424B1 1 v405603_424b1.htm FORM 424B1

Filed pursuant to Rule 424(b)(1)
Registration No. 333-198788

March 23, 2015

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Tantech Holdings Ltd

3,200,000 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, and the selling shareholder named in this prospectus, Tanbsok Group Limited, is offering 1,600,000 of our common shares.

Prior to this offering, there has been no public market for our common shares. The initial public offering price of our common shares is $4.00 per share. Our common shares will trade on The NASDAQ Capital Market under the symbol “TANH.”

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
Public offering price   $ 4.00     $ 12,800,000  
Placement discount   $ 0.20     $ 640,000  
Proceeds to us, before expenses   $ 3.80     $ 6,080,000  
Proceeds to the selling shareholder, before expenses   $ 3.80     $ 6,080,000  

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 $700,000, exclusive of the above commissions and the non-accountable corporate finance fee of 1.25%. 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 placement compensation. These payments will further reduce proceeds available to us before expenses. See “Placement.”

This offering is being conducted on a best efforts, all-or-none basis and is not being firmly underwritten. The underwriter must sell all 3,200,000 common shares offered by us and the selling shareholder if any are sold. The underwriter is required to use only its best efforts to sell the securities offered. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our underwriter after which the entire offering is sold or (ii) the close of business on March 30, 2015. Until we sell 3,200,000 common shares, all investor funds will be held in an escrow account at Signature Bank, New York. If we do not sell 3,200,000 common shares by close of business on March 30, 2015, all funds will be promptly returned to investors (within one business day) without interest or deduction. If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. If we complete this offering, then on the closing date, we will issue common shares to investors in the offering.

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.

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The date of this prospectus is March 23, 2015.


 
 

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Table of Contents

 
Prospectus Summary     1  
Risk Factors     12  
Special Note Regarding Forward-Looking Statements     34  
Use of Proceeds     35  
Dividend Policy     37  
Exchange Rate Information     38  
Capitalization     40  
Dilution     41  
Post-Offering Ownership     42  
Management’s Discussion and Analysis of Financial Condition and Results of Operations     43  
Business     73  
Regulations     99  
Our Employees     101  
Description of Property     102  
Management     108  
Executive Compensation     113  
Related Party Transactions     117  
Principal and Selling Shareholders     121  
Description of Share Capital     123  
Quantitative and Qualitative Disclosures about Market Risk     131  
Shares Eligible for Future Sale     132  
Material Tax Consequences Applicable to U.S. Holders of Our Common Shares     134  
Enforceability of Civil Liabilities     138  
Placement     139  
Expenses Relating to this Offering     145  
Legal Matters     145  
Experts     145  
Interests of Named Experts and Counsel     145  
Disclosure of Commission Position on Indemnification     145  
Where You Can Find Additional Information     146  
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 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 March 3, 2015 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 April 17, 2015 (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.

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:

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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 82% of our products in China, and the remaining 18% of products are sold internationally, including both direct and indirect distributor sales. We sell products in Japan, South Korea, Taiwan, the Middle East and Europe. In addition to our bamboo charcoal products, we also derive revenues from our trading activities, which primarily relate to industrial purchases and sales of charcoal.

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Industry and Market Background

PRC Economic Growth

Demand for our products has generally been resilient to smaller fluctuations in China’s economic growth; however, it is affected by larger economic trends in China. Demand for our household charcoal products tends to follow PRC domestic consumption of household products. Demand for our energy charcoal products tends to follow demand for supercapacitors in China. PRC macroeconomic growth has been strong and positive in recent years. According to the National Bureau of Statistics of China, China’s gross domestic product (“GDP”) grew at a rate of 7.7% in 2013 and 2012, respectively. 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 rates have consistently exceeded both the United States’ and the world’s GDP growth rates over the past twenty years and are projected to continue on that trajectory for at least the next five years.

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. China’s bamboo charcoal industry employs over 60,000 people in more than 1,000 businesses across the country.

Our Products

 
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We produce and sell three categories of bamboo charcoal products (BBQ products, 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.

BBQ Products

We sell pressed and formed charcoal briquettes for use in grills, incense burners, and other applications for which the primary purpose of the charcoal is burning for heat or fuel. These products are sold in China and internationally under the Algold brand.

