicable.
ITEM 16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company’s Board of Directors has determined that Mr. Wencai Pan qualifies as an “audit committee financial expert” in accordance with
applicable NASDAQ Capital Market standards. The Company’s Board of Directors has also determined that Mr. Pan and the other members of the Audit
Committee are all “independent” in accordance with the applicable NASDAQ Capital Market standards.
ITEM 16B.
CODE OF ETHICS.
We have adopted a Code of Ethics and have attached it as an exhibit to this annual report. A copy of the Code of Ethics may be found on our company
website.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES .
Prager Metis CPAs, LLC was appointed by the Company to serve as its independent registered public accounting firm for fiscal 2019 and 2018. Audit
services provided by Prager Metis for fiscal 2019 and 2018 included the examination of the consolidated financial statements of the Company; and services
related to periodic filings made with the SEC. Friedman LLP was appointed by the Company to serve as its independent registered public accounting firm
for fiscal 2017. Audit services provided by Friedman LLP for fiscal 2017 included the examination of the consolidated financial statements of the
Company; and services related to periodic filings made with the SEC.
Fees Paid To Independent Registered Public Accounting Firm
Audit Fees
During fiscal 2019 and 2018, Prager Metis’s fees for the annual audit of our financial statements and the periodic reviews of the financial statements
were $225,000 and $215,000, respectively. During fiscal 2017, Friedman LLP’s fees for the annual audit of our financial statements and the periodic
reviews of the financial statements were $250,000.
Audit-Related Fees
The Company has not paid Prager Metis for audit-related services in fiscal 2019 and 2018. The Company has not paid Friedman LLP for audit-related
services in fiscal 2017.
Tax Fees
The Company has not paid Prager Metis for tax services in fiscal 2019 and 2018. The Company has not paid Friedman LLP for tax services in fiscal
2017.
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All Other Fees
The Company has not paid Prager Metis other fees in fiscal 2019 and 2018. The Company has not paid Friedman LLP’s other fees in fiscal 2017.
Audit Committee Pre-Approval Policies
Before Prager Metis was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit
committee. All services rendered by Prager Metis have been so approved.
Percentage of Hours
The percentage of hours expended on the principal accountants’ engagement to audit our consolidated financial statements for 2019 that were
attributed to work performed by persons other than Prager Metis’s full-time permanent employees was less than 50%.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Neither the Company nor any affiliated purchaser has purchased any shares or other units of any class of the Company’s equity securities registered by
the Company pursuant to Section 12 of the Securities Exchange Act during the fiscal year ended December 31, 2019.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
Not applicable.
ITEM 16G.
CORPORATE GOVERNANCE.
Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the
NASDAQ Capital Market. NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the
NASDAQ Capital Market prior to issuance (or potential issuance) of securities equaling 20% or more of the company’s common stock or voting power for
less than the greater of market or book value.
Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers like the Company to follow their
home country practice rather than this shareholder approval requirement. The Company, therefore, is not required to obtain such shareholder approval prior
to entering into a transaction with the potential to issue securities as described above.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
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PART III
ITEM 17.
FINANCIAL STATEMENTS.
See Item 18.
ITEM 18.
FINANCIAL STATEMENTS.
The consolidated financial statements of Tantech Holdings Ltd are included at the end of this annual report, beginning with page F-1.
ITEM 19.
EXHIBITS.
1.1 (1)
1.2.1 (1)
1.2.2 (1)
2.1 (1)
4.1 (2)
4.2 (3)
4.3 (4)
4.4 (5)
4.5 (4)
4.6 (6)
4.7 (6)
4.8 (7)
4.9 (7)
4.10 (7)
4.11 (7)
4.12 (7)
4.13 (7)
4.14 (7)
4.15 (7)
4.16 (4)
4.17 (7)
4.18
4.19
Articles of Association of Tantech Holdings Ltd
Memorandum of Association of Tantech Holdings Ltd
First Amended and Restated Memorandum of Association of Tantech Holdings Ltd
Specimen Common Share Certificate
Purchase Agreement by and among Registrant, Henglong Chen and Suzhou Yimao E-Motors Co., Limited dated May 2, 2016
Long Term Supply Agreement between Registrant and Zhejiang Longquanzhixin Trading Co., Limited dated December 15, 2016
Summary Translation of Share Purchase Agreement between Zhejiang Apeikesi Energy Co., Ltd and Tantech Energy Technology Co.,
Ltd dated December 14, 2017
Translation of Share Transfer Agreement between Zhejiang Tantech Bamboo Technology Co., Ltd. and Lishui Ertai Trading Co. Ltd dated
June 26, 2019
Summary Translation of Lishui Xincai Share Purchase Agreement between Shanghai Shicai Minerals Co., Ltd and Tantech Holdings Ltd
dated January 8, 2018
Translation of Investment Agreement between Tantech Holdings (Lishui) Co., Ltd. and Jingning Zhonggang Mining Co., LTD dated
November 29, 2019
Translation of Supplementary Agreement among Tantech Holdings (Lishui) Co., Ltd., Jingning Zhonggang Mining Co., Ltd and Lishui
Zhonggang Mining Co., Ltd. dated December 17, 2019
Translation of Exclusive Management Consulting and Technology Service Agreement between Shanghai Jiamu Investment Management
Co., Ltd and Hangzhou Wangbo Investment Management Co., Ltd. dated December 10, 2019
Translation of Equity Pledge Agreement among Shanghai Jiamu Investment Management Co., Ltd, Xinyang Wang and Hangzhou Wangbo
Investment Management Co., Ltd. dated December 10, 2019
Translation of Exclusive Call Option Agreement among Shanghai Jiamu Investment Management Co., Ltd, Xinyang Wang and Hangzhou
Wangbo Investment Management Co., Ltd. dated December 10, 2019
Translation of Proxy Agreement among Shanghai Jiamu Investment Management Co., Ltd, Xinyang Wang and Hangzhou Wangbo
Investment Management Co., Ltd. dated December 10, 2019
Translation of Power of Attorney between Xinyang Wang and Zhengyu Wang dated December 10, 2019
Translation of Equity Pledge Agreement among Shanghai Jiamu Investment Management Co., Ltd, Wangfeng Yan and Hangzhou Wangbo
Investment Management Co., Ltd. dated May 15, 2020 with the effective date of December 10, 2019
Translation of Exclusive Call Option Agreement among Shanghai Jiamu Investment Management Co., Ltd, Wangfeng Yan and Hangzhou
Wangbo Investment Management Co., Ltd. dated May 15, 2020 with the effective date of December 10, 2019
Translation of Proxy Agreement among Shanghai Jiamu Investment Management Co., Ltd, Wangfeng Yan and Hangzhou Wangbo
Investment Management Co., Ltd. dated May 15, 2020 with the effective date of December 10, 2019
Translation of Power of Attorney between Wangfeng Yan and Zhengyu Wang dated July 13, 2017
Translation of Joint Statement among Zhengyu Wang, Wangfeng Yan, Xinyang Wang, Wangbo and Jiamu dated May 15, 2020 with the
effective date of December 10, 2019
Translation of Employment Agreement between the Registrant and Wangfeng Yan as the CEO dated December 6, 2019
Translation of Employment Agreement between the Registrant and Weilin Zhang as the CFO dated June 26, 2019
4.20
4.21
4.22
4.23
Translation of Employment Agreement between the Registrant and Mingqin Dong as the COO dated December 6, 2019
Summary Translation of Lease between Zhejiang Tantech Bamboo Technology Co., Ltd. and Tantech Energy Technology Co., Ltd dated
June 30, 2019
Translation of Lease between Zhangjiagang Jinmao Investment Development Co. LTD and Shangchi Automobile Co., Ltd.
Summary Translation of Lease between Shenzhen Shilian Junhui Real Estate Operation and Management Inc. and Shenzhen Yimao New
Energy Sales Co., Ltd.
8.1
List of subsidiaries.
11.1 (2)
Code of Ethics
12.1
12.2
13.1
Certification of the principal executive officer of the Registrant pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the principal financial officer of the Registrant pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the principal executive officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
122
13.2
Certification of the principal financial officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
15.1 (1)
Incentive Securities Plan
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
123
(1) Previously filed with the registration statement on Form F-1, File no. 333-198788, filed on September 16, 2014, as amended and incorporated herein
by reference.
(2) Previously filed on Form 6-K, dated May 2, 2016 and incorporated by reference.
(3) Previously filed on Form 6-K, dated December 19, 2016 and incorporated by reference.
(4) Previously filed with our annual report on Form 20-F, File no. 001-36885, filed on May 11, 2018 and incorporated herein by reference.
(5) Previously filed on Form 6-K, dated June 27, 2019 and incorporated by reference.
(6) Previously filed on Form 6-K, dated December 18, 2019 and incorporated by reference.
(7) Previously filed on Form 6-K, dated May 20, 2020 and incorporated by reference.
124
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
Tantech Holdings Ltd
By:
/s/ Wangfeng Yan
Name: Wangfeng Yan
Title:
Chief Executive Officer
Date: June 30, 2020
125
TANTECH HOLDINGS LTD AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORTS OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRMS
TANTECH HOLDINGS LTD AND SUBSIDIARIES
TABLE OF CONTENTS
Reports of independent Registered Public Accounting Firms
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows For the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7 - F-38
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Tantech Holdings, Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tantech Holdings, Ltd. and subsidiaries (“the Company”) as of December 31, 2019 and
2018, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the two-year
period ended December 31, 2019, and related notes (collectively referred to as the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America.
As part of our audit of the financial statements as of December 31, 2019 and 2018 and for each of the years in the two-year period ended December 31,
2019, we also audited the adjustments to the consolidated statements of comprehensive income (loss) and cash flows for the year ended December 2017 to
retroactively apply the effects of the discontinued operations that occurred in 2018 as described in Note 5. In our opinion, such adjustments are appropriate
and have been properly applied. We were not engaged to audit, review, or apply any procedures to the Company’s consolidated financial statements as of
and for the year ended December 31, 2017 other than with respect to the adjustments. The 2017 financial statements were audited by other auditors.
Accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements for the year ended December 31, 2017
as whole.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Prager Metis CPAs, LLC
We have served as the Company’s auditor since 2018
Hackensack, New Jersey
June 30, 2020
F-2
Tantech Holdings Ltd and Subsidiaries
Consolidated Balance Sheets
December 31,
2019
December 31,
2018
Assets
Current Assets
Cash and cash equivalents (Note 3 at VIE)
Restricted cash (Note 3 at VIE)
Accounts receivable, net (Note 3 at VIE)
Inventories, net (Note 3 at VIE)
Advances to suppliers, net (Note 3 at VIE)
Prepaid taxes (Note 3 at VIE)
Prepaid expenses and other receivables, net (Note 3 at VIE)
Current assets from discontinued operations
Total Current Assets (Note 3 at VIE)
Property, plant and equipment, net (Note 3 at VIE)
Other Assets
Manufacturing rebate receivable (Note 3 at VIE)
Intangible assets, net (Note 3 at VIE)
Long-term Investment
Goodwill (Note 3 at VIE)
Non-current assets from discontinued operations
Total Other Assets (Note 3 at VIE)
Total Assets (Note 3 at VIE)
Liabilities and Stockholders' Equity
Current Liabilities
Short-term bank loans
Bank acceptance notes payable (Note 3 at VIE)
Accounts payable (Note 3 at VIE)
Due to related parties (Note 3 at VIE)
Customer deposits (Note 3 at VIE)
Taxes payable (Note 3 at VIE)
Due to third parties
Accrued liabilities and other payables (Note 3 at VIE)
Current liabilities from discontinued operations
Total Current Liabilities (Note 3 at VIE)
Deferred tax liability (Note 3 at VIE)
Total Liabilities (Note 3 at VIE)
Stockholders' Equity
Common stock, $0.001 par value, 50,000,000 shares authorized, 28,853,242 shares issued and
outstanding
Additional paid-in capital
Statutory reserves
Retained earnings
Accumulated other comprehensive loss
Total Stockholders' Equity attributable to the Company
Noncontrolling interest
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
$
$
12,440,457 $
205,520
39,352,408
595,627
13,079,889
2,396,349
91,377
-
68,161,627
7,748,416
2,121,377
32,495,361
1,957,058
14,387,228
2,136,988
954,362
8,513,154
70,313,944
2,700,034
3,240,620
7,746,116
12,959,017
23,883,983
-
-
44,589,116
115,450,777 $
9,795,512
15,268,062
18,156,000
8,861,361
8,558,515
60,639,450
134,194,014
6,861,208 $
205,520
1,650,851
1,626,120
6,955,142
102,704
287,200
1,444,896
-
19,133,641
1,784,875
20,918,516
7,683,014
2,121,377
2,524,462
2,102,175
865,615
344,563
3,253,253
1,598,104
1,662,252
22,154,815
2,053,512
24,208,327
28,853
39,310,178
6,379,276
52,058,681
(7,590,943)
90,186,045
4,346,216
94,532,261
115,450,777 $
28,853
39,310,178
6,461,788
58,333,136
(2,066,364)
102,067,591
7,918,096
109,985,687
134,194,014
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Tantech Holdings Ltd and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Revenues
Cost of revenues
Gross Profit
Operating expenses
Selling expenses
General and administrative expenses
Impairment of goodwill and intangible asset
Research and development expenses
Total operating expenses
For the Years Ended December 31,
2019
2018
2017
$
49,230,570 $
43,253,070
5,977,500
29,561,399 $
21,532,319
8,029,080
42,297,612
31,741,753
10,555,859
319,946
4,655,382
9,584,000
327,260
14,886,588
320,479
4,971,804
-
386,628
5,678,911
730,834
4,625,563
-
627,577
5,983,974
Income (loss) from operations
(8,909,088)
2,350,169
4,571,885
Other income (expenses)
Interest income
Interest expense
Other income, net
Total other expenses
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss) from continuing operations
Discontinued operation:
Income from discontinued operations, net of tax
Loss from disposal of discontinued operations
Net income (loss) from discontinued operations
53,060
(443,262)
3,669
(386,533)
(9,295,621)
363,662
(9,659,283)
56,894
(626,343)
247,069
(322,380)
2,027,789
1,031,158
996,631
270,479
(569,891)
(299,412)
83,367
-
83,367
18,648
(551,044)
436,095
(96,301)
4,475,584
1,528,003
2,947,581
65,550
-
65,550
Net income (loss)
Less: net loss attributable to noncontrolling interest from continuing operations
Net income (loss) attributable to common stockholders of Tantech Holdings
Ltd.
