DRS/A 1 filename1.htm

 

As confidentially submitted to the Securities and Exchange Commission on March 3, 2014 pursuant to the
Jumpstart our Business Startups Act

 

Registration No. 333-

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 

  

FIRST AMENDMENT TO
CONFIDENTIAL SUBMISSION ON FORM F-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

 

 

 

TANTECH HOLDINGS LTD
(Exact name of registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s Name into English)

 

British Virgin Islands   2400   Not Applicable
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification Number)

 

 

  

c/o Zhejiang Tantech Bamboo Technology Co., Ltd    
No. 10 Cen Shan Road, Shuige Industrial Zone   CT Corporation System
Lishui City, Zhejiang Province   111 Eighth Avenue
People’s Republic of China   New York, New York 10011
+86-578-226-2305   (800) 624-0909
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
  (Name, address, including zip code, and telephone
number, including area code, of agent for service)

 

Copies to:

Anthony W. Basch, Esq. Gregg E. Jaclin, Esq.
Kaufman & Canoles, P.C. Szaferman Lakind Blumstein & Blader, PC
Two James Center, 14th Floor 101 Grovers Mill Road
1021 East Cary Street Second Floor
Richmond, Virginia 23219 Lawrenceville, NJ 08648
(804) 771-5700 – telephone  
 (804) 771-5777 – facsimile  

 

 

  

Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.

 

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

  

CALCULATION OF REGISTRATION FEE 

 

Title of
Class of
Securities
to be
Registered
  Amount to
be
Registered
    Proposed
Maximum
Aggregate
Price Per
Share
    Proposed
Maximum
Aggregate
Offering
Price (1)
    Amount of
Registration
Fee
 
Common Shares, $0.001 per share     1,600,000     $ 6.00     $ 9,600,000     $ 1,237  
Total     1,600,000     $ 6.00     $ 9,600,000     $ 1,237 (2)

 

(1)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Please note that, while this amount represents the sale of shares at the maximum aggregate price per share, the remainder of the registration statement assumes the sale of shares at the midpoint of the price range set forth therein.

 

(2) To be paid upon first non-confidential filing of registration statement with Securities and Exchange Commission.

 

 

  

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated March 3, 2014

 

 

Tantech Holdings Ltd

 

1,600,000 Common Shares

 

 

 

This is an initial public offering of common shares of Tantech Holdings Ltd. We are offering 1,600,000 of our common shares.

 

Prior to this offering, there has been no public market for our common shares. We expect the initial public offering price of our common shares to be between $4.00 and $6.00 per share. We intend to apply to list our common shares on The NASDAQ Capital Market under the symbol “TANH.” We cannot assure you that our application will be approved; if it is not approved, we will not complete this offering.

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common shares involves risks. See “Risk Factors” beginning on page 12.

 

   Per Common Share   Total 
Assumed public offering price  $5.00   $8,000,000 
Underwriting discount  $0.375   $600,000 
Proceeds to us, before expenses  $4.625   $7,400,000 

 

We expect our total cash expenses for this offering (including cash expenses payable to our underwriter for its out-of-pocket expenses) to be approximately $600,000, exclusive of the above commissions. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

 

This offering will remain open until the earlier of (i) a date mutually acceptable to us and our underwriter or (ii) June 30, 2014, subject to extension upon agreement with the underwriter. The underwriter expects to deliver the shares against payment in New York, New York, on or about ____, 2014.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Newbridge Securities Corporation

 

The date of this prospectus is                      , 2014.

 

 
 

 

Table of Contents

 

Prospectus Summary 1
Risk Factors 12
Special Note Regarding Forward-Looking Statements 32
Use of Proceeds 33
Dividend Policy 34
Exchange Rate Information 35
Capitalization 37
Dilution 38
Post-Offering Ownership 39
Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
Business 64
Description of Property 87
Management 91
Executive Compensation 96
Related Party Transactions 100
Principal Shareholders 103
Description of Share Capital 104
Quantitative and Qualitative Disclosures about Market Risk 113
Shares Eligible for Future Sale 114
Material Tax Consequences Applicable to U.S. Holders of Our Common Shares 116
Enforceability of Civil Liabilities 121
Underwriting and Plan of Distribution 122
Legal Matters 128
Experts 129
Interests of Named Experts and Counsel 130
Disclosure of Commission Position on Indemnification 131
Where You Can Find Additional Information 132
Financial Statements F-1

 

 

  

Neither we nor the underwriter has authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common shares only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common shares. Our business, financial condition, results of operations, and prospects may have changed since that date.

 

The information in this preliminary prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the preliminary prospectus issued                             , 2014, is authorized by us to be used in connection with our proposed initial public offering. The preliminary prospectus will only be distributed by us and the underwriter named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

 

Until                      , 2014 (25 days after the commencement of our initial public offering), all dealers that buy, sell, or trade our common shares, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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Prospectus Summary 

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

Prospectus Conventions

 

Except where the context otherwise requires and for purposes of this prospectus only, “we,” “us,” “our company,” “our” and “Tantech” refer to

·Tantech Holdings Ltd, a British Virgin Islands company limited by shares (formerly Sinoport Enterprises Limited) (“THL” when individually referenced);
·USCNHK Group Limited, a Hong Kong limited company (“USCNHK” when individually referenced), which is a wholly owned subsidiary of THL;
·Zhejiang Tantech Bamboo Technology Co., Ltd, a PRC company (“Bamboo Tech”), which is a 95%-owned subsidiary of USCNHK, the remaining 5% of Bamboo Tech being held by five individual PRC residents;
·Zhejiang Tantech Bamboo Charcoal Co., Ltd, a PRC company (“Tantech Charcoal”), which is a wholly owned subsidiary of Bamboo Tech; and
·Zhejiang Tantech Energy Technology Co., Ltd, a PRC company (“Energy Tech”), which is a wholly owned subsidiary of Bamboo Tech.

 

This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. The exchange rates in effect as of December 31, 2012 and 2011 were RMB1 for $0.1605 and $0.1571 respectively. The average exchange rates for the years ended December 31, 2012 and 2011 were RMB1 for $0.1585 and $0.1545 respectively. We use 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. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

For the sake of clarity, this prospectus follows English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our chief executive officer will be presented as “Zhengyu Wang,” even though, in Chinese, Mr. Wang’s name is presented as “Wang Zhengyu.”

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth, China’s demand for charcoal and China’s bamboo and charcoal industries. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus.

 

Overview

 

We develop and manufacture bamboo-based charcoal products for industrial energy applications and household cooking, heating, purification, sanitation and agricultural uses. We provide our charcoal products in the following areas:

 

·EDLC charcoal
·Air purification products

 

  

 
 

 

 

·Household hygiene products
·Agricultural/bamboo products (bamboo vinegar)
·Charcoal fuel for barbecue use

 

We have sales departments and conduct marketing and distribution operations in Chongqing, Fujian, Gansu, Guangdong, Hubei, Hunan, Henan, Jiangxi, Liaoning, Shaanxi, Shandong, Shanghai, Sichuan, Tianjin and Zhejiang provinces in China. From these departments, our sales network has a presence in 17 cities throughout China. We conduct marketing and distribution operations in Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou, Jinan, Jingmen, Lanzhou, Lishui, Nanchang, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou. We do not own or lease locations in Shenyang, Tianjin, Yantai, Taiyuan, Zhengzhou, Jingmen, Changsha, Fuzhou or Lanzhou; instead, our representatives in such cities conduct business without a dedicated office and spend significant amounts of time making calls on customers and potential customers. In addition, we have logistics centers in Chengdu, Guangzhou, Taiyuan, Yantai and Lishui and relationships with third-party warehousing companies in Jinan, Shanghai and Tianjin.

 

We sell approximately 85% of our products in China, and the remaining 15% of products are sold internationally, including both direct and indirect distributor sales. We sell products in Japan, South Korea, Taiwan, the United States, 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.

 

Industry and Market Background

 

PRC Economic Growth

 

Demand for our charcoal products is primarily driven in line with, as to our household charcoal products, PRC domestic consumption of household products and, as to our energy charcoal products, demand for supercapacitors. General economic growth underlies our success, especially in China. PRC macroeconomic growth has been strong and positive in recent years. According to the World Bank, China’s gross domestic product (“GDP”) grew at a rate of 9.3% in 2011. China’s GDP growth rate decreased over the course of 2012 to 7.8% by the end of 2012 and has increased slightly to 7.7% for the first quarter of 2013. Although China’s GDP growth rate has slowed over the last two years, according to International Monetary Fund’s World Economic Outlook, China’s real GDP growth rate has consistently exceeded both the United States’ and the world’s GDP growth rates over the past twenty years.

 

China’s Bamboo Market

 

China produces approximately 80% of the world’s bamboo and consumes approximately 60% of that production. China maintains approximately 5.5 million hectares of bamboo plantations, increasing by approximately 100,000 hectares annually, allowing it to lead the world in number of varieties, amount of bamboo reserves and production output, according to the International Network for Bamboo and Rattan (“INBAR”).

 

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. For this reason, China has promoted innovation in the bamboo industry, and nearly 200 bamboo-related patents have been granted in China. China’s bamboo industry accounted for more than RMB70 billion in revenues and more than 35 million jobs in 2009. 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. As such, 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.

 

 

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China’s Bamboo Charcoal Market

 

Due to deforestation in China’s natural forests and damage to ecosystems exacerbated by flooding and other natural disasters, China established the National Forest Protection Program (“NFPP”). Between 2000 and 2010, the NFPP implemented natural forest logging bans that covered 17 provinces in China. Moreover, wood charcoal production and export were curtailed, presenting an opportunity for non-wood-based charcoal. What began as a small market for bamboo charcoal has grown into an industry in which over 100,000 tons of bamboo charcoal are produced per year at values in the billions annually. For example, for the first half of 2013, China’s bamboo charcoal sales totaled over $4 billion with an estimated profit of approximately $2.7 billion. For the nine month period ending September 30, 2013, China’s bamboo charcoal exports totaled $130 million, up from $119 million for the same period in 2012. China’s bamboo charcoal industry employs over 60,000 people in more than 1,000 businesses across the country.

 

Our Segments

 

Our business consists of three principal segments. Our consumer product segment—the largest among our three segments—consists of sales of our household cleaning and decorative products under our “Charcoal Doctor” brand. Our energy segment consists of the sales of home-made barbecue charcoal and carbon for use in EDLC supercapacitors. Our trading segment consists of the export of charcoal products from China to foreign markets.

 

Consumer Product Segment

 

Our consumer product segment is the largest among our three segments. Our consumer product segment consists primarily of sales of our household cleaning and decorative products under our “Charcoal Doctor” brand. “Charcoal Doctor” is a well-known bamboo charcoal-based household use product brand in China. Our consumer products include bamboo charcoal products like purifiers, humidifiers, and activated charcoal filtering and absorbing products and charcoal vinegar products like fertilizers, soaps, and products that condition the soil and provide nutrition for plants.

 

We currently generate most of our consumer product revenue from sales of “Charcoal Doctor” brand products, and we expect the revenue from consumer products will continue to grow in the coming years with increased brand awareness and growing consumer preferences for bamboo charcoal cleaning products over other traditional household cleaning products.

 

Although the revenue from our consumer product segment decreased approximately $5.2 million in 2012, we believe the decrease was temporary as it was mainly due to unexpected interruption of supply in one of our products and the supply subsequently resumed. Indeed, segment revenue increased to approximately $29.1 million in the nine months ended September 30, 2013 from approximately $22.8 million in the nine months ended September 30, 2012 primarily because of increased sales of purification and deodorization products as we continued to expand our sales through nationwide supermarket chains and introduced new product lines under the purification and deodorization category in 2013.

 

Energy Segment

 

Our energy segment consists of the sales of home-made barbecue (“BBQ”) charcoal and carbon for use in electric double-layer capacitor (“EDLC”) supercapacitors. Our home-made BBQ charcoal is mainly sold in overseas markets as the demand for our products continues to grow. We have invested heavily in the production of EDLC carbon, which has wide application and higher gross margin than our other bamboo charcoal products. Our commercial production of EDLC carbon started in late 2011. With the improvement of technology used in the production process, we believe EDLC carbon will become an important source of revenue growth and profitability.

 

Revenues from our energy segment was approximately $6.7 million in 2012 compared to approximately $2.3 million in 2011. We realized sales of approximately $6.2 million in the nine months ended September 30, 2013 in the energy segment, an increase of approximately $1.5 million as compared with nine months ended September 30, 2012, as our sales to one of our largest customers grew quickly in the third quarter of 2013.

 

 

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Trading Segment

 

Our subsidiary, Tantech Charcoal, is authorized to engage in international trade. We use this authorization to trade commodities. Since September 2013, our trading segment has consisted primarily of the export of charcoal products to foreign markets. Prior to September 2013, we also focused on purchasing imported rubber at wholesale for resale in China. In our trading segment, we compete on price with numerous players in the market, and fluctuations in the rubber market negatively impacted our profitability. Moreover, the transparent nature of rubber trades causes gross margins to be much lower for such sales because our profits are based on locking the exchange rate and adding a slight profit margin to otherwise transparent and readily available commodity prices. As a result, our sales revenue from sales of rubber tended to be unpredictable, and in September 2013, we focused our trading segment efforts on other products.

 

Our trading segment generated approximately $9.0 million revenue in 2012 compared to approximately $5.3 million in 2011. In 2012 and 2011, revenue from trading was primarily related to our wholesale purchase and resale of imported rubber in local markets. Revenues in this segment for the nine months ended September 30, 2013 was approximately $7.0 million compared to approximately $3.2 million in the same period of 2012. Despite the significant increase in revenues, our profits associated with rubber trading are much lower than for other products and, as a result, we are allocating our efforts toward what we view as more stable business opportunities in trading and in our other segments.

 

Our Products

 

 

 

We produce and sell three categories of bamboo charcoal products (charcoal briquettes, Charcoal Doctor products and EDLC carbon), 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; we have met the standards set for designation of “environmentally friendly” enterprises by the Chinese Society for Environmental Sciences, a national-level non-profit and non-governmental organization which is the largest environmental technology community organization in China. Moreover, our facilities have received ISO 14001:2004 certification, which reflects our focus on measuring and managing our environmental impact.

 

Charcoal Briquettes

 

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.

 

Our charcoal briquettes are processed from bamboo 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 (Shisha charcoal).

 

Charcoal Doctor Products

 

Our primary consumer brand is Charcoal Doctor (“炭博士,” “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.

 

 

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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, formaldehyde, ammonia and carbon tetrachloride. The primary ingredient of these products, activated charcoal, is well-known as 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

 

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, fruit, vegetable and plant fertilizers, soil conditioners and sweeteners, and flower nutrients.

 

Electric Double-Layer Capacitor (“EDLC”) Carbon

 

We have recently begun to produce bamboo carbon for use in EDLCs. EDLCs are a type of battery that are smaller but more powerful than conventional batteries of the same size. As a result, supercapacitors are used in applications that require significant amounts of power, both in quick bursts and also for sustained periods.

 

EDLCs rely on carbon-based or synthetic materials to conduct electricity. Our product serves as the industrial carbon compound for the EDLC. Because activated charcoal is an electrical conductor that is extremely porous and has a high specific surface area, it provides a useful electrode material. Because the surface area of such a material is many times greater than a traditional material like aluminum, more charge can be stored in a given volume of battery, allowing for a higher energy density and stronger battery.

 

Our Opportunity and Strategy

 

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 use as carbon in super capacitors.

 

We expect increases in disposable income in China, improved living standards and greater awareness of health and sanitation issues to increase demand for our air purification, deodorizing products and household cleaning and hygiene products.

 

We believe we have a strong brand in our line of consumer products. In order to remain competitive, we plan to devote resources to promotion and advertising of our brands. While our customers tend to be price aware, they also have brand loyalty where prices are similar. By improving our brand recognition among customers and potential customers, we believe we will be able to improve our market share for our retail products.

 

As to our EDLC industry efforts, we believe that increasing awareness of the benefits of biomass as a renewable energy source may increase demand for our EDLC carbon compounds. China’s 12th Five-Year Plan lays out a number of national energy strategies, which call for increasing solar power, wind power and biomass power generation. The plan’s initiatives have encouraged demand for and consequently the building of EDLC factories and the use of bamboo-based carbon in EDLCs. As the supercapacitor industry in China is not centralized, such supercapacitor factories have been established around the country, from Shanghai to Beijing to Jiangsu to Shenzhen. The demand for EDLCs has brought with it a benefit to manufacturers of components of EDLCs, such as the EDLC carbon we provide.

 

 

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In the past electronic storage has played a critical role in wind power and solar electricity generation, as well as China’s automotive industry (particularly to support the role of hybrid and pure electric cars). In each of these cases, EDLCs and the use of bamboo-based carbon in EDLCs will be crucial. 2013 preliminary estimates placed China’s supercapacitor market scale at nearly RMB 2 billion.

 

We plan to participate in, attend, and expose our products at industry and technology related fairs both in China and internationally. We also plan to partner with foreign manufacturers of EDLCs who export regularly to China. In addition, we will seek opportunities to cooperate with domestic trading companies to increase the penetration of our EDLC carbon in China.

 

By increasing our investment in our production lines, we will be poised to take advantage of increased attention on bamboo. For this reason, we plan to establish a production line to increase the capacity of our EDLC carbon and to create two production lines for our hand sanitizers and bamboo charcoal-based detergents. We will also continue to invest in research and development and design so that we can anticipate products that our customers need now and will want in the future.

 

Competitive Strengths

 

We believe we have the following competitive strengths. Some of our competitors may have these or other competitive strengths.

 

·Advanced technology. We use proprietary industrialized machines and processes protected by patents.
·Strong research and development. We use cutting-edge technology and employ highly educated people with strong research backgrounds in chemistry, physics and biotechnology fields.
·Access to supplies. We have strong relationships with our significant suppliers to ensure access to relatively low-cost, high-quality bamboo charcoal. In some cases, we have prepaid for access to supply and discounts on purchase price.
·Minimal waste. Because of the types of products we produce, we are able to make use of the entire bamboo grass. We use the stems for our Charcoal Doctor products. We use the knots for EDLC carbon, and we extract bamboo vinegar during the carbonization process.
·Strong brand name. Our Charcoal Doctor brand has strong name recognition in China, and our Algold brand has strong name recognition in the Middle East and Europe. In addition to having a branded store in Lishui, we sell our products through a variety of well-known retail stores, including Walmart, Carrefour and RT Mart.
·Favorable location. Lishui is located in an important bamboo resource base, giving our company access to an abundance of high quality, affordable raw materials.

 

Our Challenges and Risks.

 

We recommend that you consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 12 of this prospectus before purchasing our common shares. If any of these risks occur, our business, prospects, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. In that case, the trading price of our common shares could decline and you could lose some or all of your investment. These risks include, among others, the following:

 

·PRC Legal Challenges.
oPRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

 

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oUnder 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.
oSince our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers.
oIf 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, this offering 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.
·Competition for Employees. Due to the location and size of Lishui, professional and technical talent is in short supply, which increases our competition for employees.
·Advanced Management Techniques. Although we have begun to industrialize our production process, we still lack digitalization and have not applied any advanced management techniques, such as ERP planning or any structured logistical system and procedures, which may result in a loss of efficiency and require investment at a later stage.
·Price Inelasticity. Although bamboo is a renewable supply, inelasticity at any given time will increase likelihood of bidding wars, resulting in an increase in raw material prices.
·EDLC Product Visibility. Competition in the lucrative international EDLC industry for our company currently lacks product visibility.
·Competition in EDLC Market. Other EDLC manufacturers may attempt to move up the supply chain and compete with us.
·EDLC Technology Development. Awareness and applications of EDLC technology in the PRC may not mature or become fully commercialized as quickly as we expect.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

·the ability to include only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations disclosure; and
·an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our ordinary shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

 

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Corporate Information

 

We are a British Virgin Islands company limited by shares. Our current corporate structure is as follows prior to completion of this offering:

  

 

 

Following completion of our initial public offering, ownership of THL will be as follows:

  

Post-Offering
 

 

 

We were established in October 2002 by our founder. We operate from our modern 39,200 square meter manufacturing facility in Shuige Industrial Zone, located on a 51,400 square meter base located near downtown Lishui, in Zhejiang province.