We sell two categories of BBQ charcoal. First, we purchase and resell charcoal briquettes produced by third parties to our specifications (“OEM BBQ charcoal”). As the barrier to entry and technical requirements for heating and cooking BBQ charcoal are low, we have found that selling OEM BBQ charcoal allows us to maximize our competitiveness where the need for the charcoal is less technically demanding. For example, our OEM BBQ charcoal is used for cooking and heating purposes, while our self-produced BBQ charcoal (described below) is more commonly used for shisha products. We source our OEM BBQ charcoal primarily based on price. Our main supplier of OEM BBQ charcoal is located in Heilongjiang province in far northeast China, where bamboo sawdust is not available. As a result, our OEM BBQ charcoal is prepared from wood sawdust, the byproduct of lumber milling. We sell our OEM BBQ charcoal under our Algold brand name and as an OEM product under the brand names of some of our purchasers. As such OEM BBQ charcoal is not bamboo-based, we do not market it as such.

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Second, we produce our own line of BBQ charcoal in our facility in Lishui (“self-produced BBQ charcoal”). Our self-produced BBQ charcoal is all bamboo charcoal-based. We sell our self-produced BBQ charcoal primarily in the export market. Our self-produced BBQ charcoal is also generally sold under our Algold brand name or the brand names of some of our purchasers. Where the source of the BBQ charcoal is bamboo, we may advertise that such charcoal is bamboo-based if we believe that the local market will value that distinction or a distributor requests that we do so.

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.

Charcoal Doctor Products

Our primary consumer brand is Charcoal Doctor (“ [GRAPHIC MISSING]  ,” pronounced “Tan Boshi” in Chinese), a China Well-known Brand, as recognized by the China Brand Strategy Management Association. 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 solid charcoal products are primarily used for purification and deodorization. These consumer products are made from dry distilled carbonized bamboo, and have the ability to absorb harmful substances and foul odors from the air, including benzene, toluene, ammonia and carbon tetrachloride. The primary ingredient of these products, activated charcoal, is an adsorbent. Our solid Charcoal Doctor products generally fit within three categories: (1) charcoal bags, primarily used as air purifiers and humidifiers, (2) charcoal deodorants and (3) toilet cleaning disks. Our primary Charcoal Doctor solid products include the following:

Air purifiers and humidifiers
Automotive accessories for air purification
Underfloor humidity control
Pillows and mattresses
Wardrobe deodorizers
Mouse pads and wrist mats
Refrigerator deodorant
Charcoal toilet cleaner disks
Liquid charcoal cleaner
Shoe insoles
Decorative charcoal gifts

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.

Our Operating Segments

Our business consists of three principal operating segments: (1) consumer products, (2) energy segment and (3) trading segment.

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Consumer Product Segment

Our consumer product segment includes purification and deodorization products, cleaning products and wood-based OEM BBQ charcoal 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. Our OEM BBQ charcoal is produced by third parties to our specifications.

We currently generate most of our consumer product revenue from our consumer product segment, 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.

Energy Segment

Our energy segment consists of EDLC carbon and self-produced BBQ charcoal for sale on the international market. Our self-produced BBQ charcoal is all bamboo charcoal-based. We sell our self-produced BBQ charcoal under our Algold brand name or the brand names of some of our purchasers. Where the source of the BBQ charcoal is bamboo, we may advertise that such charcoal is bamboo-based if we believe that the local market will value that distinction or a distributor requests that we do so. (We do not market our wood-based OEM BBQ charcoal as bamboo-based or under any brand name that would suggest that it is bamboo-based.)

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.

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.

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.

