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 report. 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 report.
A. Operating Results
Overview of Company
Historically, we have been a specialized manufacturer of bamboo charcoal-based products with primary business focus in consumer products and low emission BBQ charcoal. After completing a series of re-organizations, dismantling prior VIE structure and business strategic changes, through our operating subsidiaries, we are now engaging in research, development, production and distribution of various charcoal products and vehicles, as well as trading bamboo charcoal products. We also have investments in mining exploration. For more detailed information about our recent developments, please refer to Notes 1 of the footnotes accompanying the financial statements included in this report.
As the result of the business strategic changes, during the year ended December 31, 2021 the Company merged its trading segment into its consumer products segment. We start to provide commercial factoring business during the six months ended June 30, 2022. Now the Company had three reporting segments: consumer product segment, electric vehicle segment and commercial factoring segment.
Our consumer products include purification and deodorization products, household cleaning products and barbecue charcoals designed for domestic market. Purification and deodorization products and household cleaning products are sold under the brand name “Charcoal Doctor.” Purification and deodorization products include air purification products, deodorant products and bamboo vinegar. Household cleaning products include toilet cleaning products, kitchen cleaning products, personal care products and clothing detergent products.
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.
We are in the process to transform our business to focus more on the specialty electric vehicles (EVs) market. Our acquisition of Shangchi Automobile completed in the second quarter of 2017, and we recently established two subsidiaries in Zhejiang to shift our business strategy and focus on researching, developing and selling specialty EVs, such as electric driverless street sweepers. We are building our presence methodically, in order to maximize the impact of our R&D investments and technology advancements in specialty-use EVs rather than the more competitive, domestic general consumer EV market. We are confident in our position and remain fully committed to the EV segment, which we expect will be a key long-term growth driver for us. We expect our specialty EV business, especially driverless street sweepers, will grow with the growing sensitivity to cleaner environments and the demand for zero-emission vehicles, as well as favorable government policies and support in terms of subsidies, grants and/or tax rebates.
During six months ended June 30, 2022, we have started to provide commercial factoring service to customers who seek financing from their receivables. We estimate that we will generate approximately $1.2 million revenue from factoring service in fiscal 2022.
1
If our expansions into these new businesses are not successful, our future results of operations and growth prospects may be materially and adversely affected. There could be trends, uncertainties or events that may have a material effect on our sales or revenue of consumer products. 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 seen negative impact of unfavorable government policy regarding rebates upon our EV business in recent years. In addition, 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 such government restrictions; however, any future changes in the government’s policy on the 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.
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.
COVID-19
Our operations were 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 in fiscal 2020.
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.
2
As of the date of this filing, the COVID-19 coronavirus outbreak in China appears to be controlled and most provinces and cities have resumed business activities under the guidance and support of the government. In light of the current situation, the Company believes that the impact of the COVID-19 outbreak on the business is both temporary and limited, and that the revenues have started growing again in fiscal 2021 and fiscal 2022. However, there is still significant uncertainty regarding the possibility of another 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.