 

 

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Our principal executive offices are located at c/o Zhejiang Tantech Bamboo Technology Co., Ltd, No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province, People’s Republic of China. The telephone number of our principal executive offices is +86-578-226-2305. We maintain a website at www.tantech.cn, on which we will post our key corporate governance documents, including our board committee charters and our code of ethics. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

 

 

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The Offering

 

Shares Offered:   1,600,000 common shares
     
Shares Outstanding Prior to Completion of Offering:   12,800,000 common shares
     
Shares to be Outstanding after Offering:   14,400,000 common shares.
     
Assumed Offering Price per Share:   $5.00
     
Gross Proceeds:   $7,400,000
     
Proposed NASDAQ Capital Market Symbol:   “TANH” (CUSIP No. __________ )
     
Transfer Agent:  

VStock Transfer, LLC

77 Spruce Street, Suite 201

Cedarhurst, NY 11516

     
Risk Factors:   Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our common shares.
     
Use of Proceeds:   We plan to devote the net proceeds of this offering to (i) establishing a dedicated research and development center for our EDLC carbon, (ii) increasing our production line capacity for our EDLC carbon, (iii) research, development and promotion for our Charcoal Doctor products and (iv) building production lines for our hand sanitizer and detergent products.
     
Dividend Policy:   We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

 

10
 

 

 

Summary Financial Information

 

In the table below, we provide you with historical selected financial data for the fiscal years ended December 31, 2012 and 2011 and the nine months ended September 30, 2013. This information is derived from our consolidated financial statements included elsewhere in this prospectus. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

(All amounts in thousands of U.S. dollars)

 

Statement of operations data:

 

    For the
nine months ended
    For the year ended
December 31,
 
    September 30, 2013     2012     2011  
                   
Revenues   $ 42,292     $ 50,519     $ 47,692  
Gross profit     11,281       14,003       11,823  
Operating expenses     2,960       (2,216 )     (4,040 )
Income from operations     8,322       11,787       7,783  
Provision for Income taxes     (1,286 )     (1,893 )     (1,104 )
Net income attributable to the noncontrolling interest     (329 )     (521 )     (334 )
Net income attributable to common stockholders   $ 6,256     $ 9,893     $ 6,339  
                         
Balance sheet data:                        

 

    As of     As of December 31,  
    September 30, 2013     2012     2011  
                   
Working capital   $ 27,778     $ 32,272     $ 22,789  
Current assets     46,788       48,973       52,059  
Total assets     63,173       63,763       65,017  
Current liabilities     19,010       16,701       29,270  
Total liabilities     19,010       20,713       33,197  
Total equity   $ 44,163     $ 43,050     $ 31,820  

 

 

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Risk Factors

 

Before you decide to purchase our common shares, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our common shares could decline, perhaps significantly.

 

Risks Related to Our Business and Industry

 

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 decorative items,” meaning that these products are generally used for beautification and decoration purposes. For example, consumers tend to purchase charcoal products for their value in absorbing odors and tend to purchase bamboo charcoal products for these purposes and also for the perceived attractiveness of pieces of bamboo charcoal. 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. Over the last five years, China’s GDP growth rate has slowed from more than 11% to less than 8%. If China’s economy continues to slow, or if customer spending for household items decreases, demand for our products may be reduced, which would negatively affect sales of our Charcoal Doctor products. Similarly, a reduction in spending on automobiles or public transportation could affect the demand for the sort of supercapacitors that are likely to use our EDLC carbon, reducing the demand for products like ours.

 

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 on consumer products in our Charcoal Doctor line of products, 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 bamboo-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 derivatives of bamboo, to create their products. As a result, we do not believe they are subject to business risk in the event bamboo supplies are compromised. On the other hand, if we were unable to procure bamboo or unable to procure it 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.

 

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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 is located, restricted the production of charcoal during June, July and August 2012. At that time, our stock of 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. Our lack of product and business diversification could inhibit the opportunities for growth of our business, revenues and profits.

 

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 costs may negatively affect our operating results.

 

While bamboo is a renewable resource, the price of raw materials may be inelastic when we wish to purchase supplies. For example, we faced price inelasticity when one supplier was unable to deliver bamboo charcoal to us in sufficient quantities due to local government production restrictions. While we have attempted to mitigate this risk by taking advantages 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 may be unable to meet quality requirements for our EDLC carbon products.

 

We produce our EDLC carbon to our customers’ specifications. Each order requires us to produce EDLC to different tolerances than another order might. Prior to delivering the final product to the customer, we prepare a sample for them to test. As a relatively new producer of EDLC carbon, we had initial challenges in preparing EDLC carbon that met our customers’ demands. While our production process has improved, we cannot guarantee that our product will always meet the requirements of our customers. To the extent our EDLC carbon fails to pass inspection for such customers, they may refuse delivery. In addition, if our final shipment failed inspection after delivery of the initial sample, we could be subject to more substantial loss on such order. Any failures of our products to pass inspection could cause our customers to use different suppliers in the future.

 

Our EDLC products are not well known.

 

We have only recently entered into the EDLC carbon industry. At present, our product visibility is low. Although we plan to participate in industry events to improve recognition and drive revenues, we have no guarantee that we will be able to materially increase the market recognition of our EDLC carbon products. To the extent we are unable to increase our product visibility, we may face challenges in increasing revenues or the profit margin for such products.

 

If we misjudge the viability of the EDLC market or if technological developments in the industry are not forthcoming at the rate we expect, we may find that we have overextended our growth.

 

We are seeking to increase our capacity to produce EDLC carbon. Our desire to increase capacity is based on our assumption and belief that demand for EDLC carbon will grow, based on current and anticipated future needs. To the extent demand for EDLCs does not grow as we expect, whether because current demand does not grow or because technology in the industry does not further increase demand for EDLCs, we may find that we have capacity beyond our actual needs. While having excess capacity would allow us to more quickly increase production in the event future EDLC demand increased, it would also result in increased fixed costs (as a percentage of revenues) to our company for such facilities, reducing our profitability and tying up assets that could otherwise be used for more productive purposes.

 

13
 

 

We face competition from EDLC competitors that seek to increase their products on the supply chain.

 

To date, carbon for EDLC applications have sold at a premium compared to carbon for other purposes. Our competitors in the bamboo carbon industry may seek to enter the EDLC industry to take advantage of these premiums, and our competitors in the EDLC industry may seek to enter the carbon industry both to reduce their expenses and to capture profits from EDLC carbon. Either action, if successful, could reduce our revenues and profit margin for our EDLC carbon products.

 

We face competition from smaller competitors that may be able to provide similar 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 EDLC or 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, it 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.

 

China’s appreciating currency may make our products more expensive to export to other countries.

 

While we sell approximately 85% of our products in China, we also export our products to a variety of other countries. Historically, we have relied on favorable exchange rates between China and other countries to drive revenues from products sold abroad. Over the last three years, China’s currency has appreciated against the US dollar, Japanese yen, and Euro. As a result, our products have become more expensive in countries that use these currencies. To the extent the Chinese RMB continues to appreciate, our products could become more expensive and, as a result, less attractive to potential customers in other countries. See “Exchange Rate Information.”

 

Outstanding bank loans may reduce our available funds

 

We have approximately $6.2 million in outstanding bank loans as of September 30, 2013. The loans are held at multiple banks, and we used our land and property as the collateral for the debt. While our land and property is worth more than two times the amount of the total loan amount and we also have approximately $4.5 million in cash and approximately $38.5 million of liquid assets available to pay the debt (other than $3.6 million in restricted cash which may not be so used), 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 mortgages on 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.

 

14
 

 

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

 

We have a limited operating history, with our oldest subsidiary having been founded in 2002. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets such as the growing market for bamboo products in the PRC. Some of these risks and uncertainties relate to our ability to:

 

offer additional bamboo products to attract and retain a larger customer base;
attract additional customers and increased spending per customer;
increase awareness of our brand and continue to develop customer loyalty;
respond to competitive market conditions;
respond to changes in our regulatory environment;
manage risks associated with intellectual property rights;
maintain effective control of our costs and expenses;
raise sufficient capital to sustain and expand our business;
attract, retain and motivate qualified personnel; and
upgrade our technology to support additional research and development of new bamboo products.

 

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

 

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:

 

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.

 

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 nine months ended September 30, 2013, sales to our two largest customers amounted in the aggregate to approximately 35% of our total revenue. For the year ended December 31, 2012, sales to our four largest customers amounted in the aggregate to approximately 71% of our total revenue. For the year ended December 31, 2011, sales to our two largest customers amounted in the aggregate to approximately 78% of our total revenue. 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.

 

During the nine months ended September 30, 2013 and each of the years ended December 31, 2012 and 2011, respectively, we had two, four and two customers, respectively, that accounted for 10% or more of our revenues:

 

15
 

 

   Percentage of Revenues in 
Purchaser Name  Nine Months ended
September 30, 2013
   Year ended
December 31, 2012
   Year ended
December 31, 2011
 
Hangzhou Sigma Trading Co., Ltd.   21.9%   26.3%   0.0%
Hangzhou Bai De Sheng Ou Ltd.   12.6%   24.6%   64.3%
Hangzhou Zaochuan Tech. Co., Ltd.   0.0%   10.6%   5.9%
Shanghai Hengguan New Materials Co.   8.0%   10.5%   4.2%
Lishui JiuAnJu Commercial Trade Co., LTD   0.0%   0.0%   14.3%

 

Lishui JiuAnJu Commercial Trade Co., LTD (“JiuAnJu”) became a related party of our company in October 2011. Prior to becoming a related party, JiuAnJu accounted for 14.3% of our 2011 full-year revenues; after 2011 we did not receive any revenues from JiuAnJu. See “Related Party Transactions.”

 

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.

 

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 52%, 55% and 80% of our total sales in the nine months ended September 30, 2013 and the years ended 2012 and 2011, 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.

 

During the nine months ended September 30, 2013, our three largest suppliers accounted for approximately 55% of our total purchases. During the year ended December 31, 2012, our four largest suppliers accounted for approximately 72% of our total purchases. During the year ended December 31, 2011, our two largest suppliers accounted for approximately 56% of our total purchases. During the nine months ended September 30, 2013 and each of the years ended December 31, 2012 and 2011, respectively, we had three, four and two suppliers that accounted for 10% or more of our purchases:

  

   Percentage of Purchases in 
Purchaser Name  Nine-Months Ended
September 30, 2013
   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
 
Tahe Xingzhongda Carbon Co.   19.6%   27.5%   37.9%
Zhejiang Longquan Zhixin Trading Co.   21.6%   15.1%   0.0%
Hangzhou Shencai Trading Co., Ltd   13.5%   1.3%   0.0%
Harbin Ding Xin Trading Co., Ltd.   0.0%   15.0%   7.4%
Zhejiang Hongwen Industrial Co., Ltd.   0.0%   14.1%   0.0%
Lishui JiuAnJu Commercial Trade Co., LTD   0.0%   0.0%   18.4%

 

16
 

 

JiuAnJu became a related party of our company in October 2011. Prior to becoming a related party, JiuAnJu accounted for 18.4% of our 2011 full-year supply purchases; after 2011, we did not purchase any supplies from JiuAnJu. See “Related Party Transactions.”

 

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.

 

Our bank accounts are not insured or protected against loss.

 

We maintain our cash with various banks and trust companies 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.

 

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 substantially on our chief executive officer, Mr. Zhengyu Wang, and our chief financial officer, Mr. Ningfang Liang, to manage our operations. Mr. Wang has been involved in the bamboo charcoal industry for more than 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. In addition, locating a qualified chief financial officer with experience in US GAAP and fluency in English to replace Mr. Liang in a small market like Lishui would be difficult. We also depend on our chief technical officer, Dr. Zaihua Chen, for the development of new technology and products. Dr. Chen is an expert in charcoal in general and, in particular bamboo charcoal and the use of charcoal for EDLC carbon. He would be difficult to replace in a city the size of Lishui.

 

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 (particularly for those who work with our EDLC products) 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.

 

17
 

 

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 (particularly those who work with our EDCC products) 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:

 

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 management techniques, which may hamper our efficiency and growth.

 

Although we have begun to industrialize our production process, this process involves reliance on both industrial machinery and laborers to operate the machinery but does not rely heavily on digital logistic management. Further, we 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.

 

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

 

We rely on a combination of patent, copyright, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own ten patents in China covering our bamboo charcoal production technology. We have applied for one additional patent related to methods to process bamboo and bamboo charcoal.

 

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.

 

18
 

 

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:

 

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.

 

If we are unable to rent our commercial property, we may experience increased expenses.

 

We have moved into a new facility on Cen Shan Road in Shuige Industrial Zone of Lishui. We are seeking to rent out the property we own on Tianning Street in Lishui, which formerly served as our headquarters. Although we have rented out part of our Tianning Street property, we have no guarantee that we will be able to rent the rest of this property.

 

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.

 

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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.

 

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 emerging markets, specifically South Korea, Japan and Russia, where we hope to develop demand for our EDLC carbon, 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 issued the Notice 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 Notice, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or 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. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. Because substantially all of its operations and senior management are located within the PRC and are expected to remain so for the foreseeable future, we may be considered a PRC resident enterprise for enterprise income tax purposes and therefore subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise controlled by a Chinese natural person. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

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If the PRC tax authorities determine that we are a “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 exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.

 

In connection with this offering, we will become 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 be 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.

 

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.

 

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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.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

 

Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign invested entities (“FIEs”), to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless such investments are otherwise provided for in the business scope. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.

 

Furthermore, SAFE promulgated Circular 59 on November 19, 2010, requiring the governmental authority to closely examine the authenticity of settlement of net proceeds from offshore offerings. In particular, it is specifically required that any net proceeds settled from offshore offerings shall be applied in the manner described in the offering documents.

 

On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013. According to Circular 21, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.

 

Circular 142, Circular 59 and Circular 21 may significantly limit our ability to convert, transfer and use the net proceeds from this offering and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

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We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart, which approval usually takes no more than 30 working days to complete. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to use the proceeds of this offering and capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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.

 

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 1 June 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.

 

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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 17 December 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.

 

PRC regulation of direct investments and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of this Offering to make additional capital contributions or loans to our Company’s PRC subsidiaries.

 

Any capital contributions or loans that we, as an offshore entity, make to our Company’s PRC subsidiaries, including from the proceeds of this offering, are subject to PRC regulations. For example, any of our loans to our Company’s PRC subsidiaries cannot exceed the difference between the total investment amount and the registered capital of each of our PRC subsidiaries and must be registered with the local SAFE branch. In addition, the total amount of investment in each of our Company’s PRC subsidiaries must be approved by MOFCOM or its local counterpart. We cannot assure you that we will be able to obtain these approvals in a timely manner or at all. If we fail to obtain such approvals or make such registration, our ability to make equity contributions or provide loans to our Company’s PRC subsidiaries or to fund their operations may be negatively affected, which may adversely affect their liquidity and ability to fund their working capital and expansion projects and meet their obligations and commitments.

 

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 we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would 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 the nine months ended September 30, 2013 and the years ended December 31, 2012 and 2011, we had adjustments of $646,525, $816,491 and $1,046,127, 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, this offering 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.

 

Recently, 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, our business and this offering. 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 Philippines, 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 (including using the proceeds from this offering) 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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Risks Related to Our Corporate Structure and Operation

 

We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity.

 

Upon completion of this offering, we will become a public company in the United States. As a public company, we will 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 will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a result of becoming 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.

 

As a “controlled company” under the rules of the NASDAQ Capital Market, we may exempt our company from certain corporate governance requirements that could adversely affect our public shareholders.

 

Following this offering, our principal shareholder will beneficially own a majority of the voting power of our outstanding ordinary shares. Under the Rule 4350(c) of the NASDAQ Capital Market, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the NASDAQ Capital Market rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the "controlled company" exemption under the NASDAQ Capital Market rules, we could elect to rely on this exemption in the future. If we elected to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Capital Market corporate governance requirements. 

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

Upon completion of this offering, we will be a publicly listed company in the United States. As a publicly listed company, we will be 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 will 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 will be 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 will be 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 will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

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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 and Chief Executive Officer, Zhengyu Wang, and his wife and our director, Yefang Zhang, collectively own all of Zhejiang Forasen Group Co., LTD (“Forasen Group”). Forasen Group engages in rubber trading, an industry we have also historically engaged in. Although we have significantly reduced our trading in rubber at Tantech to immaterial levels, both businesses were for a time trading similar products. As Mr. Wang and Ms. Zhang devote considerable time and effort to Forasen Group, these sort of business activities could both distract them from focusing on Tantech and pose a conflict of interest to the extent their activities at Forasen Group compete with our company in the future.

 

Moreover, 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 Our Initial Public Offering and 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 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 exceed $1 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, will be 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 are 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 will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2014 annual report on Form 20-F to be filed in 2015, we will be 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. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we 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 will be 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 prospectus and in filings required of a public company, our business and financial condition will 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 will 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 initial public offering price.

 

The initial public offering price for our common shares will be determined through negotiations between the underwriter and us and may vary from the market price of our common shares following our initial public offering. If you purchase our common shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our common shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. 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;
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 have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our initial public offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may not spend or invest these proceeds in a way with which our stockholders agree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

 

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.

 

There may not be an active, liquid trading market for our common shares.

 

Prior to this offering, there has been no public market for our common shares. An active trading market for our common shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the underwriter based upon a number of factors which are described in the “Underwriting” section. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will 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 prior to this offering, and we will have annual payments for listing on a stock exchange if we are so listed. 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 will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1 million per year that we did not experience prior to commencement of this offering.

 

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Our classified board structure may prevent a change in our control.

 

Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2014, 2015 and 2016. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year the shareholders elect one class of directors. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders. See “Management – Board of Directors and Board Committees.”

 

Shares eligible for future sale may adversely affect the market price of our common shares, as the future sale of a substantial amount of outstanding common shares in the public marketplace could reduce the price of our common shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common shares. An aggregate of 12,800,000 shares will be outstanding before the consummation of this offering and 14,400,000 shares will be outstanding immediately after this offering. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”

 

You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our common shares. Upon the completion of this offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $1.63 or approximately 32.64% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

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).

 

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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.

 

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.

 

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Special Note Regarding Forward-Looking Statements

 

This prospectus contains forward-looking statements. All statements contained in this prospectus 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 prospectus 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 prospectus or to conform these statements to actual results or revised expectations.

 

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Use of Proceeds

 

After deducting the estimated Underwriting discount and offering expenses payable by us, we expect to receive net proceeds of approximately $6,200,000 from this offering. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. We are permitted under PRC laws and regulations to provide funding to Bamboo Tech, through capital contributions or loans, subject to approvals from or registrations with relevant PRC government authorities. If we were to increase the registered capital of Bamboo Tech (which we prefer compared to loaning money to Bamboo Tech), we would need approval from MOFCOM or its local counterparts prior to such increase. MOFCOM or the applicable local counterpart would then decide whether or not to grant such approval within 90 days after receiving the application documents. If we were to provide funding to Bamboo Tech through loans, the total amount of such loans may not exceed the difference between Bamboo Tech’s total investment amount as approved by the foreign investment authorities and Bamboo Tech’s registered capital. Such loans must also be registered with the SAFE, which registration usually takes no more than 20 working days after application to complete. The cost for obtaining such approvals and completing such registration is minimal. We cannot assure you that we will be able to complete these government registrations or obtain the relevant approvals on a timely basis, if at all. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the funds in China until remittance is completed. See “Risk Factors—Risks Related to Doing Business in the PRC—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process, and we have ordered the specific uses of proceeds in order of priority below.

 

Description of Use   Percentage of Net Proceeds  
Charcoal Doctor        
Two production lines for hand sanitizers and detergents     18 %
Research and Development and Design     12 %
Promotion and Advertising     29 %
e-Commerce Efforts     1 %
Subtotal     60 %
         
EDLC Carbon        
Optimize EDLC Production Line Capacity     20 %
Establish dedicated EDLC Research and Development Center     20 %
Subtotal     40 %
Total     100 %

 

Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our common shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are discussed in more detail in “Material Tax Matters Applicable to U.S. Holders of Our Common Shares.”

 

The foregoing represents our current intentions with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

 

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Dividend Policy

 

On January 21, 2009, our Board of Directors adopted a resolution to declare dividends of RMB5.4 million to our shareholders as of December 31, 2008. As of December 31, 2012, the outstanding unpaid dividend was RMB2,771,096. We do not intend to pay this outstanding dividend at present and will not use any funds from this offering to pay the outstanding dividend. To the extent we wished to declare a new dividend on our common shares, we would be required either to cancel the outstanding dividend or to pay it prior to paying the new dividend.