(9,958,695)
(3,601,728)
1,079,998
(896,769)
3,013,131
(754,084)
$
(6,356,967) $
1,976,767 $
3,767,215
Net income (loss)
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive income (loss)
Less: Comprehensive loss attributable to noncontrolling interest
Comprehensive income (loss) attributable to common stockholders of
Tantech Holdings Ltd.
Earnings (loss) per share - Basic and Diluted
Continuing operations
Discontinued operations
Total
Weighted Average Shares Outstanding - Basic and diluted
Continuing operations and discontinued operations
(9,958,695)
1,079,998
3,013,131
(5,494,731)
(15,453,426)
(3,571,880)
(949,689)
130,309
(881,364)
(11,881,546) $
1,011,673 $
4,341,324
7,354,455
(784,186)
8,138,641
(0.21) $
(0.01) $
(0.22) $
0.07 $
0.00 $
0.07 $
0.15
0.00
0.15
28,853,242
28,745,571
25,971,912
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Tantech Holdings Ltd and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2019, 2018 and 2017
Balance at December 31,
2016
Issuance of common stock for
acquisition
Issuance of common stock for
private placement
Foreign currency translation
adjustment
Net income (loss)
Noncontrolling interest
through acquisition
Balance at December 31,
2017
Issuance of common stock for
service
Foreign currency translation
adjustment
Net income (loss)
Balance at December 31,
2018
Foreign currency translation
adjustment
Net loss
Balance at December 31,
2019
Common Stock
Shares
Amount
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (loss)
Statutory
Reserves
Retained
Earnings
Non
Controlling
Interest
Total
Stockholders'
Equity
24,311,935
$
24,312
$
26,603,511
$
(5,472,696) $ 6,461,788
$
52,589,154
$
-
$
80,206,069
2,500,000
1,891,307
-
-
-
2,500
1,891
-
-
-
6,497,500
5,966,317
-
-
-
-
-
4,371,426
-
-
-
-
-
-
-
-
-
-
-
-
3,767,215
(30,102)
(754,084)
6,500,000
5,968,208
4,341,324
3,013,131
-
9,583,646
9,583,646
28,703,242
28,703
39,067,328
(1,101,270)
6,461,788
56,356,369
8,799,460
109,612,378
150,000
-
-
150
-
-
242,850
-
-
-
(965,094)
-
-
-
-
-
-
243,000
-
1,976,767
15,405
(896,769)
(949,689)
1,079,998
28,853,242
28,853
39,310,178
(2,066,364)
6,461,788
58,333,136
7,918,096
109,985,687
-
-
-
-
-
-
(5,524,579)
-
-
(82,512)
-
(6,274,455)
29,848
(3,601,728)
(5,494,731)
(9,958,695)
28,853,242
$
28,853
$
39,310,178
$
(7,590,943)
$ 6,379,276
$
52,058,681
$
4,346,216
$
94,532,261
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Tantech Holdings Ltd and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2018
2019
2017
Cash flows from operating activities
Net income (loss)
Net (income) loss from discontinued operations
Net income (loss) from continuing operations
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
(9,958,695) $
299,412
(9,659,283)
1,079,998 $
(83,367)
996,631
Allowance for doubtful accounts - accounts receivable
Allowance for doubtful accounts - advance to suppliers
Allowance for doubtful accounts – other receivables
Allowance for doubtful accounts - due from related party
Inventory reserve
Impairment of goodwill and intangible asset
Decrease in deferred tax liability
Depreciation expense
Amortization of intangible asset
Amortization of prepaid consulting expense
Gain from disposal of property, plant and equipment
Changes in operating assets and liabilities:
Accounts receivable - non-related party
Accounts receivable - related party
Advances to suppliers
Advances to suppliers, non-current
Inventory
Prepaid expenses and other receivables
Manufacturing rebate receivable
Accounts payable
Accrued liabilities and other payables
Customer deposits
Collection of receivable from discontinued operations
Taxes payable
Net cash provided by continuing operations
Net cash provided by (used in) discontinued operations
Net cash provided by operating activities
Cash flows from investing activities
Acquisition of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Additions to intangible assets
Payment for business acquisition
Payment for investment
Cash acquired from business acquisition
Changes in deposit for asset acquisition
Proceeds from disposition of subsidiaries
Net cash used in continuing operations
Net cash provided by (used in) discontinued operations
Net cash used in investing activities
Cash flows from financing activities
Proceeds from (repayment of) loans from third parties
Notes receivable
Bank acceptance notes payable, net of repayment
Proceeds from bank loans
Repayment of bank loans
Repayment of loans from related parties
Proceeds from issuance of common stocks
Net cash provided by (used in) continuing operations
Net cash provided by discontinued operations
Net cash provided by (used in) financing activities
1,297,752
164,220
705,400
-
1,030,236
9,584,000
(165,500)
462,639
441,489
140,738
(8,047)
(9,879,682)
-
415,727
-
242,142
9,127
1,563,840
(751,363)
(78,923)
6,184,836
8,962,187
(597,392)
10,064,143
4,632,769
14,696,912
(92,369)
16,580
-
-
(6,707,570)
-
-
854,567
(5,928,792)
(1,522)
(5,930,314)
(2,823,890)
-
(1,823,003)
6,918,544
(7,352,944)
(378,833)
-
(5,460,126)
-
(5,460,126)
910,811
777,848
66,305
364,288
700,379
-
-
628,144
443,318
102,263
(44,814)
7,023,546
3,249,359
(3,555,851)
1,558,916
(147,485)
767,849
(644,959)
(2,621,226)
49,492
(115,771)
-
573,660
11,082,703
3,582,177
14,664,880
(559,038)
54,089
(2,585)
-
(17,448,000)
-
-
-
(17,955,534)
(39,976)
(17,995,510)
2,455,806
14,540
(4,560,185)
10,291,412
(7,835,606)
(1,175,971)
-
(810,004)
-
(810,004)
3,013,131
(65,550)
2,947,581
2,632,813
(45,507)
(16,827)
-
13,908
-
-
576,953
201,647
-
(1,875,493)
(1,001,613)
-
2,826,316
6,839,953
804,763
(829,716)
(2,942,190)
(532,039)
(1,489,128)
(247,059)
-
(1,927,737)
5,936,625
(3,785,614)
2,151,011
(1,302,721)
662,144
-
(4,552,240)
-
35,707
443,400
-
(4,713,710)
1,220,458
(3,493,252)
(187,706)
(14,780)
4,911,990
10,093,262
(11,957,020)
(477,565)
5,968,208
8,336,389
-
8,336,389
Effect of exchange rate changes on cash, restricted cash and cash equivalents
(530,288)
390,992
424,298
Net increase (decrease) in cash, restricted cash and cash equivalents
2,776,184
(3,749,642)
7,418,446
Cash, restricted cash and cash equivalents, beginning of year
9,869,793
13,619,435
6,200,989
Cash, restricted cash and cash equivalents, end of year
$
12,645,977 $
9,869,793 $
13,619,435
Supplemental disclosure information:
Income taxes paid
Interest paid
Supplemental non-cash activities:
Common shares issued for service
Common shares issued for acquisition of Shangchi Automobile
Net book value of assets and liabilities of Shangchi Automobile acquired
$
$
$
$
$
1,105,876 $
439,869 $
1,044,480 $
608,048 $
1,156,976
479,358
- $
- $
- $
243,000 $
- $
- $
-
6,500,000
11,122,410
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and nature of business
Tantech Holdings Ltd. (“Tantech” or “Tantech BVI”) is a holding company established under the laws of the British Virgin Islands on November 19, 2010.
Through its 100% owned operating subsidiaries and entities controlled through VIE agreements, Tantech engages in the research and development,
production and distribution of various products made from bamboo, manufacture and sell electric vehicles, as well as mining exploration.
Below is a chart representing the corporate structure as of December 31, 2019:
On August 19, 2015, the Board of Directors of Tantech authorized USCNHK Group Limited (“USCNHK”), a 100% owned subsidiary in Hong Kong, to
form a wholly-owned subsidiary, Lishui Tantech Energy Tech Co., Ltd. (“LishuiTantech”), as a holding company to hold its 95% equity interest in Tantech
Bamboo. On April 7, 2016, LishuiTantech was registered in Lishui, China under the PRC law. On June 24, 2016, Tantech BVI, through LishuiTantech,
entered into an equity purchase agreement with the five individual holders of the remaining 5% interest of Tantech Bamboo, to acquire the 5% interest of
Tantech Bamboo for 1,018,935 shares of the Company’s common stock. The transfer of the 5% equity interest was completed on December 28, 2016. In
July 2017, LishuiTantech changed its name to Tantech Holdings (Lishui) Co., Ltd. (“Lishui Tantech”).
Zhejiang Tantech Bamboo Technology Co., Ltd. (“Tantech Bamboo” or “Bamboo”) was established on October 23, 2002 and is engaged in manufacturing
and sale of various products made from bamboo.
Zhejiang Tantech Bamboo Charcoal Co., Ltd. (“Tantech Charcoal” or “Charcoal”) was established on September 5, 2002, and is engaged in the trading
business, including the export of charcoal products.
Hangzhou Tanbo Tech Co., Ltd. (“Tanbo Tech” or “Tanbo”), established by Tantech Bamboo on December 8, 2015, is exploring business opportunities
outside Lishui area.
Zhejiang Babiku Charcoal Co., Ltd. (“Tantech Babiku” or “Babiku”), established by Tantech Bamboo on October 20, 2015, and is engaged in the
production and sales of low emission BBQ charcoal.
Lishui Zhongzhu Charcoal Co., Ltd. (“Lishui Zhongzhu” or “Zhongzhu”), established by Tantech Bamboo on November 18, 2015. It changed its name to
Zhejiang Zhongzhu Tourism Development Co., Ltd. on May 17, 2017.
F-7
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and nature of business (continued)
Zhejiang Tantech Energy Tech Co., Ltd. (“Tantech Energy” or “Energy”), was established on September 24, 2008. Tantech Energy engaged in the
manufacturing of Electric Double-Layer Capacitor (“EDLC”) carbon. Energy was sold in July 2019. (See Note 5)
Hangzhou Tanbo Tech Co., Ltd. (“Tanbo Tech” or “Tanbo”), established by Tantech Bamboo on December 8, 2015, is exploring business opportunities
outside Lishui area.
Due to business strategy change, the Company closed Lishui Zhongzhu and Tantech Babiku during the year ended December 31, 2018. As a result,
together with Tantech Energy, the assets and liabilities for these discontinued entities were reported as components of total assets and liabilities separate
from those balances of the continuing operations. At the same time, the results of all these discontinued operations, less applicable income taxes (benefit),
were reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45. (See
Note 5)
Lishui Xincai Industrial Co., Ltd. (“Lishui Xincai”) was established on December 14, 2017 by an unrelated third party. On January 8, 2018, the third party
transferred all of its shares in Lishui Xincai to Lishui Tantech. Since then, Lishui Xincai has been Lishui Tantech’s wholly owned subsidiary. On December
30, 2019, Tantech Bamboo transferred all of its shares in its wholly-owned subsidiary Tantech Charcoal to Lishui Xincai.
On July 12, 2017, the Company acquired 70% of the equity interest of Shangchi Automobile Co., Ltd. (“Shangchi Automobile”), formerly known as
Suzhou E-Motors Co., Ltd, (“Suzhou E-Motors”) from its original shareholder. Shangchi Automobile is a specialty electric vehicles and power batteries
manufacturer based in Zhang Jia Gang City, Jiangsu Province, China. The 70% equity interest include 19% equity interest owned directly through
Hangzhou Jiyi Investment Management Co., Ltd (“Jiyi”) and 51% equity interest owned through Hangzhou Wangbo Investment Management Co., Ltd
(“Wangbo”). Jiyi is 100% owned through Shanghai Jiamu Investment Management Co., Ltd (“Jiamu”), who is, in turn, wholly owned by Euroasia
International Capital (“Euroasia”), a 100% owned subsidiary of the Company. Wangbo is an entity which is controlled through a series of contractual
agreements (Note 3).