Results of Operation
The following table summarizes the selected results of our operation during the six months ended June 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
(All amounts, other than percentages, in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | |
| | Six months ended June 30, |
| Six months ended June 30, |
|
| |
|
|
| ||||||
| | 2022 | | 2021 | | | | | | | ||||||
| | | | | As a | | | | | As a | | | | | |
|
| | | | | percentage | | | | | percentage | | Dollar ($) | | Percentage | | |
| | Dollars in | | of sales | | Dollars in | | of sales | | Increase | | Increase | | |||
Statement of Operations Data: |
| thousands |
| revenue |
| thousands |
| revenue |
| (Decrease) |
| (Decrease) |
| |||
Revenues | | $ | 27,026 |
| 100.0 | % | $ | 20,633 |
| 100 | % | $ | 6,393 |
| 31.0 | % |
Cost of revenues | |
| 21,892 |
| 81.0 | % |
| 16,660 |
| 80.7 | % |
| 5,232 |
| 31.4 | % |
Gross profit | |
| 5,134 |
| 19.0 | % |
| 3,973 |
| 19.3 | % |
| 1,161 |
| 29.2 | % |
| | | | | | | | | | | | | | | | |
Operating expenses | |
| |
| | |
| |
| | |
| |
| | |
Selling expenses | |
| 145 |
| 0.5 | % |
| 122 |
| 0.6 | % |
| 23 |
| 18.9 | % |
General and administrative expenses | |
| 1,528 |
| 5.7 | % |
| 1,399 |
| 6.8 | % |
| 129 |
| 9.2 | % |
Share based compensation | |
| — |
| — | % |
| 1,840 |
| 8.9 | % |
| (1,840) |
| (100.0) | % |
Research and development expenses | |
| 237 |
| 0.9 | % |
| 6,352 |
| 30.8 | % |
| (6,115) |
| (96.3) | % |
Total operating expenses | |
| 1,910 |
| 7.1 | % |
| 9,713 |
| 47.1 | % |
| (7,803) |
| (80.3) | % |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | |
| 3,224 |
| 11.9 | % |
| (5,740) |
| (27.8) | % |
| 8,964 |
| (156.2) | % |
| | | | | | | | | | | | | | | | |
Other income (expenses) | |
| |
| | |
| |
| | |
| |
| | |
Interest income | |
| 192 |
| 0.7 | % |
| 58 |
| 0.3 | % |
| 134 |
| 231.0 | % |
Interest expense | |
| (107) |
| (0.4) | % |
| (138) |
| (0.7) | % |
| 31 |
| (22.5) | % |
Rental income from related parties | |
| 70 |
| 0.3 | % |
| 67 |
| 0.3 | % |
| 3 |
| 4.5 | % |
Other income (expense) | |
| 30 |
| 0.1 | % |
| 49 |
| 0.2 | % |
| (19) |
| (38.8) | % |
Total other income | |
| 185 |
| 0.7 | % |
| 36 |
| 0.2 | % |
| 149 |
| 413.9 | % |
| | | | | | | | | | | | | | | | |
Income (loss) before income tax expense | |
| 3,409 |
| 12.6 | % |
| (5,704) |
| (27.6) | % |
| 9,113 |
| (159.8) | % |
Income tax expense | |
| 1,537 |
| 5.7 | % |
| 1,048 |
| 5.1 | % |
| 489 |
| 46.7 | % |
| | | | | | | | | | | | | | | | |
Net income (loss) | |
| 1,872 |
| 6.9 | % |
| (6,752) |
| (32.7) | % |
| 8,624 |
| (127.7) | % |
Net income (loss) attributable to common stockholders of Tantech Holdings Ltd | | $ | 2,099 |
| 7.8 | % | $ | (6,570) |
| (31.8) | % | $ | 8,669 |
| (131.9) | % |
Revenues
Revenues increased by approximately $6.4 million, or 31.0%, to approximately $27.0 million in the six months ended June 30, 2022 from approximately $20.6 million in the same period of 2021. The increase was mainly attributable to the significant increase of our revenues from consumer products due to higher sales volume from existing and new customers.
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Consumer product segment
Revenues from consumer product segment increased by $5.8 million, or 28.6%, to $26.3 million in the six months ended June 30, 2022 from $20.4 million in the same period of 2021. The increase was primarily attributable to the demand surge for our bamboo charcoal used for active charcoal masks, air purification and sanitation products due to continued fight against the COVID-19.
Electric Vehicle (“EV”) segment
The revenue for our EV segment was approximately $0.7 million in the six months ended June 30, 2022, as compared to sales of approximately $0.2 million in the same period of 2021. In the six months ended June 30, 2022, the revenue was mainly from the commission income in connection with fuel minibuses and electric specialty vehicles sold on behalf of other manufacturers.
Commercial factoring segment
During the six months ended June 30, 2022, the Company started to provides commercial factoring service to customers who seek financing from their receivables. The Company generated revenue of $56,311 from commercial factoring for the six months ended June 30, 2022. We expect the revenue from commercial factoring will continue to increase in the future.
Cost of revenues:
Our cost of revenues increased by approximately $5.2 million or 31.4% to approximately $21.9 million in the six months ended June 30, 2022 from approximately $16.7 million in the same period of 2021. As a percentage of revenues, the cost of revenue slightly increased to 81.0% in the six months ended June 30, 2022 from 80.7% in the same period of 2021.
The slightly increase in cost of revenues as a percentage of revenues in the six months ended June 30, 2022 was mainly attributable to the increase of cost of revenue from EV segment due to high fixed costs.