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. These strategies have been developed in more detail in several of the sub-plans. The sub-plans for China’s Ministry of Energy and Resources and Ministry of Transportation, in particular, describe governmental support for development and promotion of super capacitors and electric automobiles, respectively. While these sub-plans do not set out point-by-point explanations of the full extent of governmental support, they are seen as initial policy statements that are followed up by implementation plans

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by central and local governments and agencies. For example, the Chinese Ministries of Finance, Science & Technology, Industry and Information Technology and National Development and Reform Commission published a Notice that lays out a government rebate of RMB 150,000 (approximately $24,590) per vehicle that uses batteries (including EDLCs) that meet government standards. This initiative is already in effect, focusing on Northern China (Beijing, Tianjin and Hebei Province), and the Yangtze River and Pearl River Deltas, which have historically been polluted and in need of environmental protection. These trial programs have additional features that will promote purchases of new energy vehicles, including 1. minimum quotas of the number of new energy vehicles between 2013 and 2015 and 2. requirements that government purchasers of such vehicles favor new energy vehicles, accounting for at least 30% of newly purchased or replaced public buses, governmental cars, logistic vehicles and municipal cleaning vehicles.

We view such Five-year Plan policies, as they have been implemented, as likely to have a positive effect on our industry, so long as we are able to sell our EDLC carbon to battery manufacturers for popular vehicles. Moreover, governmental funds have been devoted to research into super capacitors and related industries, and our subsidiary Energy Tech has received, in total, more than $1 Million in National Grants for development of key materials used in super capacitors.

To increase our exposure within the industry, 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.
Established supplier relationships.  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 products from the entire bamboo grass. We purchase carbonized stems for our Charcoal Doctor products. We purchase carbonized knots for EDLC carbon, and we purchase bamboo vinegar extracted during the carbonization process.
Strong brand name.  Our Charcoal Doctor brand has strong name recognition in China, having been recognized as a China Well-known Brand. In addition to having a branded store in Lishui, we sell our products through a variety of 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

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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.
º Under PRC laws and regulations, we are permitted to use the proceeds from this offering to fund our PRC subsidiaries only through parent/subsidiary loans or capital contributions, subject to applicable government registration and approval requirements. We currently anticipate using approximately 85% of the gross proceeds from this offering to increase the registered capital of Bamboo Tech (after which time Bamboo Tech may apply such funds to the purposes described in “Use of Proceeds”). The increase in registered capital will require prior approval from (i) MOFCOM to increase Bamboo Tech’s registered capital, (ii) SAIC to alter Bamboo Tech’s business certificate to reflect the increase in registered capital and (iii) SAFE to allow Bamboo Tech’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. This approval process typically takes 30 to 90 days in total, and sometimes longer, from the time MOFCOM or its local branches receive all the required application documents to begin the process. The remaining approximately 15% of such gross proceeds will be used to pay expenses related to this offering and for other general corporate purposes. We plan to remit money to China using the capital contribution method. The approval from MOFCOM is the key approval in the capital contribution process, and we believe all other approvals are ministerial if MOFCOM approves such increase in registered capital. We have not yet initiated this process but intend to start the process immediately upon completion of the offering. We do not foresee any problem receiving necessary government approvals for a capital contribution; however, if our application is rejected, we would remit money to China through a parent/subsidiary loan instead. If we were to provide funding to Bamboo Tech through parent/subsidiary loans, the total amount of such parent/subsidiary 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 parent/subsidiary 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. See “Risk Factors — Risks Related to Doing Business in the PRC — PRC regulation of parent/subsidiary 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 parent/subsidiary 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”.
º 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.
º Since 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.
º 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.
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.

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Logistical Management Techniques.  We have not yet implemented digital logistic management solutions or 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 common 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:

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Following completion of our initial public offering and sale by our selling shareholder, ownership of THL will be as follows:

Post-Offering

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Our first operating companies, Bamboo Tech and Tantech Charcoal were established in 2002. 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 323000, 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.

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, 2013 and 2012 were RMB1 for $0.1636 and $0.1605, respectively. The average exchange rates for the years ended December 31, 2013 and 2012 were RMB1 for $0.1613 and $0.1585, 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.