On November 13, 2018, the Company established Shenzhen E-Motors New Energy Sales Co., Ltd. (“Shenzhen E-Motors”), a sales subsidiary through
Shangchi Automobile. As a result, the Company ultimately controls 70% equity interest of Shangchi Automobile and its subsidiary Shenzhen E-Motors and
accounts of Shangchi Automobile and Shenzhen E-Motors are consolidated into those of the Company.
Euroasia is incorporated in Hong Kong, PRC. Jiamu is incorporated in Shanghai, PRC. Both Jiyi and Wangbo are incorporated in Hangzhou, PRC.
Euroasia also has a fully owned subsidiary Euroasia New Energy Automotive (Jiangsu) Co., Ltd (“Euroasia New Energy”). They are all investment holding
companies with no significant business activities. (Collective “E-Motor Holdings”).
F-8
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies
Principal of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”). The consolidated financial statements include the financial statements of Tantech BVI and its subsidiaries, and entities
controlled through a series of agreements known as variable interest agreements (“VIE”) (collectively, the “Company”). All significant inter-company
balances and transactions are eliminated upon consolidation.
Non-controlling interest
Non-controlling interest represents 30% of the equity interest in Shangchi Automobile and its subsidiary Shenzhen E-Motors owned by Zhangjiagang Jinke
Chuangtou Co., Ltd., which is not under the Company's control.
Business Combinations
Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net
tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the
date of acquisition.
Discontinued operation
In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a
component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-
20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to
approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported
as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued
operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as
components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
Use of Estimates
In preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the
reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include the fair value
estimates used in the purchase price allocation, the useful lives of property and equipment and intangible assets, allowances pertaining to the allowance for
doubtful accounts and advance to suppliers, the valuation of inventories, the impairment of long-lived assets, and the realizability of deferred tax assets.
F-9
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Fair Value of Financial Instruments
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, defines fair
value, establishes a three-level valuation hierarchy for fair value measurements and enhances disclosure requirements.
The three levels are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or
similar assets in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3 - inputs to the valuation methodology are unobservable.
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, restricted cash, accounts receivable, advances to
suppliers, other receivables, accounts payable, customer deposits, accrued expenses, short term bank loans and bank acceptance notes payable
approximates their recorded values due to their short-term maturities.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or
less and money market accounts to be cash equivalents. All cash balances are in bank accounts in PRC and are not insured by the Federal Deposit
Insurance Corporation or other programs.
Restricted Cash
Restricted cash represents required cash deposits as a part of collateral for bank acceptance notes payable and letters of credit. The Company is required to
maintain 0% to 100% of the balance of the bank acceptance notes payable in restricted cash to ensure future credit availability. The Company earns interest
at a variable rate per month on this restricted cash.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires
companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling
beginning-of-period and end-of-period total amounts presented in the statement of cash flows. The Company adopted the new standard effective January 1,
2018, using the retrospective transition method.
Concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade accounts receivable and
advances to suppliers. All of the Company’s cash is maintained with banks within the People’s Republic of China of which no deposits are covered by
insurance. The Company has not experienced any losses in such accounts. A significant portion of the Company's sales are credit sales which are primarily
to customers whose ability to pay is dependent upon the industry economics prevailing in these areas. The Company also makes cash advances to certain
suppliers to ensure the stable supply of key raw materials. The Company performs ongoing credit evaluations of its customers and key suppliers to help
further reduce credit risk.
F-10
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated
losses. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the
collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the
age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after efforts at
collection prove unsuccessful.
Inventory
The Company values its inventories at the lower of cost, determined on a weighted average basis, or net realizable value. The Company reviews its
inventories periodically to determine if any reserves are necessary for potential obsolescence or if a write-down is necessary if the carrying value exceeds
net realizable value.
Advances to Suppliers
In order to ensure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders.
The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a
supplier to refund an advance or provide supplies to the Company.
Property and Equipment and Construction in Progress
Property and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs
of bringing the asset to its present working condition and location for its intended use.
Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant property and
equipment are as follows:
Buildings
Machinery and equipment
Transportation equipment
Office equipment
Electronic equipment
20 years
5 - 10 years
4 - 5 years
4 - 5 years
3 - 5 years
Repairs and maintenance costs are normally charged to earnings in the year in which they are incurred. In situations where it can be clearly demonstrated
that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is
capitalized as an additional cost of the asset.
Construction in progress includes direct costs of construction or acquisition of equipment, interest expense associated with the loans used for the
construction and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and
ready for its intended use.
F-11
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Intangibles assets, net
Intangible assets are acquired individually or as part of a group of assets, and are initially recorded at their fair value. The cost of a group of assets acquired
in a transaction is allocated to the individual assets based on their relative fair values.
The estimated useful lives of the Company’s intangible assets are as follows:
Licenses and permits
Software
Land use right
Patents
Estimated Useful Life
Indefinite
5 - 10 years
50 years
10 years
The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired.
The Company evaluates licenses and permits for impairment at least annually or whenever indicators of impairment are present. For the year ended
December 31, 2019, the Company recorded an impairment of $1,103,332 for the licenses and permits acquired from the acquisition of Shangchi
Automobile (formerly known as Suzhou E-Motors) in fiscal 2017. There was no intangible assets impairment as of and for the years ended December 31,
2018 and 2017.
Goodwill
Goodwill represents the excess of the consideration over the fair value of the net assets acquired at the date of acquisition. Goodwill is not amortized but
rather tested for impairment at least annually at the reporting unit level by applying a fair-value based test in accordance with accounting and disclosure
requirements for goodwill and other indefinite-lived intangible assets. This test is performed by management annually or more frequently if the Group
believes impairment indicators are present. The Group has the option to assess qualitative factors first to determine whether it is necessary to perform the
two-step test in accordance with ASC 350-20, Intangibles - Goodwill and Other. If the Group believes, as a result of the qualitative assessment, that it is
more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described above is
required. Otherwise, no further testing is required. In the qualitative assessment, the Group considers primary factors such as industry and market
considerations, overall financial performance of the reporting unit, and other specific information related to the operations.
In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting
unit based on estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the
carrying value of the reporting unit, goodwill is not impaired and the Group is not required to perform further testing. If the carrying value of the reporting
unit exceeds the fair value of the reporting unit, then the Group must perform the second step of the impairment test in order to determine the implied fair
value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying amount of the goodwill is greater than its implied fair
value, the excess is recognized as an impairment loss in general and administrative expenses.
For the year ended December 31, 2019, the Company wrote off the goodwill acquired from the acquisition of Shangchi Automobile (formerly known as
Suzhou E-Motors) in fiscal 2017 of $8,480,668.
F-12
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Long term investments
The Company accounts for investment in equity investees over which it has significant influence but does not own a majority of the equity interest or lack
of control using the equity method. For investment in equity investees over which the Company does not have significant influence or the underlying
shares the Company invested in are not considered in-substance common stock and have no readily determinable fair value, the cost method accounting is
applied.
The Company records the equity method investments at historical cost and subsequently adjusts the carrying amount each period for share of the earnings
or losses of the investee and other adjustments required by the equity method of accounting. Dividends received from the equity method investments are
recorded as reductions in the cost of such investments. The Company records the cost method investments at historical cost and subsequently record any
dividends received from the net accumulated earnings of the investee as income. Dividends received in excess of earnings are considered a return of
investment and are recorded as reductions in the cost of the investments.
Investment in equity investees are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its
carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Group reviews several factors to
determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of
the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold
the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Customer Deposits
Customer deposits represent amounts received from customers in advance of shipments relating to the sales of the Company’s products.
Due to Third Parties
Due to third parties represent amounts the Company borrowed from third parties for working capital purpose. The due to third parties balance are
unsecured, interest-free and due upon demand. As of December 31, 2019 and 2018, the due to third parties balance amounted to $287,200 and $3,253,253,
respectively.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases. The standard requires lessees to recognize lease
assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. The new standard establishes a right-of-use
model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.
The Company adopted this standard on January 1, 2019 on a modified retrospective basis and elected the practical expedients permitted under the transition
guidance, which allows the Company to carryforward the historical lease classification, the assessment on whether a contract is or contains a lease, and the
initial direct costs for any leases that exist prior to adoption of the new standard. Leases with an initial term of 12 months or less are not recognized on the
balance sheet and the associated lease payments are included in the consolidated statements of comprehensive income (loss) on a straight-line basis over
the lease term.
The new standard has no material effect on the consolidated financial statements as the Company does not have a lease with a term longer than 12 months.
F-13
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective
approach. Revenues for the years ended December 31, 2019 and 2018 were presented under ASC 606, and revenues for the year ended December 31, 2017
was not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. There is no adjustment to the opening balance of retained
earnings at January 1, 2018 since there was no change to the timing and pattern of revenue recognition upon adoption of ASC 606. Under ASC 606,
revenue is recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an
entity expects to be entitled to in exchange for those goods or services.
The Company’s revenues are primarily derived from the following sources:
Sales of products: The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time the product is delivered to the
customer and control is transferred (point of sale).
Commission income: The Company acts as an agent without assuming the risks and rewards of ownership of the goods and reports the revenue on a net
basis. Revenue is recognized based on the completion of the contracted service.
Government manufacturing rebate income: The Company sells electric vehicles in China and is eligible for a government manufacturing rebate on each
qualifying electric vehicle sold. The government manufacturing rebates are recognized as part of revenue when sales are finalized, amount of rebates can be
reasonably estimated and collection is assured. The collectability of rebates can be assured as long as the sales are deemed qualifying based on the criteria
set by the government.
Revenue is reported net of all value added taxes. The Company does not routinely permit customers to return products and historically, customer returns
have been immaterial.
Cost of Revenues
Cost of revenues includes cost of raw materials purchased, inbound freight cost, cost of direct labor, depreciation expense and other overhead. Write-down
of inventory for lower of cost or market adjustments is also recorded in cost of revenues.
Shipping and Handling
Shipping and handling costs are expensed as incurred and included in selling expenses.
Subsidy Income
The Company periodically receives various government grants such as “High Technology Projects Subsidy” and “Scientific Research Grant”. There is no
guarantee the Company will continue to receive such grants in the future.
F-14
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Foreign Currency Translation
The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s subsidiaries in the PRC is the RMB, the
currency of the PRC. Any subsidiary transactions, which are denominated in currencies other than RMB, are translated into RMB at the exchange rate
quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of
comprehensive income (loss) as foreign currency transaction gain or loss. The consolidated financial statements of the Company have been translated into
U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S.
dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of
accumulated other comprehensive income in stockholders’ equity. Cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not
necessarily agree with changes in the corresponding balances on the balance sheets.
The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
US$: RMB exchange rate
Comprehensive Income (loss)
December 31, 2019
$
$
Period End
Average
0.1436 Period End
0.1448 Average
December 31, 2018
$
$
0.1513 Period End
0.1454 Average
December 31, 2017
$
$
0.1537
0.1478
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income (loss).
Other comprehensive income (loss) consists of foreign currency translation adjustment from those subsidiaries not using the U.S. dollar as their functional
currency.
F-15
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Income Taxes
The Company’s subsidiaries in China are subject to the income tax laws of the PRC. No taxable income was generated outside the PRC for the years ended
December 31, 2019, 2018 and 2017. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset
and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon
the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize
their benefits, or future deductibility is uncertain.
ASC 740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be
taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in
interim periods and income tax disclosures. There were no material uncertain tax positions as of December 31, 2019 and 2018. All tax returns since the
Company’s inception are subject to examination by tax authorities.
Value Added Tax (“VAT”)
The Company is subject to VAT for selling merchandise. The applicable VAT rate is 11% or 13% or 17% (depending on the type of goods involved) for
products sold in the PRC. The applicable VAT rate of 17% and 11% decreased to 16% and 10% starting from May 2018, and further decreased to 13% and
9% from April 1, 2019. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT)
less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company pays VAT
based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay
between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event the PRC tax authorities dispute the date
on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty based on the amount of taxes which is determined to
be late or deficient, with any penalty being expensed in the period when a determination is made by the tax authorities that a penalty is due. During the
reporting periods, the Company had no dispute with PRC tax authorities and there was no tax penalty incurred.
Earnings (loss) per Share (“EPS”)
The Company computes earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”), and SEC Staff Accounting
Bulletin No. 98 (“SAB 98”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net
income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a
per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per
share) are excluded from the calculation of diluted EPS. For the years ended December 31, 2019, 2018 and 2017, there were 1,078,045 warrants not
included in the diluted loss per share as they would be anti-dilutive.
F-16
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Statement of Cash Flows
In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheets.
Reclassification
Due to business strategy change, during the year ended December 31, 2018, the Company closed Lishui Zhongzhu and Tantech Babiku, and during the year
ended December 31, 2019, the Company sold Tantech Energy. In connection with the discontinued operations of the business, certain prior period amounts
have been reclassified to conform to the current period presentation.