Gross profit
Our gross profit increased by approximately $1.1 million, or 29.2% to approximately $5.1 million in the six months ended June 30, 2022 from approximately $4.0 million in the same period of 2021. The gross profit margin was 19.0% in the six months ended June 30, 2022, as compared to 19.3% in the same period of 2021. On segment basis, gross margins for consumer product, EV segment and commercial factoring segment were 19.3%, 2.0% and 92.8%, respectively, for the six months ended June 30, 2022, compared to 19.1%, 38.5% and nil, respectively, for the same period of 2021. The decrease in overall gross margin was primarily attributable to the high cost from EV segment.
Selling expenses
Selling expenses were approximately $0.15 million in the six months ended June 30, 2022 and approximately $0.12 million in the same period of 2021. As a percentage of sales, our selling expenses were 0.5% of revenues in the six months ended June 30, 2022, as compared to 0.6% of revenues in the same period of 2021. The increase was mainly due to more promotion expenses in the six months ended June 30, 2022.
General and administrative expenses
Our general and administrative expenses increased by approximately $0.1 million or 9.2%, to approximately $1.5 million in the six months ended June 30, 2022 from approximately $1.4 million in the same period of 2021. As a percentage of revenues, general and administrative expenses increased to 5.7% in the six months ended June 30, 2022, compared to 6.8% in the same period of 2021. The increase was primarily attributable to increase of approximately $0.3 million in professional consulting expenses and approximately $0.3 million in staff compensations, offset by decrease of approximately $0.4 million in allowance of account receivables and decrease of approximately $0.2 million in amortization of intangible assets.
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Research and development expenses
Research and development expenses decreased by $6.1 million, or 96.3%, to $0.2 million in the six months ended June 30, 2022 from $6.4 million in the same period of 2021. The decrease was primarily due to the less R&D activities in connection with our EV segment. During six months ended June 30, 2021, we increased our investment significantly for smart electric sanitation vehicles designed to be used in closed industrial parks and residential communities. We have successfully manufactured sanitation vehicles in fiscal 2021.
Share based compensation
In the six months ended June 30, 2021, the Company recorded share-based compensation of approximately $1.8 million. The Company issued 1,600,000 common shares to its employees under the Company’s 2014 Share Incentive Plan in May 2021. No such expense incurred in the six months ended June 30, 2022.
Total operating expenses
Total operating expenses decreased by $7.8 million, or 80.3%, to $1.9 million in the six months ended June 30, 2022 from $9.7 million in the same period of 2021, which was mainly due to a decrease of approximately $6.1 million in research and development and a decrease in share-based compensation expenses of $1.8 million compared to the same period of 2021.
Interest expenses
Our interest expenses were $0.1 million in the six months ended June 30, 2022 and 2021 reflecting no changes.
Rental income from related parties
Since fiscal 2021, the company has signed certain lease agreements with related parties to lease part of production facilities to related parties. the Company recorded rent income of approximately $0.07 million and $0.07 million for the six months ended June 30, 2022 and 2021, respectively.
Other income
Other income was approximately $0.03 million in the six months ended June 30, 2022 compared to approximately $0.49 million in the same period of 2021. Other income was primarily related to the government subsidy income.
Income (loss) before income taxes
Our income before income taxes was approximately $3.3 million in the six months ended June 30, 2022, compared to loss before income taxes of approximately $5.7 million in the same period of 2021. The increase of income before income taxes was primarily attributable to a decrease of approximately $7.7 million in operation expenses and an increase of approximately $1.2 million in gross profit compared to the same period of 2021.
Income taxes expense
Our income taxes expense was approximately $1.5 million in the six months ended June 30, 2022, an increase of approximately $0.5 million or 46.7% from approximately $1.0 million in the same period of 2021. The increased income tax provision was in line with increased taxable income in the six months ended June 30, 2022 compared to the same period of 2021.
Net income (loss) attributable to common stockholders
Our net income attributable to common stockholders was approximately $2.0 million in the six months ended June 30, 2022, an increase of approximately $8.5 million from a net loss of approximately 6.6 million in the same period of 2021. The increase of net income was attributable to the factors described above.
5
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 their 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.