 

Other than this dividend, we have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

 

Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital.

 

If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from our subsidiary, USCNHK. Current PRC regulations permit our PRC subsidiaries to pay dividends to USCNHK only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

In addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

 

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from operations in China may be used to pay dividends to our company. Bamboo Tech may go to a licensed bank to remit its after-tax profits out of China. Nevertheless, the bank will require Bamboo Tech to produce the following documents for verification before it may transfer the dividends to an overseas bank account of Bamboo Tech’s parent company: (1) tax payment statement and tax return; (2) auditor’s report issued by a Chinese certified public accounting firm confirming the availability of profits and dividends for distribution in the current year; (3) the Board minutes authorizing the distribution of dividends to its shareholders; (4) the foreign exchange registration certificate issued by SAFE; (5) the capital verification report issued by a Chinese certified public accounting firm; (6) if the declared dividends will be distributed out of accumulated profits earned in prior years, Bamboo Tech must appoint a Chinese certified public accounting firm to issue an auditors’ report to the bank to certify Bamboo Tech’s financial position during the years from which the profits arose; and (7) other information as required by SAFE.

 

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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:

 

    September 30, 2013     December 31, 2012     December 31, 2011  
US$:RMB exchange rate   Period End     $ 0.1626     Period End     $ 0.1605     Period End     $ 0.1571  
    Average     $ 0.1607     Average     $ 0.1585     Average     $ 0.1545  

 

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.

 

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated (www.oanda.com).

 

      Midpoint of Buy and Sell Prices for U.S. Dollar per RMB  
Period     Period-End     Average     High     Low  
2008       6.8358       6.9513       7.3041       6.8116  
2009       6.8272       6.8310       6.8483       6.8130  
2010       6.6018       6.7696       6.8344       6.6018  
2011       6.3585       6.4640       6.6357       6.3318  
2012       6.3086       6.3116       6.3862       6.2289  
2013                          
August       6.1610        6.1609        6.1766        6.1511   
September       6.1439       6.1537       6.1696       6.1403  
October       6.1285       6.1298       6.1453       6.1211  
November       6.1288       6.1311       6.1379       6.1242  
December       6.1122       6.1175       6.1296       6.1084  
2014                          
January       6.1065       6.1003       6.1090       6.0881  
February       6.1269       6.1089       6.1274       6.0996  

 

Over the past several years, the Renminbi has moved from a period of being tightly linked to the US dollar, to a period of revaluation and strengthening against the dollar and into a second period of current relative stability. Our primary sales outside China occur in Japan, the United States, South Korea, the Middle East and Europe, but all such sales outside China are made in U.S. Dollars. Following is a chart showing recent changes in the exchange rates between the Renminbi and U.S. Dollar.

 

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Capitalization

 

The following table sets forth our capitalization as of September 30, 2013 on a pro forma as adjusted basis giving effect to the completion of the offering at an assumed public offering price of $5.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting fees. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

Post-Offering (1,600,000 Common Shares)

U.S. Dollars

 

As of September 30, 2013                  
    Actual     Pro forma(1)     Pro forma As
adjusted(2)
 
                   
Indebtedness:                        
Short-term debt including current portion of long-term debt   $ 6,178,800     $ 6,178,800     $ 6,178,800  
Long-term debt                  
Total indebtedness     6,178,800       6,178,800       6,178,800  
Shareholder’s Equity:                        
Common shares $1.00 par value per share, 50,000 shares authorized, issued and outstanding, actual and 50,000,000 shares, $0.001 par value authorized, 12,800,000 shares issued and outstanding as adjusted pre-offering; pro forma reflects 14,400,000 shares issued and outstanding and gives effect to share split and repurchase     50,000       12,800       14,400  
                         
Additional paid-in capital(3)     9,443,230       9,480,430       15,678,830  
Statutory reserves     2,853,314       2,853,314       2,853,314  
Retained earnings     26,153,307       26,153,307       26,153,307  
Accumulated other comprehensive gain     3,423,070       3,423,070       3,423,070  
Total shareholders’ equity     41,922,921       41,922,921       48,122,921  
Total capitalization   $ 48,101,721     $ 48,101,721     $ 54,301,721  

 

(1) Gives effect to completion of the 256-for-1 share split on ______, 2014 (structured as a 1,000-for-1 share split and simultaneous repurchase of 744 shares, for which the purchase price is credited to additional paid-in capital).
(2)Gives effect to the completion of the offering, at an assumed public offering price of $5.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting discounts and our estimated offering expenses.
(2)Pro forma adjusted for IPO additional paid in capital reflects the net proceeds we expect to receive, after deducting underwriting discount, underwriter expense allowance and approximately $600,000 in other expenses. We expect to receive net proceeds of approximately $6,200,000 ($7,400,000 offering, less underwriting discount of $600,000, non-accountable expense allowance of $100,000 and offering expenses of $500,000).

 

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Dilution

 

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the pro forma net tangible book value per common share after the offering. Dilution results from the fact that the per common share offering price is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares. Our net tangible book value attributable to shareholders at September 30, 2013 was $42,301,086 or approximately $3.30 per common share. Net tangible book value per common share as of September 30, 2013 represents the amount of total assets less intangible assets and total liabilities, divided by the number of common shares outstanding.

 

Upon completion of this offering, we will have 14,400,000 common shares outstanding. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after September 30, 2013, will be approximately $48,501,086 or $3.37 per common share. This would result in dilution to investors in this offering of approximately $1.63 per common share or approximately 32.64% from the assumed offering price of $5.00 per common share. Net tangible book value per common share would increase to the benefit of present shareholders by $1.70 per share attributable to the purchase of the common shares by investors in this offering.

 

The following table sets forth the estimated net tangible book value per common share after the offering and the dilution to persons purchasing common shares based on the foregoing offering assumptions.

 

    Post-Offering(1)  
Assumed offering price per common share   $ 5.00  
Net tangible book value per common share before the offering   $ 3.30  
Increase per common share attributable to payments by new investors   $ 1.70  
Pro forma net tangible book value per common share after the offering   $ 3.37  
Dilution per common share to new investors   $ 1.63  

 

(1)Assumes gross proceeds from offering of 1,600,000 common shares.

 

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Post-Offering Ownership

 

The following chart illustrates our pro forma proportionate ownership, upon completion of the offering, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

 

   Shares Purchased   Total Consideration   Average Price 
   Amount   Percent   Amount   Percent   Per Share 
Existing shareholders   12,800,000    88.89%  $18,319,500    69.60%  $1.43 
New investors   1,600,000    11.11%  $8,000,000    30.40%  $5.00 
Total   14,400,000    100.00%  $26,319,500    100.00%  $1.83 

 

39
 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

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 that appear in this prospectus. 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 prospectus, particularly in “Risk Factors.”

 

Overview of Company

 

We are a specialized manufacturer of bamboo charcoal based products with primary business focus in household products, EDLC carbon as well as 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, Zhejiang Tantech Bamboo Technology Co., Ltd ("Tantech Bamboo" or “Bamboo”). Bamboo is engaged in the production and distribution of household products. Through Bamboo’s wholly-owned Chinese subsidiary, Zhejiang Tantech Bamboo Charcoal Co., Ltd. (“Tantech Charcoal” or “Charcoal”), we conduct trading business, including the export of charcoal products through Bamboo’s wholly-owned Chinese subsidiary, Zhejiang Tantech Energy Tech Co., Ltd. (“Tantech Energy” or “Energy”), we manufacture EDLC carbon and low emission BBQ charcoal .

 

Our household 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”. Purification and deodorization products include air purification products, deodorizer and bamboo vinegar. Cleaning products include kitchen and bathroom cleaning products, personal care products and liquid detergents. Household products accounted for approximately 68.7% of total revenue in the nine months ended September 30, 2013 and approximately 74.2% in the same period of 2012.

 

The largest category of our household 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 and clothes hangers and etc. 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 product is 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 household products but provide us another opportunity for growth. Purchased from third parties and sold through our distribution channel, barbecue charcoals designed for domestic market are also a key source of revenue for us in recent years.

 

Currently, household products are sold via our well-established sales and distribution networks located in 17 cities (Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou, Jinan, Jingmen, Lanzhou, Lishui, Nanchang, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou). We do not own or lease locations in Shenyang, Tianjin, Yantai, Taiyuan, Zhengzhou, Jingmen, Changsha, Fuzhou or Lanzhou. In addition, we have logistics centers in Chengdu, Guangzhou, Taiyuan, Yantai and Lishui and relationships with third-party warehousing companies in Jinan, Shanghai and Tianjin.

 

As of February 2014, Charcoal Doctor products are stocked in over 2,000 supermarkets, department, specialty and convenience stores throughout China. We also own and operate two Charcoal Doctor branded retail stores in Lishui. We plan to expand product lines in the coming years to take advantage of the various uses of bamboo charcoal and bamboo vinegar.

 

40
 

 

EDLC carbon and BBQ charcoal for international market accounted for approximately 14.7% of revenue in the nine months ended September 30, 2013 and approximately 15.4% in the same period of 2012. We have annual production capacity of 10,000 tons of BBQ charcoal products for international market and the production lines are fully automated. Major markets for these products are Europe, the Middle East and the U.S.

 

An area of growing focus for us in the coming years is EDLC carbon. We have invested heavily in research and development efforts in recent years to improve the production process and increase capacity and efficiency, establishing a platform for significant growth potential in the coming years. Our EDLC carbon is mainly sold in China, but we also have plans to increase international exposure by focusing efforts in markets such as the U.S., Japan and South Korea which have large demand for EDLC product and EDLC carbon. To increase our international exposure we plan to attend EDLC product exhibitions such as Canton Fair, China (Shanghai) International Super-Capacitor Industry Fair, China International Battery Fair, and Battery Japan; attend various industry seminars such as Japan Battery Seminar, China Power Energy Storage Technology and Materials Seminar; visit EDLCs and EDLC batteries manufacturers in Russia and South Korea; and enhance our e-commerce marketing through our work with Chinese e-commerce websites such as www.hc360.com and www.1688.com, and www.globalsources.com, an online marketplace that facilitates trade with China. We have signed a letter of intent with a South Korean customer to provide them EDLC carbon and anticipate that we will begin delivery in 2015. Generally our penetration strategy to the potential market is based on service and price advantage.

 

Our trading business accounted for approximately 16.6% of revenue in the nine months ended September 30, 2013 and approximately 10.4% in the same period of 2012. Our trading business was mainly related to the export of charcoal products and, prior to September 2013, the industrial purchase and sales of rubber. 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 operation. 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. We usually imported rubber from overseas markets and then sold it in local markets within a short time. The fluctuation in the exchange rate between U.S. dollar and RMB had certain effects on the profitability of our trading business, and we usually mitigated such risk by selling the imported rubber within a short period of time. As our trading business only accounts for a small portion of our total revenue, we believe our exposure to foreign exchange risk is insignificant. Due to the nature of such business, the profit of our trading business has been relatively low, and as of September 2013, we started reduce 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 expect our sales of household products will continue to grow in the coming years with the increased brand awareness and growing demand for our bamboo charcoal products. As EDLC devices are increasingly used in the mass transportation and automobile industries, we expect our sales of EDLC carbon will increase. 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 household products and EDLC carbon. As we have significantly decreased our trades of rubber starting September 2013, our revenue from our trading segment is likely to decrease in future years. If we cannot increase our household products and EDLC carbon revenues to offset such decreases, our total revenue is likely to decrease. In addition to the likely decrease in revenue, our selling expenses and general and administrative expenses are expected to grow in the following years as we increase our marketing efforts and incur higher personnel expenses. All of these may negatively impact our operating results and profitability. Therefore, our reported financial information may not necessarily be indicative of future operating results or financial condition.

 

Factors Affecting Our Results of Operations

 

Government Policy May Impact our Business and Operating Results

 

We haven’t 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. As current demand for our EDLC carbon is mainly from transportation sector in China, any future changes in the government policy upon transportation industry may impact our revenue generated from sales of EDLC carbon.

 

41
 

 

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 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 and Energy Segment

 

Our products face competition from other producers. In our household product segment, we face competition from a number of companies that have similar product portfolios. 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 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 Henan Universe Charcoal Co. Ltd’s Torch brand shisha charcoal. While our shisha charcoal is the most popular bamboo-charcoal based product of its kind, the competitor product is more popular but not bamboo-charcoal based. There are several manufacturers of EDLC carbon in China and two main international companies competing in the market, although to our knowledge none of them use bamboo as the carbon material. However, as we only started commercial production in a short time and may not have the resources and marketing strategy to compete in the market, our revenue and profit from EDLC carbon may not be sustainable.

 

Technology Development is Posing Challenge for us.

 

Awareness and applications of EDLC technology in the PRC may not mature or become fully commercialized as rapidly as we expect. As a result, the demand and wide application of the carbon component used in EDLC are still facing lots of uncertainties. Although we expect the EDLC industry will grow significantly in the coming years and this will provide us great opportunity to gain market share, the development of new technology may also put more pressure on our research efforts.

 

Some of our Products are Subject to Cyclical Sales.

 

The household product industry is not highly cyclical and not affected significantly by general economic conditions. The demand for our EDLC carbon may experience fluctuation based on economic conditions. However, 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.

 

42
 

 

Results of Operations

 

Three Months Ended September 30, 2013 and 2012

 

The following tables summarize the results of our operations during the three-months ended September 30, 2013 and 2012, 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)

 

    Three-month Period Ended
September 30, 2013
    Three-month Period Ended
September 30, 2012
             
Statement of Operations Data:   Dollars in
thousands
    As a percentage
of sales revenue
    Dollars in
thousands
    As a percentage
of sales revenue
    Dollar ($)
Increase
(Decrease)
    Percentage
Increase
(Decrease)
 
Revenues   $ 16,643       100.0 %   $ 12,891       100.0 %   $ 3,752       29.1 %
Cost of revenues     12,924       77.7 %     9,911       76.9 %     3,013       30.4 %
Gross profit     3,719       22.3 %     2,980       23.1 %     739       24.8 %
                                                 
Operating expenses                                                
Selling expenses     307       1.8 %     295       2.3 %     12       4.1 %
General and administrative expenses     807       4.8 %     274       2.1 %     533       194.5 %
Research and development expenses     251       1.5 %     46       0.4 %     205       445.7 %
Total operating expenses     1,365       8.1 %     615       4.8 %     750       122.0 %
                                                 
Income from operations     2,354       14.2 %     2,365       18.3 %     (11 )     -0.5 %
                                                 
Other income (expenses)                                                
Interest income     20       0.1 %     19       0.1 %     1       5.3 %
Interest expense     (201 )     -1.2 %     (49 )     -0.4 %     (152 )     310.2 %
Government subsidy income     -       0.0 %     260       2.0 %     (260 )     -100.0 %
Other income     1       0.0 %     82       0.6 %     (81 )     -98.8 %
Total other income (expenses)     (180 )     -1.1 %     312       2.3 %     (492 )     -157.7 %
Income before income taxes     2,174       13.1 %     2,677       20.6 %     (503 )     -18.8 %
Provision for income taxes     (342 )     -2.1 %     (379 )     -2.9 %     (37 )     -9.8 %
                                                 
Net income     1,832       11.0 %     2,298       17.7 %     (466 )     -20.3 %
                                                 
Net income attributable to the noncontrolling interest     (92 )     -0.6 %     (115 )     -0.9 %     23       -20.0 %
Net income attributable to common stockholders   $ 1,740       10.4 %   $ 2,183       16.8 %   $ (443 )     -20.3 %

 

43
 

 

Revenues. Revenues increased approximately $3.8 million, or 29.1%, to approximately $16.6 million in the third quarter of 2013, from approximately $12.9 million in the same period of 2012. The increase was mainly attributable to the increased sales from our trading segment and energy segment.

 

In our consumer product segment, revenue increased to approximately $10.1 million in the third quarter of 2013 from approximately $8.6 million in the same period of 2012. The increase was mainly attributable to the increased sales in purification and deodorization products in the third quarter of 2013 as demand for our “Doctor Charcoal” brand products continued to grow.

 

In our trading segment, the revenue was approximately $4.2 million in the third quarter of 2013, an increase of 52.8% compared with approximately $2.7 million in the same period of 2012 as we conducted more rubber wholesale trades in the third quarter of 2013.

 

44
 

 

In our energy segment, we realized sales of approximately $2.3 million, an increase of approximately $763,000 as compared with the same period of 2012. The increase in sales revenue was primarily due to the increased sales of EDLC carbon in the third quarter of 2013 as our sales to one of our largest customers grew quickly in the third quarter of 2013.

 

Cost of revenues. Our cost of revenues increased by approximately $3.0 million or 30.4% to approximately $12.9 million in the third quarter of 2013 from approximately $9.9 million in the same period of 2012. As a percentage of revenues, the cost of revenues increased by approximately 0.8% to 77.7% in the third quarter of 2013 from 76.9% in the same period of 2012. The increase in cost of revenues as a percentage of revenues was primarily due to the increased revenues from trading segment, which has a much lower profit margin.

 

Gross profit.  Our gross profit increased by approximately $739,000, or 24.8% to approximately $3.7 million in the third quarter of 2013 from approximately $3.0 million in the same period of 2012. Gross profit margin was 22.3% in the third quarter of 2013, as compared with 23.1% in the same period of 2012. The decrease was primarily attributable to the lower gross profit margin in our trading segment.

 

Selling expenses. Selling expenses increased by approximately $12,000 to approximately $307,000 in the third quarter of 2013 compared with approximately $295,000 in the same period of 2012. As a percentage of revenues, our selling expenses decreased to 1.8% in the third quarter of 2013, as compared with 2.3% in the same period of 2012. The decrease in selling expenses as a percentage of sales revenue was primarily attributable to the higher sales related expenses compared to the same period of 2012.

 

General and administrative expenses.  Our general and administrative expenses increased by approximately $533,000 or 194.5%, to approximately $807,000 in the third quarter of 2013 from approximately $274,000 in the same period of 2012. As a percentage of revenues, general and administrative expenses increased 2.7% to 4.8% in the third quarter of 2013, compared with 2.1% in the same period of 2012. The increase was primarily attributable to the increased depreciation expenses of approximately $110,000, maintenance expenses of approximately $106,000 and property tax of approximately $114,000 related to our new office building which was put into use at the end of 2012.

 

Research and development expenses. Our research and development expenses increased to approximately $251,000 in the third quarter of 2013 compared with approximately $46,000 in the same period of 2012 as we incurred more research and development expenses related to our EDLC carbon in the third quarter of 2013.

 

Interest expense. Our interest expense increased by approximately $152,000 to approximately $201,000 in the third quarter of 2013, from approximately $49,000 in the same period of 2012. In the third quarter of 2012, interest expenses of long-term loans related to the construction of our new office building was capitalized. After the new office building was put into use at the end of 2012, the interest expenses incurred were no longer capitalized. The increase was also attributable to higher interest expenses as we discounted more bankers acceptance notes payable instead of holding them to maturities in the third quarter of 2013.

 

Government subsidy income. We did not have government subsidy income in the third quarter of 2013. We had approximately $260,000 government subsidy income in the same period of 2012 which was mainly related to the subsidy income granted by local government for our EDLC carbon production.

 

Income before income taxes. Our income before income taxes was approximately $2.2 million in the third quarter of 2013, compared with approximately $2.7 million in the same period of 2012. The decrease was primarily attributable to higher general and administrative expenses and lower government subsidy income in the third quarter of 2013.

 

Provision for income taxes. Our provision for income taxes was approximately $342,000 in the third quarter of 2013, a decrease of approximately $37,000 from approximately $379,000 in the same period of 2012 due to lower income in the third quarter of 2013.

 

Net income attributable to common stockholders. Our net income attributable to common stockholders in the third quarter of 2013 was approximately $1.7 million, a decrease of approximately $443,000 from approximately $2.2 million in the same period of 2012. The decrease was attributable to the factors described above.