Risks and Uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be
influenced by the political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy. The Company’s results may
be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in
RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be
transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances in
currencies other than RMB may require certain supporting documentation in order to affect the remittance.
The Company does not carry any business interruption insurance, products liability insurance or any other insurance policy except for a limited property
insurance policy. As a result, the Company may incur uninsured losses, increasing the possibility that investors would lose their entire investment in the
Company.
Recent accounting pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting
standards that are issued.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU
2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit
losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is
currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
F-17
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Summary of significant accounting policies (continued)
Recent accounting pronouncements (continued)
In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for
adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate
resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act). The Company does not
believe this guidance has a material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05 — Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the
“Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and
Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits
and may additionally have international tax consequences for many companies that operate internationally. The Company does not believe this guidance
has a material impact on its consolidated financial statements.
On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based
Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the
existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the
exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the
grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing
model for nonemployee awards. The new standard is effective for us on January 1, 2019. Early adoption is permitted, including in interim periods, and
should be applied to all new awards granted after the date of adoption. The Company does not believe this guidance has a material impact on its
consolidated financial statements.
In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes
to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value
measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any
removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted
on a prospective basis. The Company does not expect this guidance will have a material impact on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323),
and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic
321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased
options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the
effect of adopting this ASU on the Group’s financial statements.
Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the consolidated
financial position, statements of operations and cash flows.
F-18
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Variable Interest Entity
The VIE contractual arrangements
Wangbo, Shangchi Automobile and its subsidiary, Shenzhen E-Motors, are controlled through contractual arrangements in lieu of direct equity ownership
by the Company.
These agreements include an Exclusive Management Consulting and Technology Agreement, two Equity Pledge Agreements, two Exclusive Call Option
Agreements, two Proxy Agreements and two Powers of Attorney (collectively “VIE Agreements”). Pursuant to the above VIE Agreements, Jiamu has the
exclusive right to provide Wangbo consulting services related to business operations including technical and management consulting services. All the
above contractual agreements obligate Jiamu to absorb a majority of the risk of loss from Wangbo’s activities and entitle Jiamu to receive a majority of
their residual returns. In essence, Jiamu has gained effective control over Wangbo.
In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to
finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. The VIEs with
which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is
required to consolidate the VIE for financial reporting purposes. Therefore, the Company believes that Wangbo should be considered as a Variable Interest
Entity (“VIE”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”.
Jiamu is deemed to have a controlling financial interest in and be the primary beneficiary of Wangbo because it has both of the following characteristics:
● The power to direct activities at Wangbo that most significantly impact such entity’s economic performance, and
● The obligation to absorb losses of, and the right to receive benefits from Wangbo that could potentially be significant to such entity.
Pursuant to the contractual arrangements with Wangbo, Wangbo pay service fees equal to 95% of their net profit after tax payments to Jiamu. At the same
time, Jiamu is obligated to absorb a majority of Wangbo’s losses. Such contractual arrangements are designed so that the operation of Wangbo is for the
benefit of Jiamu and ultimately, the Company.
Risks associated with the VIE structure
The Company believes that the contractual arrangements with its VIE and the VIE’s shareholders are in compliance with PRC laws and regulations and are
legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal
structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:
● revoke the business and operating licenses of the Company’s PRC subsidiary and VIE;
● discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiary and VIE;
● limit the Company’s business expansion in China by way of entering into contractual arrangements;
● impose fines or other requirements with which the Company’s PRC subsidiary and VIE may not be able to comply;
● require the Company or the Company’s PRC subsidiary and VIE to restructure the relevant ownership structure or operations; or
● restrict or prohibit the Company’s use of the proceeds from public offering to finance the Company’s business and operations in China.
F-19
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Variable Interest Entity (continued)
The Company’s ability to conduct its business through its VIE may be negatively affected if the PRC government were to carry out of any of the
aforementioned actions. As a result, the Company may not be able to consolidate its VIE and its VIE’s subsidiary in its consolidated financial statements as
it may lose the ability to exert effective control over the VIE and its shareholders and it may lose the ability to receive economic benefits from the VIE. The
Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiary and its VIE.
The following assets and liabilities of the consolidated VIE were included in the accompanying consolidated financial statements of the Company as of
December 31, 2019 and 2018 after elimination of intercompany balances:
December 31,
2019
December 31,
2018
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid taxes
Inventories, net
Advances to suppliers, net
Prepaid expenses and other receivables, net
Total Current Assets
Non-current assets
Property, plant and equipment, net
Manufacturing rebate receivable
Intangible assets, net
Goodwill
Total Assets
Current liabilities
Bank acceptance notes payable
Accounts payable
Customer deposits
Taxes payable
Due to related parties
Accrued liabilities and other payables
Total Current Liabilities
Non-current liabilities
Deferred tax liability
Total Liabilities
$
$
$
$
F-20
70,420 $
205,520
795,240
894,051
239,222
93,241
73,378
2,371,072
1,139,398
7,746,116
12,764,272
-
24,020,858 $
205,520 $
1,165,718
113,657
-
943,584
442,280
2,870,759
1,784,875
4,655,634 $
33,638
2,121,377
2,033,535
936,579
1,205,280
14,655
70,074
6,415,138
1,388,749
9,795,512
15,056,810
8,861,361
41,517,570
2,121,377
1,878,713
35,749
13,703
1,233,155
614,150
5,896,847
2,053,512
7,950,359
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Liquidity
For the year ended December 31, 2019, the Company had a significant decrease in net income. In addition, the Company closed Babiku and Zhongzhu, and
sold Tantech Energy’s remaining operation due to business strategic changes during the years ended December 31, 2019 and 2018. All of these events had
significant impact on the Company’s operations.
For its consumer product sector, the Company significantly cut its sales to supermarket customers because of long-aged accounts receivable from these
supermarket customers as online shopping has become increasingly popular. The Company has been experiencing longer collection periods. That leads to
higher balances of accounts receivable as compared to prior years. Meanwhile, the EV sector is also experiencing delays of government rebate processing
time and reduction of the amount of government rebates on eligible vehicles.
Due to a successful equity financing which resulted in net proceeds of $5.6 million in September 2017, the Company still had approximately $12.4 million
cash on hand as of December 31, 2019. Although the Company maintains a positive working capital as of December 31, 2019 and generated positive cash
flows from its continued operations during the year ended December 31, 2019, the future operations of the Company depend on whether or not the
Company can successfully collect its accounts receivable and utilize its advances, as well as how the change of government policies affect its new EV
business. Without additional equity financing, the Company may heavily rely on bank borrowings or shareholder/related party loans to fund its working
capital needs. As of December 31, 2019 and 2018, the Company had a short-term loan balance of approximately $6.9 million and $7.7 million,
respectively. In addition, the Company had bank acceptance notes payable balance of approximately $0.2 million and $2.1 million as of December 31, 2019
and 2018, respectively. Any failure to renew these bank borrowings upon their maturities could have an adverse impact on the Company’s operations.
The Company currently plans to fund its operations mainly through cash flow from its operations, renewal of bank borrowings, additional equity financing
and the continuing financial support by its shareholders and its affiliates controlled by its principal shareholder, if necessary, in the near future to ensure
sufficient working capital. The Company has implemented a stricter policy on sales to supermarkets and less credible customers and continues to improve
its collection efforts on accounts with outstanding balances. The Company is actively working with other customers and suppliers and expects to fully
collect or utilize the rest of prepayment balance in 2020.
The Company is also working closely with the local government to speed up the collection process of the outstanding government rebate balance in 2020.
With disposal of its EDLC business and placing focus on manufacturing of more marketable consumer products, the Company is shifting its strategy to cut
back costs and ensure profitability. Although the Company is currently not generating net income from its EV sector, it has been focusing on reducing the
costs and expenses and developing other non-rebate alternative energy products. The Company plans to fund this sector through additional private
placement and continued support from the parent company even without timely receipt of government rebate. The principal shareholder of the Company,
along with the affiliated entity, Forasen Group, has made pledges to provide financial support to the Company whenever necessary.
Based on its current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity for the Company
to meet its future liquidity and capital requirements for at least next twelve months from the date of this report.
F-21
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Discontinued operations
On December 14, 2017, the Company entered into a sale agreement and related agreements (the “EDLC Agreements”) to transfer its Electric Double-Layer
Capacitor (“EDLC”) carbon business (including intellectual property rights and equipment) to Zhejiang Apeikesi Energy Co., Ltd. (the “Buyer”), a PRC
start-up company controlled by Dr. Zaihua Chen, the Registrant’s former Chief Technology Officer. Pursuant to the EDLC Agreements, total purchase price
was approximately $2.5 million (RMB 16 million) (the “Purchase Price”). The purchase price is payable in ten years with initial payment of approximately
$0.7 million (RMB 4.48 million) due in fiscal 2017. The remaining purchase price shall be paid in nine equal installments in the following nine years. The
Buyer is required to pay annual interest on the remaining purchase price at the PRC prime borrowing rate.
On June 26, 2019, the Company entered a share transfer agreement to sell all of its shares in Tantech Energy to an unrelated third party with a consideration
of RMB 6,500,000 (approximately US$941,000). The Company completed the disposition process in July 2019. The Company recorded a loss of $569,891
on disposal of Tantech Energy which was included in the loss from disposal of discontinued operations on statements of comprehensive income (loss).
During the year ended December 31, 2018, the Company closed the business operation of Lishui Zhongzhu and Tantech Babiku, due to business strategy
change. In connection with the discontinued operations of the above businesses, the revenue and expenses for the year ended December 31, 2017 have been
retrospectively reclassified as discontinued operations.
The aggregated financial results of the discontinued business are set forth below.
December 31
2019
December 31
2018
Cash and cash equivalent
Accounts receivable
Inventory
Advances to suppliers
Prepaid value-added taxes
Other receivables
Total current assets from discontinued operations
Accounts receivable from EDLC business
Property, plant and equipment, net
Intangible assets, net
Total non-current assets from discontinued operations
Total assets from discontinued operations
Accounts payable
Customer deposits
Taxes payable
Accrued liabilities and other payables
Total current liabilities from discontinued operations
Total liabilities from discontinued operations
F-22
$
$
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
32,919
5,257,684
475,827
2,647,415
72,742
26,567
8,513,154
1,235,489
6,012,285
1,310,741
8,558,515
17,071,669
1,038,888
337,743
140,212
145,409
1,662,252
1,662,252
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Discontinued operations (continued)
Revenue
Cost of revenues
Gross profit (loss)
Operating expenses
(Reversal of) Bad debt provision
Income (loss) from operations
Other income, net
Income before income taxes
Income taxes
Income from discontinued operations, net of tax
Note 6 – Accounts receivable
Accounts receivable consisted of the following:
Accounts receivable – non-related parties
Allowance for doubtful accounts
Accounts receivable, net
For the period
from January 1
to July 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
3,803,430 $
4,048,640
(245,210)
629,525
(1,144,417)
269,682
797
270,479
-
270,479 $
9,107,922 $
9,116,707
(8,785)
3,164,918
(1,477,631)
(1,696,072)
1,779,439
83,367
-
83,367 $
4,189,190
2,097,436
2,091,754
1,270,723
2,916,445
(2,095,414)
2,168,132
72,718
7,168
65,550
$
$
December 31
2019
December 31,
2018
$
$
45,083,689 $
(5,731,281)
39,352,408 $
37,177,953
(4,682,592)
32,495,361
The movement of allowance for doubtful accounts are as follows for the years ended December 31, 2019 and 2018:
Balance at beginning of year
Addition to allowance for doubtful accounts
Translation adjustments
Balance at end of year
Note 7 – Inventory
Inventory consisted of the following:
Raw materials
Finished products
Work in process
Total Inventory
Years ended December 31,
2019
2018
4,682,592 $
1,286,997
(238,308)
5,731,281 $
3,794,065
947,770
(59,243)
4,682,592
December 31,
2019
December 31,
2018
515,658 $
79,269
700
595,627 $
1,619,504
261,283
76,271
1,957,058
$
$
$
$
For the years ended December 31, 2019, 2018 and 2017, the Company recorded inventory write –offs in the amounts of $1,030,236, $700,379 and $13,908,
respectively.
F-23
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Advances to suppliers
December 31,
2019
December 31,
2018
Advances to suppliers
Allowance for doubtful accounts
Advances to suppliers, net
Less: Advances to suppliers, non-current
Advances to suppliers, current
$
$
14,596,906 $
(1,517,017)
13,079,889
-
13,079,889 $
The movement of allowance for doubtful accounts are as follows for the years ended December 31, 2019 and 2018:
15,813,997
(1,426,769)
14,387,228
-
14,387,228
627,151
809,411
(9,793)
1,426,769
Years ended December 31,
2019
2018
1,426,769 $
162,859
(72,611)
1,517,017 $
December 31,
2019
December 31,
2018
430,800 $
(430,800)
- $
453,900
(453,900)
-
Balance at beginning of year
Addition to allowance for doubtful accounts
Translation adjustments
Balance at end of year
Advances to suppliers – non-current
Zhibo Jieli Special Battery Material Co., Ltd *
Allowance for doubtful accounts
Advances to suppliers – non-current, net
$
$
$
$
* representing the prepayments made to acquire machinery.