During six months ended June 30, 2022, the Company had a significantly growth in bamboo related products which generated revenue of $26.3 million from its consumer product segment. And two subsidiaries focused on developing and manufacturing of smart electric sanitation vehicles generated revenue of $0.7 million from Electric Vehicle (the “EV”) segment. In additional, the Company commenced its commercial factoring business during the six months ended June 30, 2022. The Company estimates that its commercial factoring business will generate approximately $1.2 million in revenue in fiscal 2022.
During the six months ended June 30, 2022, we successfully completed an equity financing which resulted in net proceeds of $10.1 million. In addition, the Company obtained net proceeds of $19.4 million form two equity financings during fiscal 2021. As a result, the Company had approximately $10.8 million cash on hand as of June 30, 2022. Although the Company maintained a positive working capital as of June 30, 2022, 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 if and how any changes in government policies may affect its EV business.
We currently plan to fund our operations mainly through 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 its customers and suppliers and expects to fully collect outstanding accounts receivables or utilize the rest of prepayment balance in next twelve months.
We plan to fund the EV segment through additional private placement and continued support from the parent company. The principal shareholder of the Company, along with the affiliated entity, Forasen Group, has agreed 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.
As of June 30, 2022, we had cash and restricted cash of approximately $10.8 million. Our current assets were approximately $107.7 million and our current liabilities were approximately $16.3 million, which resulted in a current ratio of 6.6:1. Total stockholders’ equity as of June 30, 2022 was approximately $118.6 million.
Our accounts receivable turnover in days were 306 days and 262 days for the year ended June 30, 2022 and the year ended December 31, 2021, 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, the Company provided bad debt allowance of $3.1 million against the aged accounts receivable balances. Subsequent to June 30, 2022 and through November 30, 2022, the Company collected $25.6 million or 51% of the accounts receivable balance as of June 30, 2022.
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As of June 30, 2022, we also had factoring receivable of approximately $43.7 million. We monitor our customers financial performance and payment records very closely. Due to the short-term nature of the factoring receivable and sufficient collaterals based on our internal risk reviews, we determined there was no collecting issues for our factoring receivable.
As of June 30, 2022 and December 31, 2021, the Company had significant advances to suppliers of approximately $3.2 million and $3.4 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 tightened 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.
The following table sets forth summary of our cash flows for the periods indicated:
(All amounts in thousands of U.S. dollars)
| | | | | | |
|
| Six months |
| Six months | ||
| | ended June 30, | | ended June 30, | ||
| | 2022 | | 2021 | ||
Net cash used in operating activities | | $ | (47,547) | | $ | (1,656) |
Net cash used in investing activities |
| | (22) |
| | (5) |
Net cash provided by financing activities |
| | 15,959 |
| | 4,714 |
Effect of exchange rate changes on cash, restricted cash and cash equivalents |
| | (1,154) |
| | 319 |
Net (decrease) increase in cash, restricted cash and cash equivalents |
| | (32,764) |
| | 3,372 |
Cash, restricted cash and cash equivalents, beginning of period |
| | 43,567 |
| | 37,339 |
Cash, restricted cash and cash equivalents, end of period | | $ | 10,803 | | $ | 40,711 |
Operating Activities
Net cash used in operating activities was approximately $47.5 million in the six months ended June 30, 2022, compared to approximately $1.7 million in the same period of 2021. The change in net cash used in operating activities was primarily attributable to the following factors:
An increase of $45.2 million in factoring receivable due to the commencement of our new commercial factoring business;
An increase of $4.0 million in accounts receivable due to the increased product sales; and
A decrease of 2.4 million in customers deposits because we provided inventories to customers;
Offset by the impacts from the following factors:
A net income of 1.9 million in the six months ended June 30, 2022.
An increase of $0.9 million in accounts payable
Investing Activities
Net cash used in investing activities was $21,879 in the six months ended June 30, 2022, compared to net cash used in investing activities of $5,086 in the same period of 2021. The net cash used in investing activities in the six months ended June 30, 2022 was primarily attributable to $21,879 paid for purchase of property, plant and equipment.
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Financing Activities
Net cash provided by financing activities was $16.0 million in the six months ended June 30, 2022, compared to $4.7 million in the same period of 2021. Net cash provided by financing activities in the six months ended June 30, 2022 was primarily from the offering of 953,333 common shares (retroactively adjusted for reverse stock split effected on November 9, 2022), which resulted in net proceeds of approximately $10.1 million in the six months ended June 30, 2022. In addition, we also had net proceeds of approximately $9.3 million from related party, offset by net repayment of $3.2 million to third party loan.