 

45
 

 

Nine Months Ended September 30, 2013 and 2012

 

The following tables summarize the results of our operations during the nine-months ended September 30, 2013 and 2012, 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)

 

    Nine-month Period Ended
September 30, 2013
    Nine-month Period Ended
September 30, 2012
             
Statement of Operations Data:   Dollars in
thousands
    As a percentage
of sales revenue
    Dollars in
thousands
    As a percentage
of sales revenue
    Dollar ($)
Increase
(Decrease)
    Percentage
Increase
(Decrease)
 
Revenues   $ 42,292       100.0 %   $ 30,711       100.0 %   $ 11,581       37.7 %
Cost of revenues     31,011       73.3 %     21,536       70.1 %     9,475       44.0 %
Gross profit     11,281       26.7 %     9,175       29.9 %     2,106       23.0 %
                                                 
Operating expenses                                                
Selling expenses     868       2.1 %     789       2.6 %     79       10.0 %
General and administrative expenses     1,745       4.1 %     663       2.2 %     1,082       163.2 %
Research and development expenses     347       0.8 %     131       0.4 %     216       164.9 %
Total operating expenses     2,960       7.0 %     1,583       5.2 %     1,377       87.0 %
                                                 
Income from operations     8,321       19.7 %     7,592       24.7 %     729       9.6 %
                                                 
Other income (expenses)                                                
Interest income     79       0.2 %     62       0.2 %     17       100.0 %
Interest expense     (569 )     -1.3 %     (160 )     -0.5 %     (409 )     255.6 %
Government subsidy income     8       0.0 %     351       1.1 %     (343 )     -97.7 %
Other income     32       0.1 %     90       0.3 %     (58 )     -64.4 %
Total other income (expenses)     (450 )     -1.0 %     343       1.1 %     (793 )     -231.2 %
Income before income taxes     7,871       18.7 %     7,935       25.8 %     (64 )     -0.8 %
Provision for income taxes     (1,286 )     -3.0 %     (1,080 )     -3.5 %     206       19.1 %
                                                 
Net income     6,585       15.7 %     6,855       22.3 %     (270 )     -3.9 %
                                                 
Net income attributable to the noncontrolling interest     (329 )     -0.8 %     (343 )     -1.1 %     14       -4.1 %
Net income attributable to common stockholders   $ 6,256       14.9 %   $ 6,512       21.2 %   $ (256 )     -3.9 %

 

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Revenues. Revenues increased approximately $11.6 million, or 37.7%, to approximately $42.3 million in the nine months ended September 30, 2013 from approximately $30.7 million in the nine months ended September 30, 2012. Revenues increased across all our segments in the nine months ended September 30, 2013.

 

In our consumer product segment, revenue increased to approximately $29.1 million in the nine months ended September 30, 2013 from approximately $22.8 million in the nine months ended September 30, 2012. The increase was mainly attributable to the increased sales in our purification and deodorization products as we continued to expand our sales through nationwide supermarket chains and introduced new product lines under the purification and deodorization category in 2013.

 

In our trading segment, the revenue was approximately $7.0 million in the nine months ended September 30, 2013, an increase of 121.3% compared with approximately $3.2 million in the nine months ended September 30, 2012. The increase was due to the increased sales of imported rubber.

 

In our energy segment, we realized sales of approximately $6.2 million in the nine months ended September 30, 2013, an increase of approximately $1.5 million as compared with nine months ended September 30, 2012. The increase in sales revenue was primarily due to the increased sales of EDLC carbon as we increased EDLC carbon sales through one of our main customers in 2013.

 

47
 

 

Cost of revenues. Our cost of revenues increased by approximately $9.5 million or 44.0% to approximately $31.0 million in the nine months ended September 30, 2013 from approximately $21.5 million in the nine months ended September 30, 2012. As a percentage of revenues, the cost of revenue increased by approximately 2.2% to 73.3% in the nine months ended September 30, 2013 from 70.1% in the nine months ended September 30, 2012. The increase in cost of revenues as a percentage of revenues was primarily due to the increased revenues from trading business, which carries a much lower profit margin than our consumer products and EDLC carbon products.

 

Gross profit.  Our gross profit increased by approximately $2.1 million, or 23.0% to approximately $11.3 million in the nine months ended September 30, 2013 from approximately $9.2 million in the nine months ended September 30, 2012. Gross profit in our consumer product segment increased approximately $1.2 million to approximately $9.4 million, gross profit in our trading segment increased approximately $95,000 to approximately $210,000 and gross profit in our energy segment increased by approximately $803,000 to approximately $1.7 million in the nine months ended September 30, 2013, as compared with the same period in 2012. Gross profit margin was 26.7% in the nine months ended September 30, 2013, as compared with 29.9% in the nine months ended September 30, 2012. The decrease in gross profit margin was primarily attributable to more revenues generated by trading segment which has a much lower profit margin compared with consumer product segment and energy segment.

 

Selling expenses. Selling expenses increased by approximately $79,000 to approximately $868,000 in the nine months ended September 30, 2013 compared with approximately $789,000 in the nine months ended September 30, 2012. As a percentage of revenues, our selling expenses decreased to 2.1% in the nine months ended September 30, 2013, as compared with 2.6% in the nine months ended September 30, 2012. The decrease in selling expenses as a percentage of sales revenue was primarily attributable to the higher sales in 2013.

 

General and administrative expenses.  Our general and administrative expenses increased by approximately $1.1 million to approximately $1.7 million in the nine months ended September 30, 2013 from approximately $663,000 in the nine months ended September 30, 2012. As a percentage of revenues, general and administrative expenses increased 1.9% to 4.1% in the nine months ended September 30, 2013, compared with 2.2% in the nine months ended September 30, 2012. The increase was primarily attributable to the increase in depreciation expenses of approximately $312,000, maintenance expenses of approximately $122,000 and property tax of approximately $114,000 related to our new office building which was put into use at the end of 2012 and higher personnel and consulting expenses in the nine months ended September 30, 2013.

 

Research and development expenses. Our research and development expenses increased approximately $216,000 to approximately $347,000 in the nine months ended September 30, 2013 compared with approximately $131,000 in the nine months ended September 30, 2012 as we increased research and development activities in the nine months ended September 30, 2013.

 

Interest expense. Our interest expense increased by approximately $409,000 to approximately $569,000 in the nine months ended September 30, 2013, from approximately $160,000 in the nine months ended September 30, 2012. In 2012, interest expenses of long-term loans related to the construction of our new office building was capitalized. After our new office building was put into use at the end of 2012, the interest expenses incurred were no longer capitalized. The increase in interest expense was also attributable to higher interest expenses as we discounted more bankers acceptance notes payable instead of holding them to maturities in the nine months ended September 30, 2013.

 

Government subsidy income. Our government subsidy income was approximately $8,000 in the nine months ended September 30, 2013 compared with approximately $351,000 in the nine months ended September 30, 2012. The government subsidy income in the nine months ended September 30, 2012 was mainly related to the subsidy income of approximately $214,000 granted by local government for our EDLC carbon production and approximately $92,000 subsidy income granted by the provincial government.

 

Income before income taxes. Our income before income taxes stayed unchanged at approximately $7.9 million in the nine months ended September 30, 2013, compared with nine months ended September 30, 2012.

 

48
 

 

Provision for income taxes.  Our provision for income taxes was approximately $1.3 million in the nine months ended September 30, 2013, an increase of approximately $206,000 or 19.1% from approximately $1.1 million in the nine months ended September 30, 2012. The increase was attributable to a higher effective tax rate of 16% in the nine months ended September 30, 2013 compared with 14% in the nine months ended September 30, 2012.

 

Net income attributable to common stockholders. Our net income attributable to common stockholders in the nine months ended September 30, 2013 was approximately $6.3 million, a decrease of approximately $256,000 from approximately $6.5 million in the nine months ended September 30, 2012. The decrease was attributable to the factors described above.

 

Years Ended December 31, 2012 and 2011

 

The following table summarizes the results of our operations during the fiscal years ended December 31, 2012 and 2011, 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)

 

    2012     2011              
Statement of Operations Data:   Dollars in
thousands
    As a percentage
of sales revenue
    Dollars in
thousands
    As a percentage
of sales revenue
    Dollar ($)
Increase
(Decrease)
    Percentage
Increase
(Decrease)
 
Revenues   $ 50,519       100.0 %   $ 47,692       100.0 %   $ 2,827       5.9 %
Cost of revenues     36,516       72.3 %     35,870       75.2 %     646       1.8 %
Gross profit     14,003       27.7 %     11,822       24.8 %     2,181       18.4 %
                                                 
Operating expenses                                                
Selling expenses     1,094       2.2 %     925       1.9 %     169       18.3 %
General and administrative expenses     948       1.9 %     2,926       6.1 %     (1,978 )     -67.6 %
Research and development expenses     174       0.3 %     189       0.4 %     (15 )     -7.9 %
Total operating expenses     2,216       4.4 %     4,040       8.5 %     (1,824 )     -45.1 %
                                                 
Income from operations     11,787       23.3 %     7,782       16.3 %     4,005       51.5 %
                                                 
Other income (expenses)                                                
Interest income     84       0.2 %     -       0.0 %     84       100.0 %
Interest expense     (200 )     -0.4 %     (123 )     -0.3 %     (77 )     62.6 %
Government subsidy income     371       0.7 %     37       0.1 %     334       902.7 %
Other income     265       0.5 %     80       0.2 %     185       231.3 %
Total other income (expenses)     520       1.0 %     (6 )     0.0 %     526       8,766.7 %
Income before income taxes     12,307       24.4 %     7,776       16.3 %     4,531     58.3 %
Provision for income taxes     (1,893 )     -3.7 %     (1,104 )     -2.3 %     (789 )       71.5 %
                                                 
Net income     10,414       20.6 %     6,672       14.0 %     3,742       56.1 %
                                                 
Net income attributable to the noncontrolling interest     (521 )     -1.0 %     (333 )     -0.7 %     (188 )     56.5 %
Net income attributable to common stockholders   $ 9,893       19.6 %   $ 6,339       13.3 %     3,554       56.1 %

 

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Revenues. Revenues increased approximately $2.8 million, or 5.9%, to approximately $50.5 million in 2012 from approximately $47.7 million in 2011. The increase was mainly attributable to the increased sales from our energy segment, which was partially offset by the decreased sales from our consumer product segment.

 

In our consumer product segment, revenue decreased to approximately $34.9 million in 2012 from approximately $40.1 million in 2011. The decrease was mainly attributable to the decreased sales in barbecue charcoal under “Doctor Charcoal” brand as one of our main suppliers ceased production for three months in summer of 2012. We have had a long-term relationship with Tahe Xingzhongda Carbon Co. due to their low prices for suitable products. In June, July and August 2012, the local government of Daxing Anlin, where the supplier is located, temporarily limited charcoal production to avoid fire risks. At that time, our stock was insufficient to protect us against supply shortages. As this shortage was government-caused and only occurred in 2012, we were unable to predict it in advance. Because the period of shortage was relatively short and our long-term cooperation with the company was positive, we did not seek alternative suppliers to replace Tahe Xingzhongda Carbon Co. Moving forward, we will seek to maintain adequate supply to protect our company against such risks during the summer, when fire risks are higher.

 

In our trading segment, the revenue was approximately $9.0 million in 2012, an increase of 69.5% compared with approximately $5.3 million in 2011. The increase was due to increased importing business in 2012, as the market demand for rubber increased that year. Through September 30, 2013, demand for rubber continued to increase.

 

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In our energy segment, we realized sales of approximately $6.7 million, an increase of approximately $4.3 million as compared with 2011. The increase in sales revenue was primarily due to the increased sales of EDLC carbon in 2012 as we started commercial production at the end of 2011.

 

Cost of revenues. Our cost of revenues increased by approximately $646,000 or 1.8% to approximately $36.5 million for 2012 from approximately $35.9 million in 2011. As a percentage of revenues, the cost of revenue decreased by approximately 2.9% to 72.3% in 2012 from 75.2% in 2011. The decrease in cost of revenues as a percentage of revenues was primarily due to a increasing revenues from EDLC carbon, which carries a higher profit margin than our consumer products.

 

Gross profit. Our gross profit increased by approximately $2.2 million, or 18.4% to approximately $14.0 million for 2012 from approximately $11.8 million in 2011. Gross profit margin was 27.7% for 2012, as compared with 24.8% for 2011. The increase was primarily attributable to the increased gross profit margin in our consumer product segment and energy segment.

 

Selling expenses. Selling expenses increased by approximately $0.2 million to approximately $1.1 million for 2012 compared with approximately $0.9 million in 2011. As a percentage of revenues, our selling expenses increased to 2.2% for 2012, as compared with 1.9% for 2011. The increase in selling expenses as a percentage of sales revenue was primarily attributable to the higher marketing expenses as we increased promotional activities and hired temporary sales personnel to attract customers. We engaged in exhibitions and product promotions and required additional sales personnel to staff such events.

 

General and administrative expenses. Our general and administrative expenses decreased by approximately $2.0 million or 67.6%, to approximately $948,000 for 2012 from approximately $2.9 million in 2011. As a percentage of revenues, general and administrative expenses decreased 4.2% to 1.9% in 2012, compared with 6.1% in 2011. The decrease was primarily attributable to the significant decrease of bad debt expenses related to our accounts receivable in 2012 compared to 2011. We recorded higher bad debt expenses in 2011 based on the result of our aging analysis conducted at the end of 2011. As large portion of accounts receivable deemed uncollectable at the end of 2011 was later collected during 2012, our bad debt expenses were partially offset by such collection and therefore led to lower bad debt expenses in 2012.

 

Research and development expenses. Our research and development expenses decreased slightly to approximately $174,000 for 2012 compared with approximately $189,000 for 2011 as the research and development activities remained the same level in 2012.

 

Interest expense. Our interest expense increased by approximately $77,000, or 62.6% to approximately $200,000 for 2012, from approximately $123,000 for 2011. The increase was primarily attributable to the increased interest expenses associated with the discounting of bankers acceptance notes payable in 2012.

 

Government subsidy income. Our government subsidy income was approximately $371,000 for 2012 compared with approximately $37,000 for 2011. The increase was primarily attributable to Energy Tech’s one-time subsidy income of approximately $222,000 granted by local government for our R&D project regarding the industrialization of EDLC carbon in 2012. This project subsidy was a one-time grant and will not occur again in the future.

 

Income before income taxes. Our income before income taxes was approximately $12.3 million for 2012, compared with approximately $7.8 million for 2011. The increase was primarily attributable to higher gross profit and lower general and administrative expenses for 2012.

 

Provision for income taxes.  Our provision for income taxes was approximately $1.9 million for 2012, an increase of approximately $789,000 or 71.5% from approximately $1.1 million for 2011. The increase was primarily attributable to two factors: (i) The effective income tax rate increased 1.1% from 2011 to 2012. Our consumer product segment is subject to a favorable tax rate of 15% compared to 25% tax rate applied to our trading and energy segments. In 2012, our trading and energy segments became profitable and were then subject to a higher tax rate. As a result, our effective income tax rate was higher in 2012. (ii) Deferred tax expenses were approximately $100,000 in 2012, an increase of approximately $514,000 from a deferred tax benefit of approximately $414,000 in 2011. In 2011, our deferred taxes included a benefit of approximately $322,000 related to the loss carry forward in our energy segment.

 

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Net income attributable to common stockholders. Our net income attributable to common stockholders for 2012 was approximately $9.9 million, an increase of approximately $3.6 million from approximately $6.3 million in 2011. The increase was attributable to the factors described above.

 

Segment Information

 

Three and Nine Months Ended September 30, 2013 and 2012

 

The following tables set forth sales information about our product mix in the three months and nine months ended September 30, 2013 and 2012, respectively.

 

(All amounts, other than percentages, in thousands of U.S. dollars)

 

    Three-month Ended September 30,
    2013   2012
    Revenue     Percentage of Net Revenue   Revenue     Percentage of Net Revenue
Consumer Product   $ 10,148       61.0 %     $ 8,597       66.7 %  
Trading     4,163       25.0 %       2,725       21.1 %  
Energy     2,332       14.0 %       1,569       12.2 %  
    $ 16,643       100.0 %     $ 12,891       100.0 %  

 

    Nine-month Ended September 30,
    2013   2012
    Revenue     Percentage of Net Revenue   Revenue     Percentage of Net Revenue
Consumer Product   $ 29,062       68.7 %     $ 22,792       74.2 %  
Trading     7,032       16.6 %       3,178       10.4 %  
Energy     6,198       14.7 %       4,741       15.4 %  
    $ 42,292       100.0 %     $ 30,711       100.0 %  

 

Consumer Product Segment

 

Our consumer product segment is the largest among our three segments. Revenues from the consumer product segment were approximately $10.1 million and $8.6 million, $29.1 million and $22.8 million for the three months and nine months ended September 30, 2013 and 2012, respectively. Revenue from consumer product was mainly generated through the sales of our purification and deodorization products and cleaning products under “Charcoal Doctor” brand and barbecue charcoals designed for domestic market. Revenue increased approximately $1.6 million in the three months ended September 30, 2013 compared to the same period in 2012 and increased approximately $6.3 million in the nine months ended September 30, 2013 compared to the same period in 2012. With the increased brand awareness and growing consumer preferences for the carbonized cleaning products over other traditional household cleaning products, we anticipate that the revenue from our consumer products will continue to increase in the coming years.

 

Cost of revenues mainly includes costs of raw materials, inbound freight costs, cost of direct labor, depreciation expenses and other overhead. Cost of revenue for consumer product increased approximately $1.4 million to approximately $7.2 million in the three months ended September 30, 2013 compared to approximately $5.8 million in the same period in 2012. For the nine months ended September 30, 2013, cost of revenue for consumer product increased approximately $5.1 million to approximately $19.7 million compared to approximately $14.6 million in the same period in 2012. Gross profit increased approximately $152,000 to approximately $2.9 million in the three months ended September 30, 2013 compared to approximately $2.8 million in the same period in 2012. Gross margin was 29.1% in the three months ended September 30, 2013 compared to 32.5% in the same period in 2012. For the nine months ended September 30, 2013, gross profit was approximately $9.4 million, compared to $8.2 million in the same period in 2012. Gross margin was 32.3% in the nine months ended September 30, 2013 compared to 35.9% in the same period in 2012. The decrease in gross margin was mainly the result of change in our product mix as more products with lower gross margin were sold in the three and nine months ended September 30, 2013 compared to the same period in 2012.

 

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Profit for consumer product segment decreased approximately $311,000 to approximately $1.9 million in the three months ended September 30, 2013 and increased approximately $253,000 to approximately $6.7 million in the nine months ended September 30, 2013.

 

Trading Segment

 

Trading segment generated approximately $4.2 million sales revenue for the three months ended September 30, 2013 compared to approximately $2.7 million in the same period of 2012. The revenue for the nine months ended September 30, 2013 was approximately $7.0 million compared to approximately $3.2 million in the same period of 2012. The revenue from trading segment was primarily related to our wholesale purchases and resale of imported rubber in local market and the export of charcoal products. While the revenue increased significantly in the three and nine months ended September 30, 2013 compared to the same periods in 2012, the main driver behind the increase was revenue from trades of rubber, which we do not consider to be a stable source of revenue. Instead, we began to phase out trades of rubber in September 2013 due to the low gross margin and market fluctuations. The gross profit was approximately $52,000 in the three months ended September 30, 2013 compared to a loss of approximately $19,000 in the same period of 2012. For the nine months ended September 30, 2013, the gross profit was approximately $210,000, compared to approximately $116,000 in the same period of 2012.

 

Loss for our trading segment decreased approximately $180,000 to approximately $44,000 in the three months ended September 30, 2013 and increased approximately $90,000 to approximately $372,000 in the nine months ended September 30, 2013.

 

Energy Segment

 

Energy segment consists of the sales of home-made BBQ charcoal and EDLC carbon. The revenue from BBQ charcoal was approximately $188,000 for the three months ended September 30, 2013, compared to approximately $62,000 in the same period in 2012. For the nine months ended September 30, 2013, the revenue from BBQ charcoal was approximately $543,000 compared to approximately $317,000 in the same period in 2012. Our home-made BBQ charcoal was mainly sold in overseas market and the increase in the sales revenue was mainly driven by the higher demand for our products.

 

We invested heavily in the production of EDLC carbon, which has wide applications and higher gross margin. For the three months ended September 30, 2013, we sold approximately 66 tons of EDLC carbon with sales revenue of approximately $2.1 million, compared to sales of approximately $1.5 million in the same period of 2012. The gross profit was approximately $744,000 in the three months ended September 30, 2013, an increase of approximately $427,000 from approximately $317,000 in the same period of 2012. For the nine months ended September 30, 2013, our sales of EDLC carbon was approximately $5.8 million, compared to approximately $4.4 million in the same period of 2012. The gross profit was approximately $1.8 million in the nine months ended September 30, 2013, an increase of approximately $688,000 from approximately $1.1 million in the same period of 2012. With the improvement of technology used in the production process, we believe EDLC carbon will become an important source of revenue growth and profitability.