F-24
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Manufacturing rebate receivable
On September 13, 2013, the Chinese Ministry of Finance, the Chinese Ministry of Science and Technology, the Chinese Ministry of Industry and
Information Technology, and the Chinese National Development and Reform Commission issued a joint announcement that in order to promote the
development, sale and use of alternative energy vehicles, Chinese government will continue to provide a manufacturing rebate for qualifying alternative
energy vehicles sold. The government rebate is paid to the Company on behalf of our customer for a portion of selling price, for which, our customer does
not need to pay at the time of purchase. The government manufacturing rebates are typically provided to eligible alternative energy automobile
manufacturers after sales are finalized and paperwork regarding the eligible mileages is submitted. Based on the criteria listed, Shangchi Automobile
(formerly known as Suzhou E-Motors) was eligible for approximately $6,000 and $29,400 in government manufacturing rebates for each of the qualifying
electric vehicles sold during the years ended December 31, 2018 and 2017, respectively. Shangchi Automobile didn’t sell any electric vehicles during the
year ended December 31, 2019.
The Company sold nil, 109 and 100 qualified electric vehicles during the years ended December 31, 2019, 2018 and 2017, respectively and recognized
$Nil, $644,959 and $2,942,190 manufacturing rebate income as part of revenue and corresponding receivable for the years ended December 31, 2019, 2018
and 2017, respectively, because the management believes that the electric vehicles sold met all the criteria set by the government and the collection of these
manufacturing rebates is reasonably assured.
As of December 31, 2019, the manufacturing rebate receivable was $7,746,116 (RMB 53,942,315), including $4,250,560 (RMB 29,600,000) of
manufacturing rebate receivable related to qualified electric vehicles sold in fiscal 2016, $2,858,582 (RMB 19,906,560) of manufacturing rebate receivable
related to qualified electric vehicles sold in fiscal 2017 and $636,974 (RMB 4,435,755) of manufacturing rebate receivable related to qualified electric
vehicles sold in fiscal 2018. The Company has not received the full payment of those eligible government rebates for the sales made in the fiscal year 2016
due to the recent slower processing of rebates. The Company is also working closely with the local government to speed up the collection process of the
outstanding government rebate balance in 2020.
Note 10 – Property, plant and equipment, net
Property, plant and equipment stated at cost less accumulated depreciation consisted of the following:
Building
Machinery and Production equipment
Electronic equipment
Office equipment
Automobiles
Construction in progress
Subtotal
Less: Accumulated depreciation
Property, plant and equipment, net
December 31,
2019
December 31,
2018
$
$
5,199,348 $
1,901,886
240,606
55,961
501,156
117,014
8,015,971
(5,315,937)
2,700,034 $
5,473,555
2,012,061
203,491
55,407
527,485
121,255
8,393,254
(5,152,634)
3,240,620
Depreciation expense was $703,113, $1,049,274 and $613,296 for the years ended December 31, 2019, 2018 and 2017, respectively, among which
$462,639, $628,144, and $576,953 were for continuing operations.
As of December 31, 2019, and 2018, building with net book value of $966,201 (all from continuing operations) and $7,139,561 (among which $1,149,156
from continuing operations and $5,990,405 from discontinued operations), respectively, were pledged as collateral for bank loans (Note 12).
F-25
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Intangible assets, net
Software
Electric vehicle registered license**
Land use rights*
Patents**
Subtotal
Less: Accumulated amortization
Intangible assets, net
December 31,
2019
December 31,
2018
$
$
24,314 $
11,899,171
287,800
4,308,000
16,519,285
(3,560,268)
12,959,017 $
25,619
13,690,078
303,232
4,539,000
18,557,929
(3,289,867)
15,268,062
*There is no private ownership of land in China. Land is usually owned by the local government and the government grants land use rights for specified
terms. The Company acquired two land use rights from the local government in December 2002 and September 2008 for periods of 50 years. As of
December 31, 2019, and 2018, land use rights with net book value of $194,745 (all from continuing operations) and $1,521,993 (among which $211,252
from continuing operations and $1,310,741 from discontinued operations), respectively, were pledged as collateral for bank loans (Note 12). The land use
rights are amortized over 50 years and the software is amortized over 5 years.
** Electric vehicle registered license and patents on specialty electric vehicles resulted from the acquisition of Shangchi Automobile (formerly known as
Suzhou E-Motors). For the year ended December 31, 2019, the Company recorded an impairment of $1,103,332 for the registered license.
Amortization expense for intangible assets totaled $459,898, $602,959 and $201,647 for the years ended December 31, 2019, 2018 and 2017, respectively,
among which $441,489, $443,318 and $201,647 were for continuing operations.
Note 12 – Short-term bank loans
The Company’s short-term bank loans consist of the following:
Loan payable to Bank of China Lishui Branch
Loan payable to SPD Bank Lishui Branch
Total
December 31,
2019
December 31,
2018
$
$
4,132,808 $
2,728,400
6,861,208 $
4,808,314
2,874,700
7,683,014
On February 26, 2019, Tantech Charcoal entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow $1,436,000 (RMB 10
million) for one year with annual interest rate of 4.35%. The purpose of the loan was for working capital needs. The loan was guaranteed by Tantech
Bamboo, two individual related parties, Zhengyu Wang, Chairman of the Board and previous CEO of the Company and his wife, Yefang Zhang and a third
party, Zhejiang Meifeng Tea Industry Co., Ltd. The loan was also collateralized by two properties owned by Zhengyu Wang and Yefang Zhang. The loan
was fully repaid upon maturity in January 2020.
On March 18, 2019, Tantech Bamboo entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow $2,696,808 (RMB 18.78
million) for one year with annual interest rate of 6.05%. The purpose of the loan was to fund working capital needs. The loan was collateralized by building
and land use right of Tantech Bamboo with maximum guaranteed amount up to approximately $3.7 million (RMB25,960,000). The loan was also
guaranteed by three related parties, Zhengyu Wang, Chairman of the Board and previous CEO of the Company and his wife, Yefang Zhang and Lishui
Jiuanju Trading Co., Ltd., the president of which was also the present CEO and previous COO of the Company. The loan was fully repaid upon maturity in
January 2020.
F-26
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Short-term bank loans (continued)
On November 4, 2019, Tantech Bamboo entered into a short-term loan agreement with Shanghai Pudong Development Bank (Lishui Branch) to borrow $
2,728,400 (RMB 19 million) with fixed annual interest rate of 5.22% and mature date of April 30, 2020. The purpose of the loan was to fund working
capital needs. The loan was guaranteed by three related parties, Zhengyu Wang, Chairman of the Board and previous CEO and his wife, Yefang Zhang and
Forasen Group Co., Ltd., a company owned by Zhengyu Wang and Yefang Zhang. The loan was also collateralized by building and land use right of
Tantech Energy with maximum guaranteed amount up to approximately $4.2 million (RMB29,250,000). The loan was fully repaid upon maturity in April
2020.
As of December 31, 2019, total bank loans payable amounted to $6,861,208.
On August 16, 2018 and August 20, 2018, Tantech Bamboo entered into two short-term loan agreements with Bank of China (Lishui Branch) to borrow
$1,513,000 (RMB 10 million) and $1,328,414 (RMB 8.78 million) for seven months with a fixed annual interest rate of 6.01% and 6.06%, respectively.
The purpose of the loans was to fund working capital needs. The loans were collateralized by building and land use right of Tantech Bamboo with
maximum guaranteed amount up to approximately $3.9 million (RMB25,570,000) as of December 31, 2018. These two loans were also guaranteed by two
individual related parties, Zhengyu Wang, Chairman of the Board and previous CEO of the Company and his wife, Yefang Zhang. In addition, loan
principal of $1,513,000 (RMB 10 million) was further guaranteed by a related party, Lishui Jiuanju Trading Co., Ltd., the president of which was also the
present CEO and previous COO of the Company. These two loans were fully repaid upon maturity in March 2019.
On August 1, 2018, Tantech Charcoal entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow $1,966,900 (RMB 13
million) for seven months with a fixed annual interest rate of 6.1%. The purpose of the loan was for working capital needs. The loan was guaranteed by
Tantech Bamboo, two individual related parties, Zhengyu Wang and Yefang Zhang and a third party, Zhejiang Meifeng Tea Industry Co., Ltd. The loan was
also collateralized by a property owned by Zhengyu Wang and Yefang Zhang. The loan was fully repaid upon maturity in February 2019.
On November 23, 2018, Tantech Bamboo entered into a short-term loan agreement with Shanghai Pudong Development Bank (Lishui Branch) to borrow
$2,874,700 (RMB 19 million) for a year with fixed annual interest rate of 6.96%. The purpose of the loan was to fund working capital needs. The loan was
collateralized by building and land use right of Tantech Energy with maximum guaranteed amount up to approximately $4.4 million (RMB29,250,000) as
of December 31, 2018. The loan was also guaranteed by three related parties, Zhengyu Wang and his wife, Yefang Zhang and Forasen Group Co., Ltd., a
company owned by Zhengyu Wang and Yefang Zhang. This loan was fully repaid upon maturity in November 2019.
As of December 31, 2018, total bank loans payable amounted to $7,683,014.
For the years ended December 31, 2019, 2018 and 2017, the interest expense related to bank loans was $421,646, $378,857 and $479,358, respectively.
F-27
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Bank acceptance notes payable
Bank acceptance notes payable do not carry a stated interest rate but have a specific due date usually for a period of one year. These notes are negotiable
documents issued by financial institutions on the Company’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as
payment or can be factored to other financial institutions before becoming due. These notes are short-term in nature. As collateral security for financial
institutions’ undertakings, the Company is required to maintain deposits with such financial institutions in restricted cash amounts of 0% to 100% of the
balances of the bank acceptance notes. As of December 31, 2019, and 2018, deposits of $205,520 and $2,121,377 were reported as restricted cash on
balance sheet.
Bank acceptance notes payable consisted of the following:
December 31,
2019
December 31,
2018
Bank acceptance notes payable issued by Bank of Zhang Jiagang Leyu Branch
Bank acceptance notes payable issued by SPD Bank Zhang Jiagang Branch
Total
(a)
(b)
$
$
- $
205,520
205,520 $
2,121,377
-
2,121,377
(a) Bank acceptance notes payable of $2,121,377 (RMB14,021,000) issued by Bank of Zhang Jiagang Leyu Branch with due dates from February 7,
2019 to June 28, 2019. The Company is required to maintain restricted cash deposits at 100% of the notes payable with the bank, in order to
ensure future credit availability.
(b) Bank acceptance notes payable of $205,520 (RMB1,431,200) issued by Shanghai Pudong Development Bank Zhang Jiagang Branch with due
date on January 12, 2020. The Company is required to maintain restricted cash deposits at 100% of the notes payable with the bank, in order to
ensure future credit availability.
F-28
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Related Party Balances and Transactions
The balances due to related parties were as follows:
December 31,
2019
December 31,
2018
Dr. Henglong Chen and his affiliates *
Forasen Group and its affiliates, controlled by Mr. Zhengyu Wang, Chairman and previous
CEO of the Company until December 6, 2019
Total
$
$
932,616 $
693,504
1,626,120 $
1,227,773
874,402
2,102,175
* Dr. Henglong Chen is the original shareholder of Shangchi Automobile (formerly known as Suzhou E-Motors). The Company acquired his 70% equity
interest in Shangchi Automobile and issued 2,500,000 restricted shares of Tantech’s common stock to him in connection with the acquisition of Shangchi
Automobile. As of December 31, 2019 and 2018, Dr. Henglong Chen and his affiliates advanced $932,616 and $1,227,773 to the Company for its working
capital purpose, respectively.
As of December 31, 2019 and 2018, the Company also borrowed $693,504 and $874,402 from Forasen Group and its affiliates, controlled by Mr. Zhengyu
Wang, Chairman and previous CEO of the Company, for working capital purpose. For the year ended December 31, 2017, the Company borrowed
$1,537,000 from Mr. Yulong Chen, a shareholder of the Company for working capital purpose. The balance was fully repaid during the year ended
December 31, 2018.
All balances of due to the related parties were unsecured, interest-free and due upon demand.
The Company’s major shareholder Mr. Zhengyu Wang and his wife Ms. Yefang Zhang, as well as related party entities controlled by Mr. Wang, provided
guarantees to the Company’s bank loans (Note 12).
Note 15 – Commitments and Contingencies
Guaranty provided for related party
In July 2017, Tantech Energy provided a guarantee with a bank on behalf of Forasen Group for maximum amount of approximately $8 million (RMB
57,070,000) by pledging certain land and building as the collateral for the loan and notes. The guarantee will expire on July 23, 2020.
In March 2019, Tantech Bamboo provided a guarantee with a bank for Zhejiang Forasen Food Co., Ltd. (“Forasen Food”) for maximum amount of
approximately $1.4 million (RMB 10 million) by pledging certain land and building as the collateral for the loan and notes. The guarantee will expire on
March 4, 2022. Forasen Food is controlled by Ms Yefang Zhang who is the Company’s director.