Our primary source of cash is currently generated from the sales of our products and bank borrowings equity financings. In the future, we may raise additional capital by issuing common shares 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 June 30, 2022, the balance of our bank loans was approximately $4.2 million. The details of all our short-term bank loans are as follows:
| | | | | | | | | | | |
No. |
| Type |
| Contracting Party |
| Valid Date |
| Duration |
| Amount | |
1 |
| Short-term bank loan |
| Bank of China | | December 22, 2021 |
| 12 months | | $ | 2,550,044 |
2 |
| Short-term bank loan |
| Shanghai Pudong Development Bank | | April 1, 2022 |
| 12 months | | $ | 1,642,300 |
On December 22, 2021, Tantech Charcoal entered into a short-term loan agreement with Bank of China (Lishui Branch) to borrow approximately $2,550,044 (RMB 17,080,000) for six months with fixed annual interest rate of 4.5%. The purpose of the loan was for purchasing bamboo charcoal materials. The loan was collateralized by building and land use right of Tantech Bamboo with a maximum guaranteed amount of up to approximately $3.9 million (RMB25,960,000). The loan was also guaranteed by two related parties, Lishui Jiuanju Commercial Trade Co., Ltd. (“LJC”), and Forasen Group Co., Ltd., an unrelated third party, Zhejiang Meifeng Tea Industry Co., Ltd., and three other related individuals, Zhengyu Wang, Chairman of the Board and previous CEO of the Company, his wife, Yefang Zhang, and his relative, Aihong Wang.
On April 1, 2022, the Company entered into a short-term-loan agreement with SPD Bank (Lishui Branch) to extend the remaining loan of $1,791,600 (RMB12 million) to March 30, 2023 with fixed interest rate of 3.9%. 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, and an unrelated third party, Lishui Zhongyun Mitai Industrial Co., Ltd. The loan was also collateralized by building and land use right of Tantech Energy with a maximum guaranteed amount of up to approximately $4.4 million (RMB29,250,000).
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 other sources 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 June 30, 2022 and December 31, 2021. We are also a party to certain debt agreements that are secured with pledges on our real property in Tianning located in Lishui, China. But such debt agreements do not restrict our net assets and instead only impose restrictions on the pledged property.
8
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 June 30, 2022 and December 31, 2021.
| | | | | | | |
| | As of | | As of |
| ||
| | June 30, | | December 31, | | ||
|
| 2022 |
| 2021 | | ||
Statutory Reserves | | $ | 7,196,867 | | $ | 6,874,614 |
|
Total Restricted Net Assets | | $ | 7,196,867 | | $ | 6,874,614 | |
Consolidated Net Assets | | $ | 118,581,437 | | $ | 112,536,711 | |
Restricted Net Assets as Percentage of Consolidated Net Assets | |
| 6.1 | % |
| 6.1 | % |
Total restricted net assets accounted for approximately 6.1% and 6.1% of our consolidated net assets as of June 30, 2022 and December 31, 2021 respectively. 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 $21,879 and $5,086 for the six months ended June 30, 2022, and 2021, respectively for the addition and renovation of our workshops and office buildings, purchasing of equipment in connection with our business activities and purchasing of long-term investment.
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 offerings through issuance of common stocks and other sources to fund capital expenditure commitments in the future.
C. Research and development, patents and licenses, etc.
We are committed to researching and developing applications of bamboo charcoal, activated bamboo charcoal and EVs such as street sweepers. We believe scientific and technological innovations will help the 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.
Our R&D team is well educated and has far-reaching research capabilities. The R&D team has 3 dedicated researchers and analysts, with one focusing on Charcoal Doctor product development and applications, and two focusing on developing vehicle products such as street sweepers. 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 are also collaborating with technology companies and consultants on developing specialty EVs, such as smart electric sanitation vehicles, and we will continue to invest in this area in 2022. Since the end of the year ended December 31, 2020, we have significantly increased our research and development spending.