 

Our energy segment recorded segment loss of approximately $67,000 in the three months ended September 30, 2013, compared to approximately $269,000 of segment profit in the same period of 2012. For the nine months ended September 30, 2013, the segment profit was approximately $256,000, a decrease of approximately $433,000 from the same period of 2012.

 

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Years Ended December 31, 2012 and 2011

 

The following table set forth sales information about our product mix in each of the last two years.

 

(All amounts, other than percentages, in thousands of U.S. dollars)

 

   Year Ended December 31,
   2012  2011
   Revenue   Percentage of Net Revenue  Revenue   Percentage of Net Revenue
Consumer Product  $34,907    69.1%    $40,082    84.0%  
Trading   8,962    17.7%     5,286    11.1%  
Energy   6,650    13.2%     2,324    4.9%  
   $50,519    100.0%    $47,692    100.0%  

 

Consumer Product Segment

 

Revenue from the consumer product segment was approximately $34.9 million and $40.1 million for the year ended December 31, 2012 and 2011, respectively. Revenue from consumer product was mainly generated through the sales of our purification and deodorization products and cleaning products under “Charcoal Doctor” brand and barbecue charcoals designed for domestic market. Although the revenue decreased approximately $5.2 million in 2012, we believe the decrease was temporary as it was mainly due to unexpected interruption of supply in one of our products and the supply subsequently resumed. We currently generate most of our consumer product revenue from the sales of “Charcoal Doctor” brand products. With the increased brand awareness and growing consumer preferences for the carbonized cleaning products over other traditional household cleaning products, we anticipate that the revenue from our consumer products will continue to increase in the coming years.

 

Cost of revenues mainly includes costs of raw materials, inbound freight costs, cost of direct labor, depreciation expenses and other overhead. Cost of revenue for consumer product decreased approximately $6 million to approximately $22.6 million in 2012 compared to $28.6 million in 2011. Gross profit increased approximately $0.8 million to approximately $12.3 million in 2012 from approximately $11.5 million in 2011. Gross margin was 35.2% in 2012 compared to $28.6% in 2011. The increase in gross profit and gross margin was mainly the result of change in our product mix as we sold more products with higher gross margin in 2012 compared to 2011. In particular, our sales of purification and deodorization products increased, while our sales of barbecue charcoals designed for domestic market decreased as a percentage of revenues.

 

Profit for consumer product segment increased approximately $1.6 million to approximately $9.5 million in 2012 compared to approximately $7.9 million in 2011.

 

Trading Segment

 

Trading segment generated approximately $9.0 million sales revenue in 2012 compared to approximately $5.3 million in 2011. The revenue from trading was related to our wholesale purchase and resale of imported rubber in local markets. While the revenue increased approximately $3.7 million or 69.6% in 2012, our trading of rubber is facing great fluctuations and uncertainties, and we have never considered it a stable source of revenue. Cost of revenue was approximately $8.4 million in 2012 compared to approximately $5.1 million in 2011. The gross profit was approximately $0.6 million in 2012 compared to approximately $0.2 million in 2011. We are competing with numerous players in the market for better price and any fluctuation in the rubber market may negatively impact our profitability; therefore, the sales revenue was unpredictable. Moreover, the transparent nature of rubber trading causes gross margins to be much lower in for such trades because our profits are based on locking the exchange rate and adding a slight profit margin to otherwise transparent and readily available commodity prices. Gross margin was 6.7% in 2012 and 2.9% in 2011.

 

Profit for trading segment increased approximately $297,000 to approximately $157,000 in 2012 compared to a loss of approximately $140,000 in 2011.

 

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Energy Segment

 

Energy segment consists of the sales of home-made BBQ charcoal and EDLC carbon. The revenue from BBQ charcoal was approximately $962,000 in 2012 compared to approximately $1.5 million in 2011. Our home-made BBQ charcoal was mainly sold in overseas market as the demand for our products continue to grow. The cost of revenue for home-made BBQ charcoal was approximately $942,000 in 2012 compared to approximately $1.5 million in 2011, which resulted in a gross profit of approximately $20,000 in 2012 and $21,000 in 2011.

 

We invested heavily in the production of EDLC carbon, which has wide applications and higher gross margin. The commercial production of EDLC carbon started in late 2011. We sold approximately 30 tons of EDLC carbon with sales revenue of approximately $0.8 million in 2011. In 2012, we sold approximately 300 tons of EDLC carbon, resulted in sales revenue of approximately $5.7 million. The gross profit was approximately $170,000 in 2011 and $1.1 million in 2012. The decrease in gross margin in 2012 was primarily due to the increased depreciation expenses related to our new manufacturing facilities used for the production of EDLC carbon. With the improvement of technology used in the production process, we believe EDLC carbon will become an important source of revenue growth and profitability.

 

Profit for energy segment increased approximately $1.8 million to approximately $740,000 in 2012 compared to a loss of approximately $1.1 million in 2011.

 

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. As of the date of this prospectus, our PRC subsidiaries have been in accumulated loss and did not pay dividends to us. Further, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. 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.

 

Nine Months Ended September 30, 2013 and 2012

 

As of September 30, 2013, we had cash and cash equivalents of approximately $4.5 million and restricted cash of approximately $3.6 million. As of September 30, 2013, we did not have any foreign cash and short-term investments. Our current assets were approximately $46.8 million and our current liabilities were approximately $19.0 million, which resulted in a current ratio of approximately 2.46. Total shareholders’ equity as of September 30, 2013 was approximately $44.2 million. The following table sets forth summary of our cash flows for the periods indicated:

 

55
 

 

(All amounts in thousands of U.S. dollars)

 

    Nine-
month
Ended
September
30, 2013
    Nine-
month
Ended
September
30, 2012
 
Net cash provided by operating activities   $ 5,360     $ 13,585  
Net cash used in investing activities     (428 )     (9,416 )
Net cash used in financing activities     (1,089 )     (4,167 )
Effect of exchange rate changes on cash     54       1  
Net increase (decrease) in cash     3,897       3  
Cash, beginning of year     618       109  
Cash, end of year   $ 4,515     $ 112  

 

Operating Activities

 

Net cash provided by operating activities was approximately $5.4 million in the nine months ended September 30, 2013, compared to net cash provided by operating activities of approximately $13.6 million in the same period of 2012. The decrease in net cash provided by operating activities was primarily attributable to the following factors, including:

 

· The accounts receivable decreased by approximately $856,000 during the nine months ended September 30, 2013 compared to a decrease of approximately $5.8 million during the same period in 2012 when we reduced credit sales to some large wholesalers and increased direct sales to retailers who usually keep lower accounts receivable balances with us in our consumer product segment.
· The accounts payable decreased by approximately $199,000 during the nine months ended September 30, 2013 compared to an increase of approximately $4.4 million during the same period in 2012.
· An increase in net cash flow was due to the decrease in other receivable of approximately $433,000 during the nine months ended September 30, 2013 compared to an increase of other receivable of approximately $950,000 during the same period in 2012.

 

Investing Activities

 

Net cash used in investing activities in the nine months ended September 30, 2013 was approximately $428,000, a decrease of approximately $9.0 million from net cash used in investing activities of approximately $9.4 million during the same period in 2012. The decrease in net cash used in investing activities in 2013 was primarily attributable to the net collection of loans to related parties and loans to third parties of approximately $1.7 million during the nine months ended September 30, 2013 compared to net loans to related parties and third parties of approximately $8.0 million during the same period in 2012. As of the filing date, all loans to related parties have been repaid.

 

Financing Activities

 

Net cash used in financing activities was approximately $1.1 million in the nine months ended September 30, 2013, compared with net cash used in financing activities of approximately $4.2 million in the same period of 2012. The decrease in net cash used in financing activities in the nine months ended September 30, 2013 was primarily attributable to the lower net repayments of banks acceptance notes payable and bank loans compared to the same period in 2012.

 

Our material cash requirements in the next twelve months include (i) Investments of approximately $5.8 million in the new production lines and manufacturing facilities to increase the production capacity of household products and the continuing investments in the upgrade of manufacturing techniques involved in the production of EDLC carbon. As the demand for our products continues to grow in the coming years, we need to add production lines and improve the efficiency of production, which will require capital expenditures on these projects. (ii) Approximately $2.0 million for marketing activities related to our household products, specifically the advertising expenditures on our “Charcoal Doctor” brand in local and national media.

 

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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 stock to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raising, we are confident that we can meet cash requirements only by cash flows generated from our operating activities.

 

Loan Facilities

 

We repaid approximately $2.1 million in bank loans and borrowed approximately $2.1 million in bank loans for our working capital needs during the nine months ended September 30, 2013. We also repaid approximately $7.1 million of bankers acceptance notes payable and secured approximately $7.1 million of bankers acceptance notes payable during the period. As a result, the balance of all our bank loans and bankers acceptance notes payable as of September 30, 2013 was approximately $13.3 million, which includes long-term bank loans of approximately $4.1 million, short-term bank loans of approximately $2.1 million and bankers acceptance notes payable of approximately $7.1 million.

 

Although we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, including the discounting of bills receivable, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. We are not dependent upon this initial offering to meet our liquidity needs for the next twelve months.

 

As of September 30, 2013, the details of all our short-term bank loans and bankers acceptance notes payable are as follows: 

 

(All amounts are in U.S. dollars)

 

No   Type   Contracting Party   Valid Date     Duration     Amount  
1   Long-term Bank Loan   Shanghai Pudong Development Bank   2011-04-14 to
2014-04-13
    3 years     $ 4,065,000  
2   Short-term Bank Loan   Bank of China   2013-01-14 to
2014-01-16
    1 year     $ 2,113,800  
3   Bankers acceptance notes payable   Bank of China   2013-05-22 to
2013-11-21
    6 months     $ 2,276,400  
4   Bankers acceptance notes payable   Bank of China   2013-05-29 to
2013-11-28
    6 months     $ 2,601,600  
5   Bankers acceptance notes payable   Bank of China   2013-07-15 to
2014-01-14
    6 months     $ 1,138,200  
6   Bankers acceptance notes payable   Bank of China   2013-07-16 to
2014-01-15
    6 months     $ 1,138,200  

 

We have long-term bank loan of approximately $4.1 million, short-term bank loan of approximately $2.1 million and bankers acceptance notes payable of approximately $7.1 million as of September 30, 2013. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.

 

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Obligations Under Material Contracts

 

Below is a table setting forth all of our contractual obligations as of September 30, 2013, which consists of our short-term and long-term loan agreements, loans from third parties and due to related parties:

 

    Payment Due by Period  
Contractual Obligations   Total     Less than 1
year
    1-3 years     3-5
years
    More
than 5
years
 
Short-Term Debt Obligations   $ 2,113,800     $ 2,113,800       -       -       -  
Long-Term Debt Obligations     4,065,000       4,065,000       -       -       -  
Bankers acceptance notes payable     7,154,400       7,154,400       -       -       -  
Capital Lease Obligations     -       -       -       -       -  
Operating Lease Obligations     -       -       -       -       -  
Purchase Obligations     -       -       -       -       -  
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP     -       -       -       -       -  
Loans from Third Parties     38,853       38,853       -       -       -  
Due to Related Parties     20,151       20,151       -       -       -  
Total   $ 13,392,204     $ 13,392,204     -     -       -  

 

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 and the covenants or financial restrictions related to outstanding debt obligations. We did not have these restrictions on our net assets as of September 30, 2013 and December 31, 2012.

 

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 September 30, 2013 and December 31, 2012.

 

    As of September 30, 2013     As of December 31, 2012  
Statutory Reserves   $ 2,853,314     $ 2,853,314  
Total Restricted Net Assets   $ 2,853,314     $ 2,853,314  
Consolidated Net Assets   $ 44,162,480     $ 43,049,994  
Restricted Net Assets as Percentage of Consolidated Net Assets     6.5 %     6.6 %

 

Total restricted net assets accounted for approximately 6.5% of our consolidated net assets as of September 30, 2013. 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.

 

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Capital Expenditures

 

We had capital expenditures of approximately $2.1 million and $1.4 million for the nine months ended September 30, 2013 and 2012, respectively for the addition and renovation of our workshops and office buildings; purchasing of equipment in connection with our business activities. As of September 30, 2013, we had capital expenditure commitments of approximately $100,000 for 2013.

 

In 2014 and 2015, our capital expenditures are expected to be approximately $6.0 million and $3.2 million, respectively, and will be primarily related to the construction of two new production lines for our household products, to increase the capacity and improve the technology used in the production of EDLC carbon and to establish R&D center for EDLC carbon. Specifically, we will continue to

 

·purchase equipment to expand our household products;
·grow our research and development staff; and
·upgrade equipment to support the production of EDLC carbon.

 

We expect that our capital expenditures will increase in the future as our business continues to develop and expand.

 

Off-balance Sheet Commitments and Arrangements

 

We have not entered into any 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.

 

Years Ended December 31, 2012 and 2011

 

As of December 31, 2012, we had cash and cash equivalents of $618,000 and restricted cash of approximately $3.5 million. We did not have any foreign cash and short-term investments. Our current assets were approximately $49.0 million and our current liabilities were approximately $16.7 million, which resulted in a current ratio of approximately 2.93. Total shareholders’ equity as of December 31, 2012 was approximately $43.0 million.

 

The following table sets forth summary of our cash flows for the periods indicated:

 

(All amounts in thousands of U.S. dollars)

 

    2012     2011  
Net cash provided by (used in) operating activities   $ 11,115     $ (4,076 )
Net cash used in investing activities     (3,299 )     (1,314 )
Net cash provided by (used in) financing activities     (7,316 )     2,784  
Effect of exchange rate changes on cash     9       59  
Net increase (decrease) in cash     509       (2,547 )
Cash, beginning of year     109       2,656  
Cash, end of year   $ 618     $ 109  

 

Operating Activities

 

Net cash provided by operating activities was approximately $11.1 million in 2012, compared to net cash used in operating activities of approximately $4.1 million in 2011. The increase in net cash provided by operating activities was primarily attributable to the following factors:

 

·Net income increased by approximately $3.7 million in 2012 compared to 2011.
·Accounts receivable decreased by approximately $9.5 million in 2012 compared to an increase of approximately $25.9 million in 2011. We increased sales to large wholesalers with longer credit terms in 2011, which in turn led to an increase in accounts receivable balances. In 2012, our accounts receivable balances decreased. The decrease in accounts receivable in 2012 was primarily due to the higher accounts receivable turnover rate as a result of our increase in sales increased sales to retailers, especially direct sales to supermarkets whose credit terms are shorter.

 

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·The increase in net cash provided by operations was partially offset by the increase in advances to suppliers, increase in inventory and the decrease in accounts payable in 2012 compared to 2011.

 

Investing Activities

 

Net cash used in investing activities in 2012 was approximately $3.3 million, an increase of approximately $2.0 million from net cash used in investing activities of approximately $1.3 million in 2011. The increase in net cash used in investing activities in 2012 was primarily due to lower repayments of loan to third parties compared to 2011, as such outstanding loan amounts were lower in 2012.

 

Financing Activities

 

Net cash used in financing activities was approximately $7.3 million in 2012, compared with net cash provided by financing activities of approximately $2.8 million in 2011. The increase in net cash used in financing activities in 2012 was primarily attributable to the higher repayments of banks acceptance notes payable and bank loans compared to 2011.

 

Loan Facilities

 

We repaid approximately $5.2 million in bank loans and borrowed approximately $2.1 million in bank loans for our working capital needs during the year ended December 31, 2012. We also repaid approximately $16.1 million of bankers acceptance notes payable and secured approximately $11.7 million of bankers acceptance notes payable in 2012. As a result, the balance of all our bank loans and bankers acceptance notes payable as of December 31, 2012 was approximately $13.2 million, which includes long-term bank loans of approximately $4.0 million, short-term bank loans of approximately $2.1 million and bankers acceptance notes payable of approximately $7.1 million.

 

As of December 31, 2012, the details of all our short-term bank loans and bankers acceptance notes payable are as follows: 

 

(All amounts are in U.S. dollars)

 

No  Type  Contracting Party  Valid Date    Duration   Amount 
1  Long-term Bank Loan  Shanghai Pudong Development Bank  2011-04-14 to
2014-04-13
   3 years   $4,012,004 
2  Short-term Bank Loan  Bank of China  2012-07-25 to
2013-01-16
   6 months   $2,086,242 
3  Bankers acceptance notes payable  Bank of China  2012-07-31 to
2013-01-30
   6 months   $2,246,722 
4  Bankers acceptance notes payable  Bank of China  2012-11-22 to
2013-05-22
   6 months   $2,246,722 
5  Bankers acceptance notes payable  Bank of China  2012-11-28 to
2013-05-28
   6 months   $2,567,683 

 

We have long-term bank loan of approximately $4.0 million, short-term bank loan of approximately $2.1 million and bankers acceptance notes payable of approximately $7.1 million as of December 31, 2012. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.

 

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Obligations Under Contracts

 

Below is a table setting forth all of our contractual obligations as of December 31, 2012, which consists of our short-term and long-term loan agreements, loans from third parties and balances due to related parties:

 

 

    Payment Due by Period  
Contractual Obligations   Total     Less than 1
year
    1-3 years     3-5 years     More
than 5
years
 
Short-Term Debt Obligations   $ 2,086,242     $ 2,086,242       -       -       -  
Long-Term Debt Obligations     4,012,004       -     $ 4,012,004       -       -  
Bankers acceptance notes payable     7,061,127       7,061,127       -       -       -  
Capital Lease Obligations     -       -       -       -       -  
Operating Lease Obligations     -       -       -       -       -  
Purchase Obligations     -       -       -       -       -  
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP     -       -       -       -       -  
Loans from Third Parties     205,567       205,567       -       -       -  
Due to Related Parties     940,045       940,045       -       -       -  
Total   $ 14,304,985     $ 10,292,981     $ 4,012,004       -       -  

 

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 and the covenants or financial restrictions related to outstanding debt obligations. We did not have these restrictions on our net assets as of December 31, 2012 and 2011.

 

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, 2012 and 2011.

 

 

   As of December 31, 2012   As of December 31, 2011 
Statutory Reserves  $2,853,314   $1,808,419 
Total Restricted Net Assets  $2,853,314   $1,808,419 
Consolidated Net Assets  $43,049,994   $31,819,838 
Restricted Net Assets as Percentage of Consolidated Net Assets   6.6%   5.7%

 

Total restricted net assets accounted for approximately 6.6% of our consolidated net assets as of December 31, 2012. 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.

 

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Capital Expenditures

 

We had capital expenditures of approximately $2.0 million and $3.5 million for the years ended December 31, 2012 and 2011, respectively for the construction of new workshops and office buildings and purchases of equipment in connection with the expansion of our production facilities. As of December 31, 2012, we did not have any capital expenditure commitments.

 

Off-balance Sheet Commitments and Arrangements

 

We have not entered into any 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.

 

Revenue recognition

 

Our revenue is generated from the sale of our products to wholesalers and retailers. We recognize revenue when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of delivery for sales, which is the point when risk of loss and title passes to the customer. We determined that delivery occurred when the goods leave our warehouses or production facilities. Revenue is reported net of all value added taxes. We do not routinely permit customers to return products and historically, customer returns have been immaterial.

 

Advances to suppliers

 

In order to ensure a steady supply of raw material, bamboo charcoal, sometimes we are required to make cash advances to suppliers when placing our purchase orders. We review our advances to suppliers on a periodic basis and make general and specific allowances when there is doubt as to the ability of a supplier to refund an advance to us.

 

Allowance for accounts receivable and advance to suppliers

 

We establish an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivable and advance to suppliers. A considerable amount of judgment is required in assessing the amount of the allowance. We consider the historical level of credit losses and apply percentages to aged receivable categories.

 

Additional specific provision is made against accounts receivable and advance to suppliers to the extent which they are considered to be doubtful. Bad debts are written off when identified. We do not accrue interest on trade receivables. Based on aging analysis conducted on September 30, 2013, if we saw a 50% increase in accounts receivable due over 1 year, we would recognize a corresponding 4.8% decrease in our income before income taxes.

 

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While our credit losses have historically been insignificant, we may experience higher credit loss rates in the future than we have in the past. Our accounts receivable are concentrated in relatively few customers, with two of our customers in the aggregate accounting for 25% of our total accounts receivable, net as of September 30, 2013 and four of our customers in the aggregate accounting for 85% of our total accounts receivable, net as of December 31, 2012. Therefore, a significant change in the liquidity or financial position of any one significant customer would require us to increase our allowance for doubtful accounts and negatively affect our working capital.