Operating lease
Shangchi Automobile leased certain factory facilities under operating leases through May 9, 2019. The annual rent under operating lease agreement was
approximately $144,000 (RMB 1 million). This agreement was renewed for the period from May 10, 2019 to August 31, 2019 with daily rent of
approximately $400 (RMB2,740). On August 10, 2019, Shangchi Automobile signed a new operating lease agreement with the landlord for one year until
August 9, 2020 with annual rent of approximately $144,000 (RMB 1 million).
Shenzhen E-Motors leased office space under operating leases for one year from November 12, 2018 to November 11, 2019 with annual rent of
approximately $13,500 (RMB93,600). The lease agreement was renewed for another year until November 11, 2020.
Tantech Bamboo leased factory facilities and office space from Tantech Energy after Tantech Energy was sold in July 2019 under operating leases until
December 31, 2019 with rent free for the whole period in 2019. This agreement was renewed for another year from January 1, 2020 to December 31, 2020
with annual rent of approximately $178,000 (RMB1,238,784).
The rental expense for the years ended December 31, 2019, 2018 and 2017 were $167,526, $139,507 and $73,184, respectively.
F-29
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Commitments and Contingencies (continued)
Contingency
In May 2018, our wholly owned subsidiary Tantech Bamboo signed an agreement with other co-guarantors to jointly and severally guarantee the share
repurchase obligation of Forasen Group, in favor of an unrelated third party. Such third party filed a complaint to claim a payment of approximately $4.2
million (RMB 29.50 million) against Forasen Group, together with the guarantors on January 9, 2019. On August 30, 2019, the court issued a settlement by
which another third party agreed to purchase the shares from the plaintiff by paying approximately $13 million (RMB 90 million), and all the co-guarantors
including Tantech Bamboo jointly and severally guarantee the payment obligation regarding the $13 million (RMB 90 million) and other possible fees, for
three years from June 30, 2020, the due date of the share purchase payment obligation. The other third party has paid approximately $4.6 million (RMB
32.06 million) and approximately $8.4 million (RMB 57.94 million) remains unpaid.
Accordingly, in June 2020, Lishui Jiuanju Commercial Trade Co., Ltd. (“LJC”), another related party, issued to Tantech Bamboo an anti-guaranty guaranty
to guarantee Tantech Bamboo’s potential payment obligation, and a bank statement of approximately $10.1 million (RMB 70 million). Therefore, the
Company’s PRC counsel believes Tantech Bamboo’s legal risk has been relieved to some extent. The company believes that it is more likely than not that
LJC will perform its guaranty obligation and Tantech Bamboo will not need to make the payment.
F-30
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Stockholders’ equity
On July 12, 2017, in connection of the acquisition of Shangchi Automobile (formerly known as Suzhou E-Motors), the Company issued 2,500,000 shares
of its common stock to the original shareholder of Shangchi Automobile. These shares are restricted for minimum twelve months after the completion of
the acquisition. The fair value of these shares was $6,500,000 based on the share price of $2.6 on July 12, 2017.
On September 27, 2017, the Company and certain institutional investors entered into a securities purchase agreement in connection with the September
2017 Offering, pursuant to which the Company agreed to sell an aggregate of 1,891,307 common shares and warrants to initially purchase an aggregate of
1,078,045 common shares, consisting of 945,654 investor warrants and 132,391 placement agent warrants. The common share purchase price was $3.45
per common share. On September 29, 2017, the Company completed the September 2017 Offering. After deducting offering expenses, the Company
received $5,968,208 in net proceeds from the sale of the common shares.
On September 19, 2018, the Company issued 150,000 shares of common stock to three individuals for consulting services to be provided for the period
from September 19, 2018 to May 18, 2019, which were valued at $243,000 based on the quoted market price at issuance. The entire cost of $243,000 was
amortized over the 8-month service period using straight line method.
Warrants registered in September 2017 Offering
In connection with the September 2017 offering, the Company registered and issued warrants to purchase an aggregate of 1,078,045 common shares,
consisting of 945,654 investor warrants (the “Investor Warrants”) and 132,391 placement agent warrants (the “Placement Agent Warrants”). All warrants
carry a term of 5 years. The Investor Warrants are exercisable at $4.25 per share and the Placement Agent Warrants are exercisable at $4.675 per share. The
Investor Warrants can be exercisable immediately as of the date of issuance. The Placement Agent Warrants are not exercisable for a period of 180 days
after the effective date of the offering. A holder of the warrants also will have the right to exercise its warrants on a cashless basis if the registration
statement or prospectus contained therein is not available for the issuance of the common shares issuable upon exercise thereof. The exercisability of the
warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Company’s common shares.
Management determined that these warrants are equity instruments because the warrants are indexed to its own stock. The warrants were recorded at their
fair value on the date of grant as a component of stockholders’ equity. As of December 31, 2019, the total number of warrants outstanding was 1,078,045
with remaining life of 3 years. No warrants were exercised since the issuance date.
F-31
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Noncontrolling Interests
A reconciliation of non-controlling interest as of December 31, 2019 and 2018 is as follows:
Beginning Balance
Proportionate shares of net loss
Foreign currency translation adjustment
Total
December 31,
2019
December 31,
2018
$
7,918,096 $
(3,601,728)
29,848
8,799,460
(896,769)
15,405
$
4,346,216 $
7,918,096
As of December 31, 2019 and 2018, the noncontrolling interests balances represented the noncontrolling shareholder’s 30% equity interests in Shangchi
Automobile (formerly known as Suzhou E-Motors) and its subsidiary Shenzhen E-Motors.
F-32
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 – Long term investments
On January 10, 2018, the Company invested approximately $18.2 million (or RMB 120 million) to acquire 18% equity interest in Libo Haokun Stone Co.,
Ltd. (“Libo Haokun”). Libo Haokun holds a government-issued permit and has the exclusive right to mine a 0.11-square-kilometer marble quarry in the
southwestern province of Guizhou province, China. Libo Haokun obtained the permit to mine the quarry from the local government in September 2016.
On November 29, 2019, the Company entered into an investment agreement (the “Investment Agreement”) with Jingning Zhonggang Mining Co., Ltd.
(“Jingning Zhonggang”) through Lishui Tantech to acquire 18% of the equity interest of Fuquan Chengwang Mining Co., Ltd. (“Fuquan Chengwang”), a
wholly-owned subsidiary of Jingning Zhonggang, at a price of RMB 46.323 million (approxiamately $6.65 million). The consideration equals 18% of
RMB 257.354 million, the value of the mining right under a permit being renewed by Fuquan Chengwang according to an evaluation report. Fuquan
Chengwang is a basalt mining company. It is renewing a government-issued mining permit which expired on May 20, 2019. The mining permit would
provide it the right to mine a 0.2607-square-kilometer basalt quarry in Fuquan City, Guizhou Province, China.
Pursuant to the Investment Agreement, Tantech is obligated to pay the consideration within 30 days after Fuquan Chengwang completes the recording
process with the local industrial and commerce administration for transfer of the share ownership. Pursuant to the Investment Agreement, after the transfer
of the 18% share ownership, if the value of Fuquan Chengwang is lower than RMB 257.354 million according to the financial statements audited by an
accounting firm approved by the Tantech, Jingning Zhonggang will be obligated to refund to Tantech the overpaid amount. The payment could be in the
form of cash, shares, or other assets with the same value, as selected by Tantech.
On December 17, 2019, Lishui Tantech entered into a supplementary agreement to the Investment Agreement (the “Supplementary Agreement,” and
collectively with the Investment Agreement, the “Agreements”) with Jingning Zhonggang and Lishui Zhonggang Mining Co., Ltd. (“Lishui Zhonggang”).
Jingning Zhonggang is a wholly-owned subsidiary of Lishui Zhonggang. Pursuant to the Supplementary Agreement, if Fuquan Chengwang is not able to
receive the renewed mining permit by June 30, 2020, Lishui Tantech has the option to terminate the Investment Agreement and Jingning Zhonggang is
obligated to return all of the consideration paid by the Company within 30 days after the termination date and the interest calculated by the relevant loan
rate of the People’s Bank of China. Lishui Zhonggang, as the only shareholder of Jingning Zhonggang, will be jointly and severally liable for Jingning
Zhonggang’s liabilities under the Agreements. Due to COVID-19 pandemic in early 2020, the permit renewal process has been delayed. Accordingly, the
Company is in the process of negotiating an investment agreement amendment to extend the renewal due date from June 30, 2020 to December 31, 2020.
After a series of transactions and reorganization, as of December 31, 2019, The Company and Jingning Zhonggang owns 18% and 82% of Libo Haokun,
respectively, through Jingning Meizhongkuang Industry Co., Ltd. (“Jingning Meizhongkuang”). Jingning Meizhongkuang owns 100% of Fuquan
Chengwang. The Agreements would enable Tantech to indirectly hold a 18% stake in Fuquan Chengwang through holding 18% of the equity interest of
Jingning Meizhongkuang.
As the Company did not have significant influence over the equity investee, the investments were accounted for using the cost method. For the years ended
December 31, 2019 and 2018, the Company did not recognize any impairment losses for the long term investments.
F-33
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Taxes
Prepaid taxes
Prepaid taxes as of December 31, 2019 and 2018 consist of the following:
Prepaid corporation income tax
Prepaid value-added tax
Total
Taxes Payable
Taxes payable as of December 31, 2019 and 2018 consist of the following:
Corporation income tax payable
Other tax payable
Total
Corporation Income Tax (“CIT”)
December 31,
2019
December 31,
2018
356,121 $
2,040,228
-
2,136,988
2,396,349 $
2,136,988
December 31,
2019
December 31,
2018
- $
102,704
227,386
117,177
102,704 $
344,563
$
$
$
$
Tantech BVI was incorporated in the BVI and is not subject to income taxes under the current laws of BVI.
USCNHK and Euroasia are holding companies registered in Hong Kong and has no operating profit for tax liabilities.
Tantech Bamboo was registered in the PRC and is subject to corporate income tax at a reduced rate of 15% starting from 2008 when it was approved by
local government as a high-tech company. Tantech Energy was registered in the PRC and is also subject to corporate income tax at a reduced rate of 15%
starting from 2013 when it was approved by local government as a high-tech company. Shangchi Automobile was approved by local government as a high
–Tech company on December 7, 2017 and was subject to income tax rate of 15%.
Lishui Tantech, Shenzhen E-Motors, Jiamu, Jiyi, Wangbo, Bamboo Tourism, Tantech Charcoal, Tantech Babiku and Tanbo Tech are all subject to income
tax at unified rate of 25%.
The impact of the tax holidays noted above decreased foreign taxes by $381,033, $158,424 and $899,503 for the years ended December 31, 2019, 2018 and
2017, respectively. The benefit of the tax holidays on net income (loss) per share (basic and diluted) was $0.01, $0.01 and $0.03 for the years ended
December 31, 2019, 2018 and 2017, respectively.
The following table reconciles PRC statutory rates to the Company’s effective tax rates for the years ended December 31, 2019, 2018 and 2017:
Statutory PRC income tax rate
Favorable tax rate impact (a)
Permanent difference and others
Changes of deferred tax assets valuation allowances
Total
Years ended December 31,
2018
2019
2017
25%
(11)%
4%
(22)%
(4)%
25%
(8)%
(1)%
35%
51%
25%
(10)%
2%
17%
34%
(a) Two of the Company’s subsidiaries, Tantech Bamboo and Shangchi Automobile are subject to tax rate of 15%.
F-34
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Taxes (continued)
The provision for income tax consisted of the following:
Current
Deferred
Total
$
$
Significant components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts and other reserves and impairments
Valuation allowance
Total
Deferred tax liability:
Increase in fair value of intangible assets acquired through acquisition
Impairment of intangible assets acquired through acquisition
Total
2019
Years ended December 31,
2018
1,031,158 $
-
1,031,158 $
529,162 $
(165,500)
363,662 $
2017
1,334,254
193,749
1,528,003
December 31,
2019
December 31,
2018
4,426,306 $
(4,426,306)
- $
2,389,719
(2,389,719)
-
1,949,004 $
(164,129)
1,784,875 $
2,053,512
-
2,053,512
$
$
$
$
At December 31, 2019 and 2018, the Company has provided full valuation allowance for deferred tax assets that the Company estimated the Company
could not realize due to expected future operating loss in certain entities. As of December 31, 2019 and 2018, the valuation allowance was $4,426,306 and
$2,389,719, respectively. The net change in the valuation allowance was an increase of $2,036,587, $707,013 and $1,212,303 for the years ended
December 31, 2019, 2018 and 2017, respectively. The Company’s management reviews this valuation allowance periodically and makes adjustments as
necessary.
F-35
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 – Segment information
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal
organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source
for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results of consumer
products, trading and electric vehicles separately. The Company has determined that it has three operating segments as defined by ASC 280, “Segment
Reporting”: consumer products, electric vehicles, and trading. Consumer products segment manufactures and sells Charcoal Doctor branded products and
BBQ charcoal in China. Trading segment conducts trading businesses related to bamboo charcoal products. Electric Vehicle segment (“EV”) was acquired
in July 2017.