Our Intellectual Property
We rely on trademarks and service marks to protect our branding. As of the date of this report, we hold over 38 registered trademarks about or related to “Charcoal Doctor” and “Shangchi” in different applicable trademark categories in China. We also own a domain name of tantech.cn, the registration of which will expire on March 11, 2023. This website is not part of this report and is not incorporated by reference herein.
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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. 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 three patents on charcoal products and five patents on vehicles. Since the filing of our annual report for the year ended December 31, 2020 in July 2022, we have obtained the following patents, which are effective as of the date of application.
Recent Renewed Patents on Vehicles
| | | | | | | | | | |
| | | | Patent | | | | | | |
Patent Description |
| Holder |
| Type |
| Application |
| Expiration |
| Patent Number |
Energy-absorbing and anti-collision equipment on side of fuel tank |
| Shangchi Automobile |
| Utility Mode | | November 26,2020 | | November 25,2030 |
| ZL202022776533.2 |
Variable light front windshield |
| Shangchi Automobile |
| Utility Mode | | November 26,2020 | | November 25,2030 |
| ZL202022779980.3 |
Sound insulation and noise prevention hood with reinforcing ribs for front engine |
| Shangchi Automobile |
| Utility Mode | | November 12,2020 | | November 15,2030 |
| ZL202022605348.7 |
Multifunctional expanding bucket for sweeping vehicle |
| Shangchi Automobile |
| Utility Mode | | November 12,2020 | | November 15,2030 |
| ZL202022601008.7 |
D. Trend information
Market Trends
Other than as disclosed elsewhere in this financial report, we are not aware of any trends, uncertainties, demands, commitments or events for the six months ended June 30, 2022 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.
E. Off-balance Sheet Arrangements
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 were 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.
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 useful lives of property and equipment and intangible assets,
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allowances pertaining to the allowance for doubtful accounts of accounts receivable, advance to suppliers and other receivables, the valuation of inventories, the impairment of long-lived assets, and the realizability of deferred tax assets.
Research and development costs
Research and development expenses include costs directly attributable to the conduct of research and development projects, including the cost of salaries and other employee benefits, testing expenses, consumable equipment and consulting fees. All costs associated with research and development are expensed as incurred.
Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective approach. 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).
For the Company’s electric vehicles sales contracts, the Company provides a warranty for 12 months from the products are delivered. The Company determines such product warranty is an assurance-type warranty and is not a separated performance obligation in revenue recognition, because the nature of warranty is to provide assurance that a product will function as expected and in accordance with customer’s specification. The Company estimates the warranty costs when the promised good is delivered to the customer and accrues as warranty liabilities.
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.
Factoring income: The Company provides commercial factoring service to customers who seek financing from their receivables. The Company identifies the distinct performance obligation is to serve the customer with ongoing factoring service over the contractual period. The Company’s customer simultaneously receives and consumes the benefit provided by the company performance over the loan term. As the result, the Company recognizes the interest income from factoring service over the contract time.
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.
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Investment in equity investees is 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 Company 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.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Company evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available.
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 December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted this guidance and this guidance did not have a material impact on the 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 adopted this guidance and this guidance did not have a material impact on the consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company adopted this guidance and this guidance did not have a material impact on the consolidated 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 statements.
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F. Tabular Disclosure of Contractual Obligations
Below is a table setting forth all of our contractual obligations as of June 30, 2022, which consists of our short-term loan agreements and due to related parties:
| | | | | | | | | | | | | | | |
|
| Payment Due by Period | |||||||||||||
| | | | | Less than | | 1 – 3 | | 3 – 5 | | More than | ||||
Contractual Obligations |
| Total |
| 1 year |
| years |
| years |
| 5 years | |||||
Short-Term Debt Obligations | | $ | 4,192,344 | | $ | 4,192,344 | | $ | — | | $ | — | | $ | — |
Due to related parties | |
| 971,919 | |
| 971,919 | |
| — | |
| — | |
| — |
Loan payable to third parties | | | 3,579,893 | | | 3,579,893 | | | — | | | — | | | — |
Operating lease commitment | | | 1,853,533 | | | 463,433 | | | 427,321 | | | 293,124 | | | 669,655 |
Total | | $ | 10,597,689 | | $ | 9,207,589 | | $ | 427,321 | | $ | 293,124 | | $ | 669,655 |
G. Safe Harbor
See “Special Note Regarding Forward-Looking Statements.”
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