 

Income Tax

 

We account 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.

 

Our subsidiaries in China are subject to the income tax laws of the PRC. We believe that our tax return positions are fully supported, but tax authorities in China may challenge certain positions. Therefore, the amount ultimately paid could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.

 

Recently Issued Accounting Pronouncements

 

Our management believes that recently issued accounting standards will not have a material effect on our Company’s consolidated financial position, results of operations, or cash flows.

 

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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.

 

We provide our charcoal products in the following areas:

 

·EDLC charcoal
·Air purification products
·Household hygiene products
·agricultural/bamboo products (bamboo vinegar)
·Charcoal fuel for barbecue use

 

We oversee a well-established national sales network that has a presence in 17 cities throughout China. We sell approximately 85% of our products in China, and the remaining 15% of products are sold internationally. We sell products in Japan, South Korea, the United States, 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 most commercial and wealthy provinces in China. Its province-wide GDP of approximately RMB3.5 trillion in 2012 places it as the fourth highest in China in absolute amount and sixth per capita.

 

Lishui is a prefecture-level city located in southwest Zhejiang province. Approximately 2.5 million residents live in the city, and city-wide GDP is approximately RMB50.6 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 have relocated all of our production, research and development (“R&D”) and management facilities a newly built production facility in the Shuige Industrial Zone, 20 kilometers from downtown Lishui. The facility covers a land area of 37,248 square meters (9.7 acres) and includes two dormitories, a large office and R&D building, two buildings housing Charcoal Doctor production and storage facilities, a five story building for charcoal briquette production, four buildings housing a complete EDLC carbon production line and one inventory warehouse for EDLC carbon raw materials. Facilities boast an array of sophisticated and automated production machinery and a water treatment plant. Gross floor area stands at 51,419 square meters (12.7 acres).

 

We rely on a combination of patent, copyright, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own nine patents in China covering our bamboo charcoal production technology. We have applied for one additional patent related to methods to process bamboo and bamboo charcoal.

 

During the year ended December 31, 2012, our four largest suppliers accounted for approximately 72% of our total purchases. During the year ended December 31, 2011, our two largest suppliers accounted for approximately 56% of our total purchases. 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.

 

On March 27, 2011, the National Development and Reform Commission (“NDRC”) has issued the Guidance Catalogue for Industrial Structure Adjustments (2011 edition), which was amended on February 16, 2013. This Guidance 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. According to an announcement issued by the General Administration of Customs on May 26, 2011, for domestic investment projects falling under the encouraged category of the Guidance Catalogue for Industrial Structure Adjustments, imported self-use equipment is exempt from customs duty in accordance with the applicable regulations. As our Company has not imported any self-use equipment in the past, this announcement has not yet had a direct effect on us but might in the future, depending on our importation plans then.

 

According to the Guidance Catalogue, development of bamboo byproducts (竹副产品开发) like our products falls in the encouraged category while activated carbon production using raw material of woods or chopped roots (以木材、伐根为主要原料的活性炭生产) (as opposed to our methods, which use neither) falls in the eliminated category. As a result, government initiatives favor our carbon production methods over methods using wood and wood products.

 

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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 use as carbon in super capacitors.

 

Corporate Information

 

Overview

 

THL 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, Tantech Charcoal, was acquired in September 2006 to manage the Forasen Group’s export business. In September 2008 a third subsidiary, Energy Tech, was established to research and develop bamboo charcoals application as a carbon component for EDLCs. Following the renaming of the Forasen Group to its current name, 95% of Bamboo Tech’s shares were acquired by USCNHK, a Hong Kong registered company, in December 2010.

 

Historical Timeline

 

Below is a brief timeline of key dates in our Company’s history since its formation.

 

·September 2001: Tantech Charcoal is established.
·October 2002: Bamboo Tech is established as “Lishui Zhonglin High Tech Co., Ltd.” with registered capital of RMB3.15 million.
·April 2003: Lishui Forasen Green Industry Group (“Forasen Group”) was established.
·May 2003: Forasen Group acquires 60% of Bamboo Tech.
·December 2005: (1) Bamboo Tech reorganizes its structure (a) from a limited company to a shareholder company and (b) to increase registered capital to RMB21 million, resulting in a decrease of Forasen Group’s interest to 41.24%; (2) Bamboo Tech is renamed “Zhejiang Tantech Bamboo Technology Co., Ltd”; (3) Zhengyu Wang becomes legal representative of Bamboo Tech.
·September 2006: Bamboo Tech acquires Tantech Charcoal by transferring shares from Forasen Group and natural shareholders to Bamboo Tech. 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 Bamboo Tech increases to 44.25%.
·January 2008: Bamboo Tech increases its registered capital to RMB27 million, decreasing Forasen Group’s interest to 34.41%.
·July 2008 through April 2009: Several shareholders of Bamboo Tech transfer their interests to Forasen Group, increasing its interest in Bamboo Tech to 51.45%.
·September 2008: Energy Tech is established and operates as subsidiary of Bamboo Tech.
·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) Bamboo Tech increases its registered capital to RMB80 million, increasing Forasen Group’s interest to 95%; (3) Forasen Group transfers all of its interest in Bamboo Tech to USCNHK.
·April 2013: THL is renamed “Tantech Holdings Ltd.”

 

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Corporate Structure

 

Below is a chart representing our current corporate structure:

 

 

 

In the above chart, we provide the Chinese names of our corporate entities. As to THL and USCNHK, both the English and Chinese names are legal corporate names. As to Bamboo Tech, Tantech Charcoal and Energy Tech, only our Chinese names are legal corporate names, and the English translations are provided as courtesy translations.

 

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.

 

THL

 

THL was incorporated on November 19, 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 __________, 2014 in contemplation of the initial public offering of its common shares, THL effected a 256-for-1 split of its common shares. Upon completion of this split, THL was authorized to issue 50,000,000 common shares, $0.001 per share, of which 12,800,000 are issued and outstanding prior to completion of the initial public offering of the company’s common shares. At formation, THL had one director, Dehong Zhang, a citizen of the Philippines. On June 21, 2013, Yefang Zhang, a citizen of the Philippines, was also appointed as a director of THL.

 

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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 HKD10,000, and the company has issued 10,000 shares, par value HKD1.00 per share, to its sole shareholder, THL. USCNHK has one director, Dehong Zhang, a citizen of the Philippines. On June 21, 2013, Yefang Zhang, a citizen of the Philippines, was also appointed as a director of USCNHK.

 

Bamboo Tech

 

Bamboo Tech 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, Bamboo Tech changed its name to “Zhejiang Tantech Bamboo Technology Co., Ltd” Bamboo Tech’s authorized share capital is RMB80 million, of which USCNHK owns 95% and five individual PRC residents own the remaining 5%. Bamboo Tech is organized and qualified as a Sino-foreign joint venture enterprise under PRC law. Bamboo Tech has five directors, Zhengyu Wang, Yefang Zhang, Dexian Zhang, Xiaolin Chen and Yaqing Ye, all of whom are PRC citizens other than Yefang Zhang, who is a citizen of the Philippines.

 

Tantech Charcoal

 

Tantech Charcoal was formed on September 5, 2002. Tantech Charcoal’s authorized share capital is RMB 3.5 million, of which Bamboo Tech owns 100%. Tantech Charcoal is organized as a limited liability company under PRC law. Tantech Charcoal has one director, Zhengyu Wang, who is a PRC citizen.

 

Energy Tech

 

Energy Tech was formed on September 24, 2008. Energy Tech’s authorized share capital is RMB 30 million, of which Bamboo Tech owns 100%. Energy Tech is organized as a limited liability company under PRC law. Energy Tech has one director, Zhengyu Wang, who is a PRC citizen.

 

Bamboo and Bamboo Charcoal

 

Bamboo

 

Bamboo is a flowering perennial evergreen plant in the grass family. Bamboo plants are some of the fastest growing plants in the world, with some varieties growing more than three feet per day. Indeed, it is possible not merely to see the bamboo growing but to hear it growing in the fastest-growing varieties.

 

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.

 

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.

 

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The speed with which bamboo grows, the versatility of the plant (being useful for such purposes as diverse as food, jewelry, lumber, charcoal and electricity), and its key role in protecting the environment make it an extremely important plant from an economic perspective worldwide, but especially in China.

 

For these reasons, China has promoted innovation in the bamboo industry, and nearly 200 bamboo-related patents have been granted in China. China’s bamboo industry accounted for more than RMB70 billion in revenues and more than 35 million jobs in 2009. 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. China maintains approximately 5.5 million hectares of bamboo plantations, increasing by approximately 100,000 hectares annually, allowing it to lead the world in number of varieties, amount of bamboo reserves and production output, according to the International Network for Bamboo and Rattan (“INBAR”). What began as a small market for bamboo charcoal has grown into an industry in which over 100,000 tons of bamboo charcoal are produced per year at values in the billions annually. For example, for the first half of 2013, China’s bamboo charcoal sales totaled over $4 billion with an estimated profit of approximately $2.7 billion. For the nine-month period ending September 30, 2013, China’s bamboo charcoal exports totaled $130 million, up from $119 million for the same period in 2012. China’s bamboo charcoal industry employs over 60,000 people in more than 1,000 businesses across the country.

 

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:

 

·average lifespan of 8-10 years after culm (stem) will collapse and decay so harvesting is necessary;
·will re-grow from same rootstalk (rhizome);
·requires minimal rainwater and is drought resistant;
·compared to an equivalent area of trees, bamboo takes in 5 times as much carbon dioxide; and
·generates 35% more oxygen than an equivalent area of trees.

 

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.

 

According to the United Nations’ Food and Agriculture Organization the bamboo industry affects the lives of about 1.5 billion people around the world and global bamboo trade volumes are estimated anywhere between $5-10 billion annually and with potential for trade volumes to reach $15-20 billion annually by 2017-2020 according to the international not-for-profit organization, SNV. However since most trade of bamboo is sparsely and often occurs in the informal economy, few official statistics are available.

 

China is a major player in the bamboo supply chain with about 5.2 million hectares of bamboo forests (not including mountain bamboo bushes), Fujian, Zhejiang, Hunan and Jiangxi provinces accounting for 60% of the country’s forest area. According to the State Forestry Administration the domestic bamboo trade volume reached RMB 104 billion in 2011. It is estimated bamboo industries affect 300 million people’s lives in China alone. 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.

 

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Zhejiang province is situated on the shore of the East China Sea, and has about thirty genera and four hundred varieties of bamboos. The many thousands of bamboo products made there are sold all around the world, with an annual output of RMB 25 billion Yuan (3.7 billion USD) in 2008, a quarter of China bamboo industry’s total income at the time. Zhejiang has 800,000 hectares of bamboo forests. 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 m2/g, bamboo charcoal generally ranges from 200-600 m2/g, and our company’s EDLC carbon has achieved 2,200 m2/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 300 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.

 

EDLC Carbon

 

Bamboo charcoal is beginning to be used for applications in hi-tech industries. Due to the range of possible uses, there are a variety of essential qualities of bamboo charcoal required among various hi-tech industries. Bamboo charcoal is used in related research and to develop items such as baseboard material for supercapacitor research, high-capacity battery manufacturing, fiber synthesis mixed with bamboo charcoal in textiles, special coatings manufacture, enzyme fixing in biochemical technology, porous carbon materials manufacturing, nano-carbon tube research in biomedical sciences.

 

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Supercapacitors refer to high capacitance electrochemical batteries or capacitors. These devices can store more energy (energy density) than a traditional capacitor (but less than a battery) and more power (power density) than a battery bringing significant benefits to both “peak-assist” and “power-assist” applications. Some of the advantages of supercapacitors include:

 

·They can be used in conjunction with batteries to increase voltage and energy.
·There is no chemical reaction, which increases total lifespan and decreases risk of overcharging.
·They have very low per-cycle costs.
·Unit costs have decreased significantly in recent years, with 3,000 Farad supercapacitor that cost $5,000 in 2000 decreasing to $50 by 2011.

 

While existing supercapacitors have energy densities that are approximately 10% of a conventional battery, their power density is generally 10 to 100 times greater. As a result, supercapacitors are used in applications that require significant amounts of power, both in quick bursts and also for sustained periods.

 

Compared to traditional batteries, EDLCs can be charged and discharged many hundreds of thousands of times without any degradation or damage. This is due to the absence of chemical reactions. Additionally, EDLCs have much shorter charge/discharge times and can operate in a much wider temperature range. These qualities are made possible by the absorption/desorption processes that govern EDLCs as opposed to chemical reactions. EDLCs are constructed from a number of components, namely electrodes, electrolytes, separators, collection fluid, lead and packaging materials. The electrode, electrolyte and membrane composition are critical in the performance and quality and will influence the basic properties of the final product.

 

Electrode charcoal is a porous and amorphous carbon material. This special charcoal has a very highly developed and complex pore structure and a large surface area making it an ideal electrode fuel cell material for EDLCs.

 

The main uses of supercapacitors include:

 

·Electric/Hybrid electric vehicle power supply (including cars, motorcycles and golf carts);
·Immediate high power supply; high power energy storage, electric pulse power supply;
·Renewable (solar/wind) energy storage buffer systems;
·Utility meters: Electric meter, water meter, gas meter auxiliary power supply;
·Uninterruptable power supply (“UPS”) systems, mainly for vital-use machines;
·Backup power supply systems;
·Direct current (“DC”) control power transformer and distribution stations and DC panels;
·Military maintenance systems; and
·Electric toys, electric tools, automatic flashlights and other types of power systems

 

Due to perceived favorable prospects in the industry, more than 50 domestic manufacturers are engaged in research and development of large and super capacity capacitors. However, only approximately 10 manufacturers are capable of mass production and have reach the utilization level. We believe the supercapacitors for vehicle use developed by Shanghai Aowei Technology Co., Ltd. are leading the industry in terms of technology. Through comparison with products made by foreign manufacturers, the electrical performance and physical performance of Aowei are equivalent to similar products made by foreign companies.

 

At present, domestic manufacturers mainly produce electric double-layer capacitors. The main companies include Jinzhou Kam Company, Beijing Supreme Power Systems Co., Ltd, Shanghai Aowei Technology Co., Ltd. and etc. Jinzhou Kam Company is the largest supercapacitor manufacturer in China. Domestically made supercapacitors are believed to occupy 60-70% of China’s supercapacitor market share.

 

In addition, there are also several other domestic supercapacitor suppliers, such as Haerbin Jurong Newpower Co., Ltd., and Chaoyang Liyuan New Energy Co., Ltd. Meanwhile, provinces and cities like Jiangxi, Jiangsu, Henan, Shanxi and Tianjin have also launched relevant policies to support enterprises in their own territory to march into the newly-emerging energy storage component market of supercapacitor. For instance, Jiangxi Xinda Electronics Company, one of the top 100 electronic components companies in China, is seeking to cooperate with partners to produce supercapacitors. In 2011, the industry realized a total scale of $3.122 billion, an annual increase of 50% over 2010.

 

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Japan is the main producer of carbon for EDLCs and has led the industry for 30 years. The main manufacturing companies include Calgon Mitsubishi Chemical Corporation, Futamura Chemical Co., Ltd, Kuraray Chemical, Japan Enviro Chemicals. Ltd, Takeda Pharmaceutical Company Limited, Osaka Gas Co., Ltd., Kansai Coke and Chemicals Co., Ltd., Kureha Chemical and Nippon Oil. Such companies take biomass such as coconut shells, or chemical raw materials such as phenolic resin or petroleum as raw material, and use water vapor or alkali to activate the carbon.

 

South Korea is also a leader in terms of supercapacitor production and research. In July 2008, GS Caltex from South Korea and Nippon Oil founded the joint venture Power Carbon Technology, which is engaged in production of activated supercapacitor carbon. The joint venture’s factory is predicted to reach 900 tons annual capacity by 2015, making it the largest manufacturer of activated supercapacitor carbon. Suntel Co., Ltd. was founded in 2001; it is a subsidiary under Heung-A Suntel. In 2008, it started to produce active carbon for supercapacitor; in 2010, the annual productivity reached 30 tons, making it the second largest manufacturer of activated supercapacitor carbon in South Korea.

 

The main domestic manufacturers of active carbon for supercapacitor include our company, Chaoyang Senyuan Activated Carbon Co., Ltd, Henan Huaxian Active Carbon Factory, Nanjing Zhengsen Environment Protection Technology Co., Ltd., Nanjing Linda Active Carbon Co., Ltd., Daying Juneng Technology and Development Co., Ltd., Fujian Xinsen Carbon Industry Co., Ltd. and Shanghai Heda Carbon Material Co., Ltd. At a current annual capacity of 500 tons, our company has more than twice the annual production capacity of the closest of these domestic competitors.

 

Bamboo Charcoal Production Process

 

The process of making bamboo charcoal consists of the following steps:

 

1.Raw Material Preparation

 

Our suppliers select bamboo culms that are between 5 and 8 years old, which we consider the optimal range for our needs. Raw bamboo is prepared for pyrolysis, heating organic material in the absence of oxygen to cause them to decompose. The absence of oxygen is what causes bamboo to convert into charcoal rather than to catch on fire. This preparation involves shaping the bamboo culm into the appropriate shape, depending upon the ultimate use of the charcoal product. Because the density, cavity structure and tissue composition of bamboo culms differ from top to bottom, and based on the age, soil and climate conditions in which the bamboo is grown, it is common to divide bamboo accordingly. The cut bamboo is typically air or smoke dried until moisture content is between 15 to 20%.

 

2.Carbonization

 

The carbonization process consists of first loading the mechanical furnace with the prepared bamboo. Bamboo is then dried, to the extent it is not already dry, by heating at 120 to 150°C until the desired moisture content is reached. Pre-carbonization (150-280°C) then follows, paying attention to keep the temperature below the autoignition point of bamboo. The carbonization phase (280-450°C) is brief and exceeds the flash point of bamboo, releasing heat in an exothermic reaction. As the bamboo is carbonizing, bamboo vinegar and tar pyrolyze and flow out of the bamboo. The specific amount of bamboo vinegar that can be recovered depends on carefully coordinating the temperature and rate of increase.

 

Next, high-temperature refining occurs between 600 and 1,100°C. During this stage, volatile matter is discharged due to the high temperature, and the fixed carbon content in the charcoal is increased as a result. The characteristics of the bamboo charcoal depend on choices made at this stage. For instance, electrical resistance decreases as carbonization temperature increases, while density increases. Techniques matter even in non-EDLC bamboo charcoal: bamboo carbonized at 500°C excels at filtering ammonia, while bamboo carbonized at 1,000°C is better at filtering benzene and toluene.

 

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Finally, at the completion of refining, the bamboo charcoal is allowed to naturally cool. Once the temperature in the furnace is below 60°C, the charcoal may be unloaded.

 

3.Finishing Process

 

After the carbonization process is completed, the bamboo charcoal is sorted according to grade and type, finished and processed, checked and packed for delivery.

 

As to briquette charcoal, the process for finishing involves disintegrating the charcoal into an appropriate size, combining the charcoal with a binding agent and pressing the charcoal into the desired briquette shape.

 

As to charcoal to be used for ornamental purposes, the charcoal may be left whole or ground to an appropriate size for the desired purpose.

 

Charcoal to be used for EDLC carbon purposes is first activated and then crushed to an appropriate size for the desired applications. The specific size and characteristics of the charcoal, including porosity, will depend upon the use intended by the EDLC manufacturer. To produce activated bamboo carbon, carbonized bamboo is subjected to a further process involving granulation and high pressure steam injection, which further exposes pores. The surface area to mass ratio of the bamboo charcoal can more than double after activation, and we have achieved a surface area to mass ratio of 2,200 m2/g for our EDLC carbon.

 

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Our Processing Workflow

 

We develop and manufacture our bamboo charcoal products using the following processing workflow:

 

 

Our Products

 

 

 

We produce and sell 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.

 

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Samples of Charcoal Doctor solid products from our exhibition hall   Samples of Charcoal Doctor liquid products from our exhibition hall.

  

Charcoal Briquettes

 

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.

  

 
BBQ Charcoal Briquettes   Hookah Coals
     
 
Refined BBQ Charcoal   Disposable BBQ Grill

 

Our charcoal briquettes are processed from bamboo 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 will stabilize as we continue to focus on higher margin EDLC and Charcoal Doctor branded products. We expect a decline in comparison to these other segments, but no decline in absolute terms. We currently have annual production capacity of 10,000 tons from three fully automated mold and furnace production lines. The major markets for our briquette products are Europe, the Middle East and the US.