Adjustments and eliminations of inter-company transactions were not included in determining segment (loss) profit, as they are not used by the chief
operating decision maker. The following table presents summary information by segment for the years ended December 31, 2019, 2018 and 2017,
respectively.
Revenue from external customers
Revenue from inter segment
Cost of revenue
Gross profit
Interest Expenses
Depreciation & amortization
Capital expenditure
Segment assets
Segment profit
2019
Consumer product
2018
$
$
45,821,163 $
(1,005,029)
40,138,663
5,682,500
355,400
276,170
6,787,833
81,944,714
2,430,387 $
22,388,827 $
(7,790,931)
14,347,896
8,040,931
292,996
420,301
13,512,820
84,899,512
4,135,969 $
2017
31,889,149 $
(2,736,204)
23,693,289
8,195,860
290,383
454,178
74,202
83,024,439
5,258,037 $
2019
3,379,705 $
-
2,270,766
1,108,939
71,979
-
-
9,487,143
(83,910) $
Trading
2018
3,776,842 $
-
3,290,089
486,753
126,030
-
209,721
7,777,390
(134,511) $
2017
1,829,475 $
(24,550)
1,412,062
417,413
124,587
25,345
-
5,988,364
203,157 $
2019
29,702 $
-
843,641
(813,939)
15,883
627,958
12,106
24,018,920
(12,005,760) $
EV
2018
3,395,730 $
-
3,894,334
(498,604)
207,317
526,725
792,981
41,517,112
(3,004,827) $
2017
8,578,988
-
6,636,402
1,942,586
136,162
299,075
8,061
49,474,923
(2,513,613)
2019
$ 49,230,570 $
(1,005,029)
43,253,070
5,977,500
443,262
904,128
6,799,939
115,450,777
$ (9,659,283) $
Total
2018
29,561,399 $
(7,790,931)
21,532,319
8,029,080
626,343
947,026
14,515,522
134,194,014
996,631 $
2017
42,297,612
(2,760,754)
31,741,753
10,555,859
551,044
778,598
82,263
138,487,726
2,947,581
All of the Company's long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on customers, is set
out as follows:
Revenue from China
Revenue directly from foreign countries
Total Revenue
Years ended December 31,
2018
29,561,399 $
-
29,561,399 $
2019
49,230,570 $
-
49,230,570 $
2017
42,297,612
-
42,297,612
$
$
F-36
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 – Major customers and suppliers
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable
balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the year ended December 31, 2019, six major customers accounted for approximately 19%, 19%, 18%, 17%, 13% and 12% of the Company’s total
sales, respectively. For the year ended December 31, 2018, two major customers accounted for approximately 37% and 12% of the Company’s total sales,
respectively. For the year ended December 31, 2017, two major customers accounted for approximately 39% and 8% of the Company’s total sales,
respectively.
As of December 31, 2019, five customers accounted for approximately 30%, 18%, 18%, 16% and 16% of the Company’s accounts receivable balance. As
of December 31, 2018, three customers accounted for approximately 45%, 13% and 11% of the Company’s accounts receivable balance.
The Company also had certain major suppliers whose purchases individually represented 10% or more of the Company’s total purchases. For the year
ended December 31, 2019, three major suppliers accounted for approximately 38%, 20% and 18% of the Company’s total purchases, respectively. For the
year ended December 31, 2018, three major suppliers accounted for approximately 33%, 24% and 15% of the Company’s total purchases, respectively. For
the year ended December 31, 2017, three major suppliers accounted for approximately 28%, 17% and 16% of the Company’s total purchases, respectively.
Note 22 – Subsequent events
Bank loans
On January 6, 2020, Tantech Bamboo entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow approximately $2.6 million
(RMB 17.78 million) for six months with annual interest rate of 5.88%. The purpose of the loan was to fund working capital needs. The loan was
collateralized by building and land use right of Tantech Bamboo with maximum guaranteed amount up to approximately $3.7 million (RMB25,960,000).
The loan was also guaranteed by three related parties, Zhengyu Wang, Chairman of the Board and previous CEO of the Company and his wife, Yefang
Zhang and Lishui Jiuanju Trading Co., Ltd., the president of which was also the present CEO and previous COO of the Company.
On January 6, 2020, Tantech Charcoal entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow approximately $1.4 million
(RMB 10 million) for six months with annual interest rate of 4%. The purpose of the loan was for working capital needs. The loan was guaranteed by
Tantech Bamboo, two individual related parties, Zhengyu Wang and Yefang Zhang and a third party, Zhejiang Meifeng Tea Industry Co., Ltd. The loan was
also collateralized by two properties owned by Zhengyu Wang and Yefang Zhang and building and land use right of Tantech Bamboo with maximum
guaranteed amount up to approximately $1.4 million (RMB 10 million).
On April 27, 2020, Tantech Bamboo entered into a short-term loan agreement with Shanghai Pudong Development Bank (Lishui Branch) to borrow
approximately $2.7 million (RMB 19 million) for one year with fixed annual interest rate of 4.785%. The purpose of the loan was to fund working capital
needs. The loan was guaranteed by three related parties, Zhengyu Wang and his wife, Yefang Zhang and Forasen Group Co., Ltd., a company owned by
Zhengyu Wang and Yefang Zhang. The loan was also collateralized by building and land use right of Tantech Energy with maximum guaranteed amount up
to approximately $4.2 million (RMB29,250,000).
F-37
TANTECH HOLDINGS LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 – Subsequent events (continued)
Equity investment
On April 3, 2020, Lishui Ansheng Energy Technology Co., a third party, signed an investment agreement with Jingning Meizhongkuang to invest in
Fuquan Chengwang by paying RMB 46.50 million (approximately $6.6 million) to exchange 18% of the interest of Fuquan Chengwang. After the
transaction, the Company’s indirect interest in Fuquan Chengwang was diluted from 18% to 14.76% through holding 18% of the equity interest of Jingning
Meizhongkuang.
Corporation structure reorganization
On January 2, 2020, Lishui Jikang Energy Technology Co., Ltd. (“Jikang Energy”) was established as a wholly owned subsidiary of Lishui Xincai with
authorized share capital of RMB 5 million. Jikang Energy is a holding company and does not conduct any substantial business.
On January 3, 2020, Tantech Bamboo transferred all of its shares in its wholly-owned subsidiary Tanbo Tech to Lishui Xincai.
On January 10, 2020, Lishui Tantech transferred all of its shares in its wholly-owned subsidiary Tantech Bamboo to Jikang Energy.
After the above transfers, Tantech Bamboo becomes the wholly-owned subsidiary of Jikang Energy. Jikang Energy, Tanbo Tech and Tantech Charcoal
become the wholly-owned subsidiaries of Lishui Xincai.
Stockholders’ equity
On March 23, 2020, the Company issued 35,592 shares of common stock to an individual for consulting services provided for the period from September
2019 to February 2020, which were valued at $33,812 based on the quoted market price at issuance. The entire cost of $33,812 was amortized over the 6-
month service period using straight line method.
COVID-19
The Company’s operations are affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was
declared a pandemic by the World Health Organization. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses. The
Company’s business has been negatively impacted by the COVID-19 coronavirus outbreak to certain extent.
From late January 2020 to the middle of February 2020, the Company had to temporarily suspend our manufacturing activities due to government
restrictions. During the temporary business closure period, our employees had very limited access to our manufacturing facilities and the shipping
companies were not available and as a result, the Company experienced difficulty delivering our products to the customers on a timely basis. In addition,
due to the COVID-19 outbreak, some of the customers or suppliers may experience financial distress, delay or default on their payments, reduce the scale
of their business, or suffer disruptions in their business due to the outbreak. Any increased difficulty in collecting accounts receivable, delayed raw
materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could
negatively impact our results of operations.
In light of the current circumstances and available information, the Company estimated that for the period from January to May 2020, the Company’s
revenues for consumer product segment could be approximately 20% lower as compared to the same period of last year, however, the sales for trading
segment increased due to the significant increased demand for bamboo charcoal used for air purification and sanitation products.
As of the date of this filing, the COVID-19 coronavirus outbreak in China appears to have slowed down and most provinces and cities have resumed
business activities under the guidance and support of the government. However, there is still significant uncertainty regarding the possibility of a second
wave of infections, and the breadth and duration of business disruptions related to COVID-19, which could continue to have material impact to the
Company’s operations.
F-38
Party A: Tantech Holdings Ltd.
Party B: Wangfeng Yan , ID NO. : XXXXXXXXXXX
Employment Agreement
According to the relevant provisions of the "Contract Law of the People's Republic of China", both parties A and B reached an agreement on the
Exhibit 4.18
employment of Party B as follows.
1. Employment
Party A hires Party B as the company's CEO .
2. The responsibilities of Party B:
(1) Fully comprehend the resolutions of the board of directors, monitor the implementation process of the resolutions, correct problems in time, and
ensure the implementation of the resolutions.
(2) Explore market opportunities, preside over the formulation of the company's business objectives and management plans, lead the team to implement,
and achieve rapid growth of the group's business and investment returns.
(3) Responsible for operating results, organize the implementation of the financial budget plan and profit distribution approved by the board of directors;
(4) Establish the organization system and business system of the company, be responsible for the construction of the senior management team, select
middle and senior management personnel, and review the setting plan and basic management system of the internal management organization;
Responsible for handling major emergencies, reporting to the chairman in time, and handling other important matters authorized by the chairman;
(5) Fully preside over the management work of the company, implement the annual performance targets and business development strategic plans and
overall marketing planning plans issued by the board of directors, and realize the business management goals;
(6) Continuously optimize the human resources allocation of the company and continuously improve the overall organizational capabilities of the
company; leaders create an enterprise cultural atmosphere, improve the enterprise identification system, and shape and strengthen the group company
values.
3. Hiring time
The first appointment period is from December 6, 2019 to December 5, 2022. If the agreement has not expired and the two parties have not proposed
not to renew the contract, the agreement shall be deemed to be automatically terminated.
4. Working methods
Party B works full-time in Party A, the working hours refer to Party B's personnel system; the place of work is Lishui; Party B can no longer
concurrently serve as CEO of other listed companies outside the Forsen system.
5. Treatment and Payment:
Treatment: RMB 200,000 one year.
The payment method : RMB 15,000 per month
Party B ’s travel expenses incurred for Party A ’s work are reported and reimbursed according to the invoice.
6. Confidentiality
In view of the nature of Party B ’s work, Party B ’s confidentiality obligations are set out in the Confidentiality Agreement signed by both parties.
7. Settlement of disputes
This agreement becomes effective after the official seal is signed by both parties. Disputes arising from the performance of this agreement will be
resolved through consultation between the two parties.
8. This agreement is made in duplicate, with the same legal effect, one for each party.
Party A (Stamp) Tantech Holdings Ltd
Party B (Stamp): Fengwang Yan
Date: December 6, 2019
Party A: Tantech Holdings Ltd.
Party B: Weilin Zhang , ID NO. : 332529196808143318
Employment Agreement
According to the relevant provisions of the "Contract Law of the People's Republic of China", both parties A and B reached an agreement on the
employment of Party B as follows.
Exhibit 4.19
1. Employment
Party A hires Party B as the company's CFO .
2.The responsibilities of Party B:
(1) Assist the CEO of the company to formulate the company's development strategy, and provide forward-looking warnings and measures from the
directions of finance, capital, risk control, and policy;
(2) provide comprehensive financial management from product cost analysis and management, financial control, tax planning, management reports,
business analysis and development planning, corporate financing and deployment, and improve the efficiency of capital;
(3) Establish and improve financial systems and standards, establish a scientific and systematic financial accounting system and financial monitoring
system, and conduct effective internal financial control and enterprise evaluation;
(4) Formulate effective financing strategies and plans, including financing schemes, equity strategies, and use various financial tools and financing
tools to ensure the company's optimal capital structure;
(5) As a senior management of the company, participate in capital operations such as company acquisitions, mergers, and asset restructuring;
(6)Familiar with capital market , good relationship with investors and funds, provide financial advice and decision support for the company's major
investment, financing, mergers and acquisitions, and participate in risk assessment, guidance, tracking and control;
(7) Responsible for providing detailed and clear financial performance and relevant corporate financial and operational status reports to the CEO,
board of directors, and investors to provide strategic basis for making business decisions;
(8) Supervise fund management reports and final accounts; preside over the preparation and review of various standardized financial statements to
provide timely and effective financial analysis models for the company;
(9) Review financial statements and submit financial management reports; participate in the review of company legal documents, coordination of
legal affairs, compliance and operation.
3. Hiring time
The first appointment period is from July 1, 2019 to June 30, 2022. If the agreement has not expired and the two parties have not proposed not to
renew the contract, the agreement shall be deemed to be automatically terminated.
4. Working methods
Party B works full-time in Party A, the working hours refer to Party B's personnel system; the place of work is Lishui; Party B can no longer
concurrently serve as CFO of other listed companies outside the Forsen system.