 

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Charcoal Doctor Products

 

Our primary consumer brand is Charcoal Doctor (“炭博士”, “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 35%, 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, formaldehyde, ammonia and carbon tetrachloride. The primary ingredient of these products, activated charcoal, is well-known as 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

 

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Samples of the range of solid Charcoal Doctor products are pictured below.

 

   
Flat Health Pillow   Memory Foam Back Rest   Mesh Charcoal Insole
         
   
Clothes Hanger   Rod Charcoal Head Pillow   Air Purifier/Humidifier
         
   
Wardrobe Strips   Liquid Toilet Cleaner   Bottle Bag
         
   
Toilet Cleaner Disks   Car Air Purifiers   Refrigerator Deodorants

 

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:

 

·Fruit, vegetable, and other plant fertilizers

 

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·Soil conditioners and sweeteners
·Flower nutrients
·Toilet cleaning liquid detergent and solid disks
·Hand washing sanitation

 

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 nano technology.

 

Samples of the range of liquid Charcoal Doctor products are pictured below.

 

   
Horticultural Additive   Melon Fertilizer   Red Fruit Fertilizer
         
   
First Stage Conditioner   Plant Sweetener   Flower of God Fluid
         
   
Strawberry Fertilizer   Bamboo Vinegar Paste   Bamboo Vinegar Soap

 

EDLC Carbon

 

We have recently begun to produce bamboo carbon for use in EDLCs. Our product serves as the industrial carbon compound for the EDLC and is responsible for conducting electricity in the battery. Activated charcoal is extremely porous and has a high specific surface area, so it provides a useful electrode material. Because the surface area of such a material is many times greater than a traditional material like aluminum, many more charge carriers (ions or radicals from the electrolyte) can be stored in a given volume, allowing for a higher energy density.

 

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Because this is an area of growing focus for our Company, we have invested heavily in R&D efforts in recent years to improve our production process and increase our capacity and efficiency. We only began developing EDLC carbon in 2008 with initial samples being sent to customers in May 2010; it was not until November 2011 that our products were ready for public sale. Thus far our EDLC products have had limited exposure in a market dominated by imports. Our EDLC penetration strategy is based on service and price. We seek to maintain our prices are at a discount of up to 20% from import prices for products of at least equivalent quality. We currently develop three activated carbon compounds:

 

Product FCA FCO FEC
FCA-10 FCA-15 FCO-20 FCO-25 FEC-15 FEC-20
Description Activated Carbon for
Aqueous solution type
EDLC
Activated Carbon for
Organic solution type
EDLC

Super Activated Carbon



Application


Ultra-low resistance for
high current/ power
applications mainly used in
box type EDLC and
dynamoelectric power
supplies
High capacitance &
energy density for button
type, cylindrical, laminar
and box type EDLC and
lithium-ion EDLC
Molecular sieve, food
decoloring,
pharmaceuticals,
precious metal
recycling, cigarette
filters, gas masks
Standards(National Standards
are prefixed by GB/T, all others
are Enterprise Standards)

Q/LCF 0017-2006


Q/LCF 0018-2007

GB/T12496.3,
GB/T12496.8,
GB/T19587
Configuration Formulation Powder Powder Powder
Average Size (um) 5-15 5-15 5-10 5-10 10-100 10-100
Physical Properties Specific Area (BET m2/g) 900- 1300- 1800- >2200 1500- ≥200
Total Pore Volume (cm3/g) 0.8-1.0 1.1-1.3 1.0-1.4 ≥1.4 - -
Micro Pore Size (nm) 0.5-2 1-2 1.5-3.5 1.5-4 - -
Bulk Density ≥0.45 ≥0.4 ≥0.35 ≥0.25 - -
Ash Content (%) ≤0.5 ≤0.5 ≤0.3 ≤0.2 ≤0.5 ≤0.5
Iodine Absorption (mg/g) - - - - ≥1500 ≥1700
Electrochemical Characteristics Specific Capacitance (F/g) ≥80 ≥90 ≥30 ≥36 -

 

-

 

Capacitance per Volume (F/cm3) ≥60 ≥55 ≥15 ≥14 - -

  

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Distribution Channels and Methods of Competition

 

International Markets and Customers

 

All three categories of our products are sold to international markets, including bamboo vinegar, bamboo charcoal purification products, and EDLC carbon. The majority of export items are for non-energy use. We plan to increase our exports globally, particularly for our EDLC carbon. Target markets for EDLC carbon include the United States, Japan, South Korea and Europe, as these markets are more mature with regards to EDLC items. Less than 2% of our direct sales are currently international. Including business conducted with domestic distributors, however, we estimate that the percentage of goods sold for export is approximately 15%, with the majority destined for Japan, South Korea and Taiwan.

 

The following is a list of selected international customers, their respective nations and products sold:

 

Country   Company   Product
Japan   IBR LTD.   Air Purification Charcoal Pieces
  Hyonen Kogyo Co., Ltd.  

Bamboo Charcoal Powder;

Bamboo Charcoal Pieces;

Bamboo Charcoal Granules

  Takeda Corporation Co., Ltd.   Ceramic Balls, Eye patches
  Hokushin Shoji Co., Ltd.   Fertilizer; Wood Vinegar
  Fuji Chikusan Co., Ltd.   EDLC Carbon
South Korea   SeoKwang Labware Sales Co.   EDLC Carbon
  BF Korea Co., Ltd.  

BBQ Charcoal;

Disposable BBQ Charcoal

Taiwan

 

  Longyuan Co., Ltd.   Deodorant Granules
  Mang Ga Industrial Corp.   Bamboo Charcoal
  Fay-Li Enterprises Co., Ltd.  

Charcoal Keyboard Mats;

Bamboo Charcoal Pieces;

EDLC Carbon

Hong Kong   Active Trading Company Co., Ltd.   Disposable BBQ Charcoal

Germany

 

  Alaa El Din Waterpipes & More  

BBQ Charcoal;

Shisha Tobacco Charcoal

Israel   Intersun, Ltd.   BBQ Charcoal

 

Domestic Markets and Customers

 

We have sales departments and conduct marketing and distribution operations in Chongqing, Fujian, Gansu, Guangdong, Hubei, Hunan, Henan, Jiangxi, Liaoning, Shaanxi, Shandong, Shanghai, Sichuan, Tianjin and Zhejiang provinces in China. From these departments, our sales network has a presence in 17 cities throughout China. We conduct marketing and distribution operations in Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou, Jinan, Jingmen, Lanzhou, Lishui, Nanchang, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou. We do not own or lease locations in Shenyang, Tianjin, Yantai, Taiyuan, Zhengzhou, Jingmen, Changsha, Fuzhou or Lanzhou; instead, our representatives in such cities conduct business without a dedicated office and spend significant amounts of time making calls on customers and potential customers. In addition, we have logistics centers in Chengdu, Guangzhou, Taiyuan, Yantai and Lishui and relationships with third-party warehousing companies in Jinan, Shanghai and Tianjin. Below is a map of our current network.

 

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Our Charcoal Doctor brand has been successful in the domestic market, and is sold through many specialty stores and large chain stores and supermarkets.

 

The following is a list of selected stores and shops that stock our products in China:

 

       Estimated Number of Stores 
Store name  Total Stores   Carrying Product 
Hongqi Chain   1,200    800 
Wal-Mart   390    350 
Carrefour   229    150 
Tesco Supermarket   136    136 
RT-Mart (HuaDong)   109    109 
Fujian Yonghui Supermarket   98    98 
Hangzhou Lianhua   90    70 
Meet All   68    68 
Jingmen Dongfang Store   56    56 
Yantai Zhenhua   50    50 
Zhengzhou Dennis   42    42 
Shandong Jiajiayue Group   40    40 
RT-Mart (Jinan)   33    33 
Qingdao Lotte Mart   9    9 
Xin Parkson   4    4 
Chengdu Rainbow   2    1 
Total        2,016 

 

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We are in the process of expand our product line to include toilet cleaning and hand washing 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. These products will help lead us into developing and marketing other consumer products and will help increase our market share of carbon products in China.

 

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.

 

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 regards to household carbonized bamboo products, the Charcoal Doctor brand is one of the largest and most famous. 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

 

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2006

 

·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

 

2007

 

·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

 

2008

 

·Official China High Tech Industry Enterprise Certificate (this award entitles the company to preferential enterprise income tax rates of 15% rather than 25%)

 

2009

 

·National Torch Plan Project Certificate for Liquid Bamboo Products
·National Science and Technology Progress Award (Second Class) for Bamboo Carbonization

 

2011

 

·Zhejiang Science and Technology Award (Second Class) for its Activated Carbon Production Technology and Equipment Research
·Garden Unit Recognition for beautification and ecological efforts

 

2012

 

·Lishui City Recognition for Patent Grants

 

2013

 

·Zhejiang Province High Technology Enterprise Recognition

 

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.

 

Led by our Chief Technical Officer, Dr. Zhaihua Chen, our R&D team is well educated and has far-reaching research capabilities. Dr. Chen is a graduate of Chiba University in Japan and is one of the China’s one-thousand talent plan experts, with particular expertise in carbon for supercapacitors.

 

The R&D team is well balanced and has 13 dedicated researchers and analysts focusing Charcoal Doctor product development and applications as well as EDLC formulations. Quality control is an important aspect of the teams work and ensuring quality at every stage of the process has been a key driver in maintaining and developing brand value for the Company.

 

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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.

 

Project Description   Time Period   Project Level
Technological innovations to achieve productive annual capacity of 3,000 metric tons of EDLC carbon   12/08 – present   Central Government funded high-tech industrial project
Bamboo carbonization technology R&D for tobacco product manufacturing   12/07 – 6/10   Zhejiang Provincial Government funded scientific agricultural project
Development of dry distillation of bamboo wood   6/07-5/09   Central government funded high-tech agricultural project
Technological innovations to be able to produce bamboo vinegar in a continuous process   4/06-4/08   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   8/04-12/06   Central Government funded high-tech agricultural project
Bamboo R&D for lithium-ion battery anodes   8/04-2/06   Zhejiang Provincial Government funded scientific project

 

During the years ended December 31, 2012 and 2011, we spent $174,347 and $188,706, respectively, on R&D. R&D expenditures in each year were for the following purposes

 

Purpose  Amount 
Year Ended December 31, 2012     
Salaries  $106,606 
Materials   27,846 
Other   39,895 
      
Year Ended December 31, 2011     
Salaries  $45,410 
Materials   86,417 
Other   56,879 

 

In the coming year, we will continue our R&D efforts in our Charcoal Doctor and EDLC lines. In 2013, we expect to spend approximately $1.0 million on R&D projects to continue and further understanding of bamboo charcoal applications and improve efficiency in the value chain. We aim to research and develop five new products annually. Moreover, we plan to establish and develop a dedicated EDLC carbon R&D facility, which will allow for greater efficiency and effectiveness in research efforts than the current shared-use facility.

 

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The increase in planned R&D expenses is related to the following initiatives:

 

Purpose  Anticipated Amount 
New R&D projects and expansion of R&D team, including new hires and testing expenses  $500,000 
Purchase of new testing equipment   200,000 
Set up of laboratories at Chinese universities   200,000 
Other expenses   100,000 
Total  $1,000,000 

 

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 ten issued patents, and one patent is pending:

 

Patent Description   Holder   Patent Type   Approval   Expiration   Patent Number
Methods and equipment for combustion and distillation   Bamboo Tech  

Invention

 

  Mar. 22, 2006   Aug. 25, 2024   ZL 200410075047.0
Methods and equipment for water and bamboo vinegar refining   Bamboo Tech   Invention   Mar. 7, 2007   Apr. 15, 2023   ZL 03108978.X
Biomass acaricide with gasified tar for organic pesticides   Bamboo Tech   Invention   Nov. 18, 2009   Jan. 24, 2026   ZL 200610049234.0
A door with air treatment function   Bamboo Tech   Invention   June 15, 2011   Sep. 4, 2028   2008101204443
Method of using biomass as raw materials in manufacturing organic carbon electrodes   Tantech Charcoal   Invention   May 30, 2012   Oct. 20, 2028   200810121556.0
Titanium dioxide manufacturing method   Tantech Charcoal   Invention   July 18, 2012   Dec. 11, 2028   200810162826.2
Aqueous solution EDLC electrode materials performance measurement methodology   Energy Tech   Invention   Dec. 5, 2012   Aug. 20, 2029   200910101640.0
Supercapacitor electric car batteries   Energy Tech   Utility Model   Dec. 31, 2008   Nov. 21, 2017   ZL 200720191201.X
Surface with fiber material in the perforated carbon plate   Bamboo Tech   Utility Model   July 14, 2010   May 21, 2019   200920120429.9
Aqueous solution EDLC electrode materials performance measurement unit apparatus   Energy Tech   Utility model   May 19, 2010   Aug. 20, 2019   200920191752.5
Method for washing electrode active carbon   Energy Tech   Invention   Sept. 25, 2013   Sept. 24, 2033   CN101723359B

 

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Our Employees

 

As of March 3, 2014, we employed total of 183 full-time and 82 part-time employees in the following functions:

 

    Number of Employees  
Department         December 31,     December 31,     December 31,  
    March 3, 2014     2013     2012     2011  
Senior Management     6       6       6       5  
Human Resource & Administration     22       23       23       17  
Finance     12       15       15       14  
Research & Development     17       10       10       9  
Production & Procurement     80       99       99       139  
Sales & Marketing     46       29       29       29  
      Total     183       182       182       213  

 

Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.

 

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 2012 and 2011, we contributed approximately $52,000 and $116,000 to the employee benefit plans and social insurance. For the nine months ended September 30, 2013, we contributed approximately $114,000 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.

 

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Description of Property

 

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 between 2051 and 2058. Following is a list of our properties:

 

    Land Use       Ground Floor
Property   Expiration   Space   Area

No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province, People’s Republic of China

(headquarters)

  September 23, 2058   51,419 m2   37,248 m2
             
No. 508 Wen San Road, Room 1106, Hangzhou City, Zhejiang Province, People’s Republic of China   June 7, 2051   357 m2   118 m2
             
No. 888 Tianning Street, Lishui City, Zhejiang Province, People’s Republic of China   December 18, 2052   15,208 m2   13,755 m2
             
Total       66,984 m2   51,120 m2

 

Currently, we have a sales and distribution network with presence in 17 cities (Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Hangzhou, Jinan, Jingmen, Lanzhou, Lishui, Nanchang, Shanghai, Shenyang, Taiyuan, Tianjin, Yantai, and Zhengzhou) and logistics presence in 8 cities (Chengdu, Guangzhou, Jinan, Shanghai, Taiyuan, Tianjin, Yantai and Lishui).

 

We do not own or lease locations in Shenyang, Tianjin, Yantai, Taiyuan, Zhengzhou, Jingmen, Changsha, Fuzhou or Lanzhou; instead, our representatives in such cities conduct business without a dedicated office and spend significant amounts of time making calls on customers and potential customers. Such efforts require them to travel frequently between storage facilities (both ours and third party facilities) and distributors’ offices; accordingly, we have determined at present that our efforts in these cities do not yet require a standalone office.

 

We use logistics services in Tianjin, Jinan and Shanghai to warehouse our products in those markets, but we do not own warehouses in such cities. Instead, we pay third parties to store our products based on the extent to which we use their facilities and services in any period.

 

The following is a list of our sales and distribution networks and logistic center locations.

 

Location   Lease Expiration   Area  
Sales Locations          
           

Jinan

2-2-1702. A district, Shangpinqinghe, 18# Luoan Rd. Tianqiaoqu, Jinan

  December 2014   99 m2  
           

Shanghai

Suite 202, No 9, Lane 36, Fangcao Rd. Shanghai

  January 2015   110 m2  
           

Hangzhou

11F, T3 West, Ruihe Technology Park, No 475 Changhe Rd. Bingjiangqu, Hangzhou

  December 2017   300 m2  
           

Nanchang

13-1808, Jingyumingdu, Hongdu Avenue Middle, Donghuqu, Nanchang

  June 2014   42 m2  
           

Lishui

No 888, Tianning St., Lianduqu, Lishui

  Company-owned property described above      
           

Guangzhou

Rm 223, F. 94# Liwang Rd. Guangzhou

  January 2015   25 m2  
           

Chengdu

16-1001, The Second, Glamor City of Wanke, Chengdu

  April 2014   147 m2  
           

Chongqing

1-27 Qingfeng Massion, Mawangpingzhengjie, Bananqu, Chongqing

  November 2014   70 m2  
           
           
Logistics Centers          
           

Taiyuan

Warehouse, Nanpan Village Xiaodian Economy Technology Develoment Zone, Taiyuan

  July 2014   100 m2  
           

Yantai

Zhujiang Industry and Trading Co., Ltd, 3-112, Times New City, Zhifuqu Wangwu, Yantai

  May 2014   70 m2  
           

Guangzhou

Yihui Logistic Warehouse, Chenjialin Rd. Xintang Town, Zengcheng, Guangzhou

  December 2014   150 m2  
           

Chengdu

Zhongchu Jinshang Court, A-21, Goose Industry Zoon, Baohexiang, Chenghuaqu, Chengdu

  December 2014   100 m2  
           

Lishui

No 888, Tianning St., Lianduqu, Lishui

  Company-owned property described above      

 

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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. 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. Following the completion of this Offering, we will refer the matter to our corporate governance committee to determine an appropriate rental fee for this office space. We will base the rental fee on comparable rental spaces in the Lishui area. We have rented approximately 4,922 square meters of our Tianning Street property, leaving 10,769 square meters vacant and available for rental. As of the date hereof, we have contracted rents of approximately $140,603 (RMB 885,888) per year. Although we estimate that current contracted rents will be sufficient to cover the costs to maintain the Tianning property (approximately $19,179 (RMB 121,000) per year), we have no guarantee at this point that we will be able rent the remainder of the property.

 

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 will be funded either through proceeds from this Offering if it is successful or through our operating cash flows. The estimated costs for such efforts, along with the description of the purposes for such expenditures, are described in “Use of Proceeds.”

 

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Images of our facilities are presented below: 

 

     

Carbon capacitance department workshops

 

Cen Shan Road office building

 

Recent Capital Expenditures and Divestitures

 

The following table sets forth our principal capital expenditures and divestitures (including interests in other companies) for the nine months ended September 30, 2013 and the years ended December 31, 2012 and 2011:

 

   Nine Months     
   ended   Year ended 
   September 30,   December 31, 
   2013   2012   2011 
Investments in building  $1,721,594   $803,275   $2,564,485 
Investments in machinery and production equipment   61,197    1,204,864    812,488 
Investment in electronic equipment   68,527    8,018    44,242 
Investment in office equipment   15,290    1,109    8,196 
Investment in automobiles   253,041    18,913    64,489 
Total capital expenditures  $2,119,649   $2,036,179   $3,493,900 

 

All of these capital expenditures have been made at our facilities in Lishui city in Zhejiang province for the construction of new workshops and office buildings and purchases of equipment in connection with the expansion of our production facilities. These expenditures were funded by cash flow from operations. We made the following expenditures in the period following September 30, 2013:

 

    Through March 3, 2014  
Investments in building   $  
Investments in machinery and production equipment     81,750  
Investment in electronic equipment     -  
Investment in office equipment     -  
Investment in automobiles     -  
Total capital expenditures   $ 81,750  

 

Moving forward, in 2014 and 2015, we expect to use capital expenditures primarily for the construction of two new production lines for our household products (specifically our hand sanitizer and liquid detergent products) and to increase the capacity and improve the technology used in the production of EDLC carbon. Specifically, we will continue to

 

·purchase equipment to expand our household products;
·grow our research and development staff; and
·upgrade equipment to support the production of EDLC carbon.

 

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We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We plan to use the proceeds of this Offering to fund these capital expenditures, as described in more detail in “Use of Proceeds.” If we are unable to complete the Offering, we plan to fund these capital expenditures through our operating cash flow.

 

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Management 

 

Executive Officers and Directors

 

The following table provides information regarding our executive officers and directors as of March 3, 2014:

 

Name   Age   Position(s)
         
Zhengyu Wang   46   Chairman of Board of Directors and Chief Executive Officer
         
Zaihua Chen   50   Chief Technical Officer
         
Jianming Wu   46   Chief Operating Officer
         
Ningfang Liang   41   Chief Financial Officer
         
Qingsong Dong   40   Treasurer
         
Yefang Zhang   48   Director

 

Zhengyu Wang is a seasoned veteran in business and high-tech agricultural products. He founded Bamboo Tech 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. He earned his Bachelor’s Degree in Biology from Zhejiang University in Hangzhou, China in June 1990. He earned an Executive MBA from Shanghai’s Fudan University, one of China’s top business schools, in July 2006. 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.