5.Treatment and Payment:
Treatment: RMB 300,000 one year.
The payment method : RMB 25,000 per month
Party B ’s travel expenses incurred for Party A ’s work are reported and reimbursed according to the invoice.
6. Confidentiality
In view of the nature of Party B ’s work, Party B ’s confidentiality obligations are set out in the Confidentiality Agreement signed by both parties.
7. Settlement of disputes
This agreement becomes effective after the official seal is signed by both parties. Disputes arising from the performance of this agreement will be
resolved through consultation between the two parties.
8. This agreement is made in duplicate, with the same legal effect, one for each party.
Party A (Stamp) Tantech Holdings Ltd
Party B (Stamp): Weilin Zhang
Date: June 26, 2019
Party A: Tantech Holdings Ltd.
Party B: Mingqin Dong , ID NO. : 23071119900316001X
Employment Agreement
According to the relevant provisions of the "Contract Law of the People's Republic of China", both parties A and B reached an agreement on the
Exhibit 4.20
employment of Party B as follows.
1. Employment
Party A hires Party B as the company's COO .
2.The responsibilities of Party B:
(1) As the company's core management, participate in the formulation of company strategies, and promote the implementation of the company's
strategic business goals, and are responsible for the results of operations;
(2) Comprehensively control the company's business operation management, build operation system, brand marketing system, product system,
customer service system and sales system, etc., which can optimize business links in real time according to the operation status and improve business
operation efficiency;
(3) Implement various business management and marketing management activities to ensure the completion of business and management indicators,
accurately locate business ideas based on market trends and development trends, and study and formulate business strategies and guidelines in light of
market conditions;
(4) Under the guidance of the company's business strategy, conduct market surveys and feedback, comprehensive planning of the business direction,
strengthen the company's brand image construction, promote the company's extension, connotation value, improve the company's popularity and brand
influence;
(5) Lead the internal team building of the enterprise, improve the internal management mechanism and innovative incentive mechanism, optimize the
company's human resource allocation, and continuously improve the company's overall organizational capabilities。
(6) Coordinate the relationship between various departments, ensure smooth information, rationally allocate resources of each department, and
achieve maximum conversion and output of resources.
3. Hiring time
The first appointment period is from December 6, 2019 to December 5, 2022. If the agreement has not expired and the two parties have not proposed
not to renew the contract, the agreement shall be deemed to be automatically terminated.
4. Working methods
Party B works full-time in Party A, the working hours refer to Party B's personnel system; the place of work is Lishui; Party B can no longer
concurrently serve as COO of other listed companies outside the Forsen system(Except New Third Board Company).
5.Treatment and Payment:
Treatment: RMB 180,000 one year.
The payment method : RMB 15,000 per month
Party B ’s travel expenses incurred for Party A ’s work are reported and reimbursed according to the invoice.
6. Confidentiality
In view of the nature of Party B ’s work, Party B ’s confidentiality obligations are set out in the Confidentiality Agreement signed by both parties.
7. Settlement of disputes
This agreement becomes effective after the official seal is signed by both parties. Disputes arising from the performance of this agreement will be
resolved through consultation between the two parties.
8. This agreement is made in duplicate, with the same legal effect, one for each party.
Party A (Stamp) Tantech Holdings Ltd
Party B (Stamp): Mingqin Dong
Date: December 6, 2019
Summary Translation
Exhibit 4.21
Lease Agreement between Zhejiang Tantech Energy Technology Co., Ltd. and Zhejiang Tantech Bamboo Technology Co., Ltd.
Party A: Zhejiang Tantech Energy Technology Co., Ltd.
Party B: Zhejiang Tantech Bamboo Technology Co., Ltd.
The two parties signed a Lease Agreement. Party A rented the building to Party B.
The house is located in Building 3 #, 4 #, No. 10 Censhan Road, Shuige Industrial Zone,, Lishui City, Zhejiang Province, China ,with an area of 12,904
square meters.
The building is used as production and office space for Party B.
The rental period of the house is 1 year, from January 1, 2020 to December 31, 2020. The rent is paid every six months. The total annual rent of the house
is 1,238,784 yuan.
The Agreement is made in duplicate with all parties herein holding one copies each with the same legal effect.
Zhejiang Tantech Energy Technology Co., Ltd.
(Corporate Chop)
By: /s/ Yonghong Wu
Zhejiang Tantech Bamboo Technology Co., Ltd.
(Corporate Chop)
By: /s/ Zhengyu Wang
Translation of Lease Agreement
Exhibit 4.22
Party A: Zhangjiagang Jinmao Investment Development Co. LTD
Party B:Shangchi Automobile Co., Ltd.
After negotiation, both parties reached the following agreement on land, housing and other lease matters:
1. Party B rents the 11688 ㎡ workshop, 4515 ㎡ land, train operation, transformer, cable and other facilities of former Chassis Factory of Peony
Group located in the Yongli village, Leyu Town, Zhangjiagang City.
2. The lease period: one year, from August 10, 2019 to August 9, 2020.
3. The rent is 1 million yuan one year, which is still the preferential rental price determined by the two parties. The rent is paid semi annually.
4. Party B shall bear all expenses such as electricity, water and sanitation during the lease period.
5. Party B should not damage the facilities in the Premises. If structural change is necessary in the process of decoration or the installation of the
equipment does damage to the Premises, Party B should get the prior written approval from Party A. The cost of such change should be borne by Party B.
The structural changes that Party B will carry out to the Premises are indicated in the project attached to this Contract. Party A hereby gives its consent to
such changes.
6. During the lease period, Party B shall be responsible for the safety inspection, use, maintenance and repair of all the leased assets. Party B should
be responsible for the reinstatement works and compensation for the economic losses for the damage of the Premises and loss of its facilities due to the
mismanagement of Party B.
7. After the lease expires or the agreement is terminated due to other reasons such as termination of the agreement, Party B must move out within 15
days after the agreement is terminated, and pay all the costs that should be borne by Party B. Party A does not assume any responsibility for compensation,
and Party A must be present at the same time as the day of moving out.
8. When the lease expires, Party B should return the leased house land as scheduled. If Party B needs to continue to lease, it should give the written
request to Party A two months before the lease expires. right.
9. During the lease period, if the plant land leased by Party A to Party B is sold, auctioned, or subject to other sanctions, Party A shall notify Party B
two months in advance. Party B shall cooperate, but Party A shall ensure that the asset transferee gives Party B Enjoy the right to lease within the lease
period.
10. If the contractual relationship between the two parties is terminated and Party B does not move out unconditionally within the agreed date, Party
A will give Party B a 15-day grace period. The rent for the grace period is calculated at 6000 yuan per day. Party A pays the house usage fee to Party A at
twice the original lease price, and it is deemed that Party B authorizes Party A to have the right to move or leave and dispose of all items of Party B, and
Party B shall bear the losses incurred.
11. Party B shall abide by the laws and disciplines in its business activities. In the event of violations of the law, Party B shall be responsible for all
consequences.
12. During the lease period, both parties should abide by the contract and may not cancel the contract at will. For example, due to government
planning, urban construction needs, and local government industrial planning needs, the two parties should obey the government's needs, that is, terminate
the lease relationship and handle them in accordance with relevant regulations.
13. If Party B fails to pay the rent or other payables on time during the rental period, Party A has the right to recover from Party B the default penalty
of 1% of the daily rent owed; Party A has the right to stop water if it is overdue for more than 10 days. Measures such as power outages can also
unilaterally terminate this contract and claim damages in accordance with the aforementioned standards.
14. Party B voluntarily sublet, lend or transfer the leased house land to others for use, or add the house to the body structure, or privately occupy
unused house land, or seriously violate other provisions of this contract. Party A has The unilateral party terminates this contract and claims the costs and
compensation that should be borne by Party B.
15. If Party A realizes its claims through litigation due to the above-mentioned breach of contract by Party B, Party B shall bear the costs of Party A
’s realization of its claims (including litigation fees, attorney fees, security fees, etc.)
16. Both parties must fully fulfill the obligations stipulated in the contract. If either party breaches the contract, it shall compensate the other party for
economic losses in accordance with the law.
17. This contract is made in duplicate, with each party holding one copy, and the contract becomes effective after being signed by the representatives
of both parties.
Party A
Date of signature:
Party B
Date of signature:
Summary Translation
Exhibit 4.23
Lease Agreement between Shenzhen Shilian Junhui Real Estate Operation and Management Inc. and Shenzhen Yimao New Energy Sales Co.,
Ltd.
Party A: Shenzhen Shilian Junhui Real Estate Operation and Management Inc.
Party B: Shenzhen Yimao New Energy Sales Co., Ltd.
The two parties signed a Lease Agreement. Party A rented the place to Party B.
The house is located in Suite 510, Floor 5, Tower B, Zhongshe Square, 1028 Buji Rd, Luohu District, Shenzhen City, Guangdong Province, China, with an
area of 120 square meters.
The place is used as office space for Party B.
The rental period of the place is from November 12, 2019 to November 11, 2020. The rent is paid every month. The total annual rent of the house is 7,800
yuan.
The Agreement is made in duplicate with all parties herein holding one copies each with the same legal effect.
Shenzhen Shilian Junhui Real Estate Operation and Management Inc.
(Corporate Chop)
By: /s/
Shenzhen Yimao New Energy Sales Co., Ltd.
(Corporate Chop)
By: /s/ Mingqin Dong
TANTECH HOLDINGS LTD
List of Subsidiaries and Consolidated Affiliated Entities
Country of
Incorporation/Formation
Ownership
Exhibit 8.1
Company Name
USCNHK Group Limited
EAG International Vantage Capitals Limited
Hong Kong
Hong Kong
Tantech Holdings (Lishui) Co., Ltd.
People’s Republic of China
Euroasia New Energy Automotive (Jiangsu) Co., Ltd.
People’s Republic of China
Shanghai Jiamu Investment Management Co., Ltd.
People’s Republic of China
Wholly owned subsidiary of
Tantech Holdings Ltd
Wholly owned subsidiary of
Tantech Holdings Ltd
Wholly owned subsidiary of
USCNHK Group Limited
Wholly owned subsidiary of
EAG International Vantage
Capitals Limited
Wholly owned subsidiary of
EAG International Vantage
Capitals Limited
Lishui Xincai Industrial Co., Ltd.
People’s Republic of China
Wholly owned subsidiary of
Zhejiang Tantech Bamboo Charcoal Co., Ltd
People’s Republic of China
Lishui Jikang Energy Technology Co., Ltd.
People’s Republic of China
Hangzhou Tanbo Technology Co., Ltd.
People’s Republic of China
Tantech Holdings (Lishui) Co.,
Ltd.
Wholly owned subsidiary of
Lishui Xincai Industrial Co.,
Ltd.
Wholly owned subsidiary of
Lishui Xincai Industrial Co.,
Ltd.
Wholly owned subsidiary of
Lishui Xincai Industrial Co.,
Ltd.
Zhejiang Tantech Bamboo Technology Co., Ltd
People’s Republic of China
Wholly owned subsidiary of
Hangzhou Wangbo Investment Management Co., Ltd.
People’s Republic of China
Hangzhou Jiyi Investment Management Co., Ltd.
People’s Republic of China
Lishui Jikang Energy
Technology Co., Ltd.
Consolidated affiliated
variable interest entity
controlled solely by Shanghai
Jiamu Investment
Management Co., Ltd.
Wholly owned subsidiary of
Shanghai Jiamu Investment
Management Co., Ltd.
Shangchi Automobile Co., Ltd.
(previously called Suzhou Yimao E-Motors Co., Ltd.)
People’s Republic of China
51%-owned subsidiary of
Shenzhen Yimao New Energy Sales Co., Ltd.
People’s Republic of China
Hangzhou Wangbo Investment
Management Co., Ltd., with
the remaining equity interest
of 19% and 30% owned,
respectively, by Hangzhou Jiyi
Investment Management Co.,
Ltd. and an unrelated third
party.
Wholly owned subsidiary of
Shangchi Automobile Co.,
Ltd.
Exhibit 12.1
I, Wangfeng Yan, certify that:
1. I have reviewed this annual report on Form 20-F of Tantech Holdings Ltd.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the company and have
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: June 30, 2020
By:
/s/ Wangfeng Yan
Name:
Wangfeng Yan
Title:
Chief Executive Officer
Exhibit 12.2
I, Weilin Zhang, certify that:
1. I have reviewed this annual report on Form 20-F of Tantech Holdings Ltd.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the company and have
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: June 30, 2020
By:
/s/ Weilin Zhang
Name: Weilin Zhang
Title:
Chief Financial Officer
CERTIFICATION
Exhibit 13.1
In connection with the Annual Report of Tantech Holdings Ltd. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2019 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Wangfeng Yan, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: June 30, 2020
By:
/s/ Wangfeng Yan
Name:
Wangfeng Yan
Title:
Chief Executive Officer
CERTIFICATION
Exhibit 13.2
In connection with the Annual Report of Tantech Holdings Ltd. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2019 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Weilin Zhang, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: June 30, 2020
By:
/s/ Weilin Zhang
Name:
Weilin Zhang
Title:
Chief Financial Officer