 

Zaihua Chen is an academic in the field of general science, physics and chemistry, and has spent almost two decades in Japan. He joined Bamboo Tech in August 2008 where he has served as Technology Director and CTO. From 2006 to 2008, he served as Technology Director at Japan KANAC Co., Ltd, also in Takamatsu, Japan. From April 2001 to March 2006, he served as leader of R&D in Research Institute for Solvothermal Technology at the Japan Research Institute in Takamatsu, Japan. He graduated in 1985 from Fuzhou University with a degree in Chemistry, in Fuzhou, Fujian Province. In March 1994, he earned his Master’s Degree from Chiba University (Japan), in Education. He earned his Ph.D. at Chiba University in Natural Science Research in March 2000 from the Graduate School of Science and Technology, and extended his experience with Postdoctoral research at Yokohama National University in 2001 in Yokohama, Japan, focusing on Eco-Technology.

 

Jianming Wu joined Bamboo Tech in Feb. 2011 and has since served as our Chief Operating Officer. From June 2005 to February 2011, he worked in the Zhejiang WeiKang Pharmaceutical Co., Ltd. as General Manager. Prior to that, he was a Deputy Manager during June, 2003 to May, 2005. He worked for Zhejiang Ruixin Pharmaceutical Co., Ltd. as a Manager of Technical Department and Quality Control Department during March, 2000 and May, 2003. From September 1990 to February 2000, he served for Zhenan Pharmaceutical Co., Ltd. as a technician and manager. He graduated from Hangzhou University in June 1998 in Hangzhou, Zhejiang Province with a Bachelor’s Degree in Biology. He joined an Executive MBA program in China People’s University during 2006 and 2008, and once joined a Pharmaceutical DBA program in Beijing University during 2009 and 2011.

 

Ningfang Liang became our Chief Financial Officer on March 7, 2013. Prior to joining our Company, Mr. Liang worked as the Chief Financial Officer at China GengSheng Minerals, Inc. from July 2011 to January 2013. Mr. Liang has over 17 years of finance and accounting experience, including over eight years at U.S. public companies, where he managed SEC reporting, internal controls, U.S. GAAP compliance, internal auditing, financial analysis and management reporting activities. He was the Finance Manager at White Mountains Re Ltd, the reinsurance subsidiary of White Mountains Insurance Group, Ltd. from December 2008 to June 2011. Additionally, he has held senior finance and accounting positions at American International Group, Inc. from December 2006 to December 2008, Celgene Corporation from January 2005 to December 2006, and China Construction Bank from July 1993 to May 2002. Mr. Liang is a licensed CPA in the states of New Jersey and Illinois and is a member of the American Institute of Certified Public Accountants. He holds a Bachelor’s degree in finance from Shanghai University of Finance and Economics, and an MBA from the University of Illinois Urbana-Champaign.

 

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Qingsong Dong joined Bamboo Tech in March 2010 and has since served as Company Treasurer. From September 2003 to February 2010, he worked in the Kangchao Group Guangzhou Motorcycle Manufacturing Co., Ltd. as an Accountant and Finance Manager. From February 2003 to September, he worked for Zhejiang Kangli Metal Products Co., Ltd., a subsidiary of Kangchao Group, as an accountant in Hangzhou. From 1998 to 2002, he worked as Assistant Accountant at Dexing Credit Union, in Dexing City, Jiangxi Province. He graduated from the Jiangxi Academy of Finance in June 1998 in Nanchang, Jiangxi Province with a Bachelor’s Degree in Accounting.

 

Yefang Zhang has been in leadership roles for over a dozen years. She then helped to found Zhejiang Forasen Group Co., LTD in October 2002 and has served as a Board Member since then. From 1997 until 2002, she worked as General Manager at Zhejiang Forasen Food and Stuff Co., LTD. From 1994 to 1997, she served as Vice GM 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 director and Chief Executive Officer, 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. She earned an Executive MBA from Zhejiang University of Industrial Management in Hangzhou in July 2005. We have appointed Ms. Zhang to be a director due to her strong understanding of our industry and business.

 

Election of Officers

 

Our executive officers are elected by, and serve at the discretion of, our board of directors. Our CEO and chairman of the Board of Directors, Zhengyu Wang is married to our other Director, Yefang Zhang.

 

Board of Directors and Board Committees

 

Our board of directors currently consists of two (2) directors. We expect that all current directors will continue to serve after this offering. In connection with our initial public offering, we plan to increase the number of directors to five (5) directors, a majority of whom will be independent, as such term is defined by The NASDAQ Capital Market.

 

The directors will be divided into three classes, as nearly equal in number as the then total number of directors permits. Class I directors shall face re-election at our annual general meeting of shareholders in 2014 and every three years thereafter. Class II directors shall face re-election at our annual general meeting of shareholders in 2015 and every three years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders in 2016 and every three years thereafter.

 

If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third parties to gain control of our company by making it difficult to replace members of the Board of Directors.

 

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.

 

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Mr. Zhengyu Wang currently holds both the positions of Chief Executive Officer and Chair of the Board. These two positions have not been consolidated into one position; Mr. Wang simply holds both positions at this time. We do not have a lead independent director because we do not have any independent directors at this time. After we appoint independent directors, 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. We believe this leadership structure is appropriate because we are a relatively small company in the process of listing on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Wang as both our principal executive officer and Chair of the Board. Our Board of Directors plays a key role in our risk oversight. 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.

 

Board Committees

 

We currently do not have standing audit, nominating or compensation committees. Our board of directors handles the functions that would otherwise be handled by each of the committees. In connection with our initial public offering, we will establish three standing committees under the board: the audit committee, the compensation committee and the nominating committee. The audit committee will be 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 will review and make recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and will also administer 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 will be 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 will consider diversity of opinion and experience when nominating directors.

 

Upon the establishment of an audit committee, the board will determine which of the directors qualifies as an audit committee financial expert.

 

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. See “Description of Share Capital—Differences in Corporate Law” for additional information on our directors’ fiduciary duties under British Virgin Islands law. 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.

 

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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. Once we appoint a majority independent Board of Directors, we will 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. (We have not yet implemented this policy because our two current directors are married to each other.) 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.

 

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 their respective class of directors is re-elected and until their successors have been duly elected and qualified. Our CEO, 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. When we appoint them, we anticipate that non-employee directors will be entitled to receive $30,000 per year for serving as directors and may receive incentive security grants from our company. In addition, non-employee directors will be entitled to receive compensation for 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.

 

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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.

 

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.

 

Code of Business Conduct and Ethics

 

We current do not have a code of business conduct and ethics applicable to our directors, officers and employees, however, we intend to adopt one in the near future in connection with our application to list on the Nasdaq Capital Market.

 

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Executive Compensation

 

We currently do not have a compensation committee approving our salary and benefit policies. 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 will be measured by a series of performance criteria by the board of directors, or the compensation committee on a yearly basis. Such criteria will be 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.

 

Our board of directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The board of directors will make 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 year ended December 31, 2012 and 2011.

 

               All Other     
   Fiscal   Salary   Bonus   Compensation   Total 
Name and Principal Position  Year   ($)   ($)(1)   ($)(2)   ($) 
Zhengyu Wang(1)   2013    38,760        1,308    40,068 
Chief Executive Officer   2012    38,040        1,189    39,229 
                          
Jianming Wu(1)   2013    29,070        1,308    30,378 
Chief Operating Officer   2012    28,530        1,189    29,719 
                          
Ningfang Liang(3)   2013    45,000            45,000 
Chief Financial Officer   2012                - 
                          
Zaihua Chen(1)   2013    48,450        1,308    49,758 
Chief Technical Officer   2012    68,948        1,189    70,136 
                          
Qingsong Dong(1)   2013    19,380        872    20,252 
Treasurer   2012    19,020        856    19,876 

 

(1)Salaries for all individuals in the above table other than Mr. Chen were identical in 2012 and 2013 but were paid in RMB. As a result of changes in exchange rate, the U.S. Dollar amounts appear different. Social security payments varied each year.
(2)Consists of social security payments required under Chinese law.
(3)Mr. Liang became an officer in 2013 and received no compensation in 2012. Mr. Liang’s 2013 wages were paid in US Dollars. Mr. Liang did not receive social security payments as he resides more than half the year in the United States.

 

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.

 

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.

 

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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.

 

Zhengyu Wang

 

We entered into an employment agreement with our chief executive officer, Mr. Zhengyu Wang, effective January 1, 2011. Under the terms of Mr. Wang’s employment, Mr. Wang is entitled to the following:

 

Base compensation of approximately RMB 300,000 per year.
Reimbursement of reasonable expenses incurred by Mr. Wang.

  

Mr. Wang’s employment has no expiration date but may be terminated at any time by either party upon presentation of 30 days’ prior notice or immediately for cause.

 

Ningfang Liang

 

We entered into an employment agreement with our chief financial officer, Mr. Ningfang Liang, effective March 7, 2013. Under the terms of that employment agreement, Mr. Liang is entitled to the following:

  

Base compensation of $60,000, payable in 12 equal monthly installments of $5,000 each. Upon completion of this Offering, Mr. Liang’s salary will increase to $90,000 per year, and he will be granted an as-yet-undetermined number of options to purchase shares of our company.
Reimbursement of reasonable expenses incurred by Mr. Liang.

  

Mr. Liang’s employment agreement is scheduled to expire on March 6, 2014. Mr. Liang’s agreement may be terminated at any time by either party upon presentation of 30 days’ prior notice or immediately for cause.

  

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Zaihua Chen

 

We entered into an employment agreement with our chief technical officer, Mr. Zaihua Chen, effective June 30, 2013. Under the terms of that employment agreement, Mr. Chen is entitled to the following:

 

Base compensation of approximately RMB 500,000.
Reimbursement of reasonable expenses incurred by Mr. Chen.

 

Mr. Chen’s employment agreement is scheduled to expire on June 30, 2018. Mr. Chen’s agreement may be terminated at any time by either party upon presentation of 30 days’ prior notice or immediately for cause.

  

Jianming Wu

 

We entered into an employment agreement with our chief operating officer, Mr. Jianming Wu, effective February 25, 2011. Under the terms of that employment agreement, Mr. Wu is entitled to the following:

 

Base compensation of RMB 15,000 per month, with increases to be implemented according to applicable law.
Reimbursement of reasonable expenses incurred by Mr. Wu.

 

Mr. Wu’s employment agreement is scheduled to expire on February 24, 2014. Mr. Wu’s agreement may be terminated at any time by either party upon presentation of 30 days’ prior notice or immediately for cause.

  

Qingsong Dong

 

We entered into an employment agreement with our treasurer, Mr. Qingsong Dong, effective February 28, 2013. Under the terms of that employment agreement, Mr. Dong is entitled to the following:

 

Base compensation of approximately RMB 80,000 per year with increases to be implemented according to company policies.
Reimbursement of reasonable expenses incurred by Mr. Dong.

 

Mr. Dong’s employment agreement is scheduled to expire on February 28, 2016. Mr. Dong’s agreement may be terminated at any time by either party upon presentation of 30 days’ prior notice or immediately for cause.

  

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Director Compensation—Fiscal 2012

 

The following section presents information regarding the compensation paid during fiscal 2012 to members of our Board of Directors who are not also our employees (referred to herein as “Non-Employee Directors”).

 

Non-Employee Directors

 

Historically, we have not paid our directors, as they have consisted of our Chief Executive Officer and his spouse. Upon completion of this offering, we plan to pay our independent directors an annual cash retainer of $30,000. 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.

 

The following table presents information regarding the compensation of our non-employee directors for fiscal 2012. Compensation for our Chief Executive Officer, Mr. Zhengyu Wang, is reflected above in the Summary Compensation Table rather than below.

 

Name  Fees
earned or
paid in
cash
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-equity Incentive
Plan Compensation
($)
   Changes in Pension
Value and
Nonqualified
Deferred
Compensation
($)
   All other
Compensation
($)
   Total ($) 
Yefang Zhang  $0   $0   $0   $0   $0   $0   $0 

 

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Related Party Transactions

 

In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we describe transactions since January 1, 2011, 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 2011, we have had transactions with the following related parties:

 

·Zhengyu Wang
·Yefang Zhang
·Wangfeng Yan
·Dexian Zhang
·Dehong Zhang
·Yamin Jin
·Shihua Ye
·Shiyang Zhang
·LiShui JiuAnJu Commercial Trade Co., LTD
·Zhejiang Forasen Group Co., LTD
·Zhejiang Forasen Import & Export Co., LTD
·Hangzhou Forasen Industry & Trade Co., LTD
·Zhejiang Green Valley Charcoal’s Products Co., LTD
·Zhejiang Forasen Food and Stuff Co., LTD
·Zhejiang Forasen Wooden and Bamboo Products Co., LTD
·Daxinganling (Forasen) Energy Technology Co., Ltd.
·Hangzhou Forasen E-Commerce Co., LTD
·Forasen Group Research Co., LTD
·China Wooden and Bamboo Products Marketing Co.
·Hangzhou Nanlin Forasen Co.

 

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 loans described here during the periods covered that is material to us or the related party. For more detail, please refer to note 13 of the accompanying financial statements. As described in more detail below, as of the date of this filing, there is no related party balances outstanding.

 

These related parties fall within two categories: those who are shareholders, officers and directors of THL and/or Bamboo Tech, and those who are related to Zhejiang 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 Bamboo Tech

 

THL is owned entirely by Tanbsok Group Ltd., the sole shareholder of which is Ms. Yefang Zhang, the spouse of our Chief Executive Officer and the Chairman of our Board of Directors, Mr. Zhengyu Wang.

 

Yefang Zhang has the following relatives who have had transactions with our company in the last two years. Dexian Zhang and Dehong Zhang are Yefang Zhang’s brothers. Shihua Ye is Yefang Zhang’s mother, and Shiyang Zhang is her father.

 

THL owns 100% of USCNHK, which in turn owns 95% of Bamboo Tech. The remaining 5% of Bamboo Tech is owned by five individual PRC resident shareholders, each of whom owns 1% of Bamboo Tech. Those shareholders are Wangfeng Yan, Xiaozhong Lin, Dexian Zhang (mentioned above as the brother of Yefang Zhang), Yaqing Ye and Xiaolin Chen.

 

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All of these shareholders of Bamboo Tech invested cash for their interests in Bamboo Tech and, with the exception of Mr. Lin, are employed by our company and/or our subsidiaries. Mr. Lin was previously employed by Bamboo Tech. All of the shares of Bamboo Tech held by these five individual shareholders are encumbered by a right of first refusal that gives the remaining shareholders the right to acquire a pro rata interest in such shares in the event such shareholder wishes to sell.

 

Wangfeng Yan and Dexian Zhang each own 50% of the equity of Lishui JiuAnJu Commercial Trade Co., Ltd. (“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.

 

The largest outstanding amount LJC owed our company in 2012 and 2011 was approximately RMB 43.3 million (approximately $6.8 million ) and approximately RMB 49.3 million (approximately $7.9 million), respectively, representing trade accounts receivable for sales made to LJC by our company and further loans from our company to LJC for its operational needs. During nine months ended September 30, 2013, the largest outstanding amount LJC owed our company was approximately RMB 44.0 million (approximately $7.2 million) As of September 30, 2013, all such amounts have been repaid. In the year ended December 31, 2011, we purchased $4,636,966 from LJC, representing purchases of packaging materials and product components made prior to the acquisition of LJC by Mr. Zhang and Mr. Yan. Since Mr. Zhang and Mr. Yan acquired LJC on September 11, 2011, we have sold no further products to LJC.

 

Forasen Companies

 

Mr. Zhengyu Wang and Ms. Yefang Zhang each own 50% of the equity of Zhejiang Forasen Group Co., LTD (“Forasen Group”). Moreover, 95% of Bamboo Tech was previously owned by Forasen Group, rather than USCNHK. Forasen Group owns part of the equity of Daxinganling (Forasen) Energy Technology Co., Ltd. (“DXA”) and Zhejiang Forasen Food and Stuff Co., LTD (“ZFF”). Forasen Group previously owned part or all of the equity of Zhejiang Forasen Import & Export Co., LTD (“ZFI”), Hangzhou Forasen Industry & Trade Co., LTD (“HFI”), Hangzhou Forasen E-Commerce Co., LTD (“HFE”), Forasen Group Research Co., LTD (“FGR”), China Wooden and Bamboo Products Marketing Co. (“CWB”), Hangzhou Nanlin Forasen Co. (“HNF”) and Zhejiang Forasen Wooden and Bamboo Products Co., LTD (“ZFW”) prior to their respective sales to separate third parties. Tantech Bamboo acquired Zhejiang Green Valley Charcoal’s Products Co., LTD (“ZGV”) in 2010 and sold to a third party in 2011.

 

The largest outstanding amount Forasen Group owed our company in 2012 and 2011 was approximately RMB 36.6 million (approximately $5.9 million) and nil respectively, representing loans made to support the rubber and mushroom trading activities of Forasen Group. During nine months ended September 30, 2013, the largest outstanding amount Forasen Group owed our company was approximately RMB 83.8 million (approximately $13.6 million). As of September 30, 2013, Forasen Group owed our company approximately RMB 83.8 million (approximately $13.6 million). In 2012 and 2011, our company had sales to Forasen Group of $677,238 and $3,680,762, respectively. Prior to 2012, we exported our BBQ products through Forasen Group, as we lacked the appropriate export approvals. In 2012, we established Tantech Charcoal for purposes of exporting BBQ products to foreign markets. As a result, sales to Forasen Group decreased significantly in 2012.

 

The largest outstanding amount ZFF owed our company in 2012 and 2011 was approximately RMB 18.5 million (approximately $2.9 million) and approximately RMB 18.5 million (approximately $3.0 million), respectively, representing loans made to support the rubber and mushroom trading activities of Forasen Group. We understand that ZFF made such funds available to Forasen Group. During nine months ended September 30, 2013, the largest outstanding amount ZFF owed our company was approximately RMB 19.0 million (approximately $3.1 million). As of September 30, 2013, all significant amounts have been repaid.

 

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Yamin Jin was previously a shareholder of Forasen Group. In 2012, our company owed Yamin Jin an insignificant amount, representing personal loans made from Yamin Jin to our company. As of the date of this filing, all such amounts have been repaid.

 

Future Related Party Transactions

 

After completion of this Offering, the Corporate Governance Committee of our Board of Directors (which we will establish and which will consist solely of independent directors) must approve all related party transactions. All material related party transactions will be made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties. Related party transactions that we have previously entered into were not approved by independent directors, as we had no independent directors at that time. In particular, following completion of this Offering, we will request that the Corporate Governance Committee of our Board of Directors review the proposed terms for rental of our office by Forasen Group to ensure that the terms of such rental are no less favorable than could be obtained from unaffiliated third parties.

 

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Principal Shareholders 

 

The following table sets forth information with respect to beneficial ownership of our common shares as of March 3, 2014 by:

 

Each person who is known by us to beneficially own 5% or more of our outstanding common shares;
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 before the offering are based on 12,800,000 common shares outstanding as of March 3, 2014. 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 March 3, 2014 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 Zhejiang Tantech Bamboo Technology Co., Ltd, No. 10 Cen Shan Road, Shuige Industrial Zone, Lishui City, Zhejiang Province, People’s Republic of China. As of the date of the Prospectus, we have one (1) shareholder of record.

 

Named Executive Officers and Directors  Amount of Beneficial
Ownership(1)
   Pre-Offering
Percentage
Ownership(2)
   Post-
Offering
Percentage
Ownership
 
Directors and Named Executive
Officers:
               
Zhengyu Wang(3)   12,800,000    100%   100.0%
Zaihua Chen       0    0 
Jianming Wu       0    0 
Qingsong Dong       0    0 
Yefang Zhang(3)   12,800,000    100%   100.0%
All directors and executive officers as a group (five (5) persons)   12,800,000    100%   100.0%
                
5% or greater Beneficial Owners:               
Tanbsok Group Ltd(3)   12,800,000    100%   100.0%

  

 

 

(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 excludes the common shares underlying options held by such person. In addition, the percentage ownership assumes the return to the shareholder of all shares subject to the