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The Offering

Shares Offered by Us:    
    1,600,000 common shares
Shares Offered by Selling Shareholder:    
    1,600,000 common shares
Shares Outstanding Prior to Completion of Offering:    
    20,000,000 common shares
Shares to be Outstanding after Offering:    
    21,600,000 common shares.
Offering Price per Share:    
    $4.00
Gross Proceeds to Us before Expenses:    
    $6,080,000
Gross Proceeds to Selling Shareholder before Expenses:    
    $6,080,000
NASDAQ Capital Market
Symbol:
   
    “TANH” (CUSIP No. G8675X 107)
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. We will not receive any of the proceeds from the sale of common shares by the selling shareholder.
Dividend Policy:    
    We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

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Summary Financial Information

In the table below, we provide you with historical selected financial data for the fiscal years ended December 31, 2013 and 2012. 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
six months
ended June 30,
2014
  For the year ended
December 31,
     2013   2012
Revenues   $ 27,235     $ 61,220     $ 50,519  
Gross profit     8,675       17,156       14,003  
Operating expenses     (1,720 )      (5,323 )      (2,216 ) 
Income from operations     6,955       11,833       11,787  
Provision for Income taxes     (1,327 )      (1,820 )      (1,893 ) 
Net income attributable to the noncontrolling interest     (283 )      (505 )      (521 ) 
Net income attributable to common stockholders   $ 5,379     $ 9,581     $ 9,893  

Balance sheet data:

     
  As of
June 30,
2014
  As of December 31,
     2013   2012
Working capital   $ 35,461     $ 28,614     $ 32,272  
Current assets     51,872       48,780       48,973  
Total assets     69,694       68,110       63,763  
Current liabilities     16,410       20,166       16,701  
Total liabilities     16,410       20,166       20,713  
Total equity   $ 53,284     $ 47,945     $ 43,050  

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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 Charcoal Doctor and EDLC carbon products.

Our Charcoal Doctor products are generally considered “household use and decorative items,” meaning that these products are used for beautification and decoration purposes in addition to purification purposes. For example, consumers tend to purchase charcoal products for their value in absorbing odors and tend to purchase some of our bamboo charcoal products for these purposes and also for the perceived attractiveness of our products. We seek to design bamboo charcoal products that our customers want to display throughout their homes.

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 charcoal-based provider of household products, we are subject to supply risks that some of our competitors do not face.

Some of our largest competitors in the provision of household products such as our bamboo vinegar products rely on chemical solutions, rather than charcoal and derivatives of charcoal, to create their products. As a result, we do not believe they are subject to business risk in the event bamboo or wood charcoal supplies are compromised. On the other hand, if we were unable to procure bamboo or wood charcoal products or unable to procure them on attractive terms, our product line could become substantially more expensive or our growth rate could be limited, resulting in us becoming less competitive than others in our industry.

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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 of wood-based OEM BBQ charcoal is located, restricted the production of charcoal during June, July and August 2012. At that time, our stock of OEM BBQ charcoal was insufficient to avoid demand pressures. As a result, our revenues declined during this period. If local governments similarly reduce production of charcoal in the future, we could be negatively impacted by the lack of supply, either as to our ability to obtain suitable product or by our ability to obtain such product at a reasonable price.

We lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a more diversified company.

Our primary business activities focus on bamboo-related products. Because our focus is limited in this way, any risk affecting the bamboo industry or consumers’ desire for bamboo- and bamboo charcoal-related products could disproportionately affect our business. 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 charcoal costs may negatively affect our operating results.

While bamboo is a renewable resource (and thus bamboo products like bamboo charcoal may be considered renewable), the price of raw materials may be inelastic when we wish to purchase supplies. While we have attempted to mitigate this risk by taking advantage of decreases in other expenses (due to better transportation infrastructure reducing the cost of bringing materials to our company and from our company to our customers) and improving efficiency, we cannot guarantee that we will be able to control our material expenses. In addition, as we are competing based upon low price, we will risk losing customers by increasing our selling prices. To the extent our expenses increase beyond the price we can charge our customers, our operating results could be harmed.

We 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

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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.

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 December 31, 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 $1.7 million in cash and approximately $43.0 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.

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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.

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 six months ended June 30, 2014, sales to our seven largest customers amounted in the aggregate to approximately 52% of our total revenue. For the six months ended June 30, 2013, sales to our six largest customers amounted in the aggregate to approximately 52% of our total revenue. For the year ended December 31, 2013, sales to our eight largest customers amounted in the aggregate to approximately 53% of our total revenue. For the year ended December 31, 2012, sales to our four largest customers amounted in the aggregate to approximately 72% 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 six and twelve months ended June 30, 2014 and 2013 and December 31, 2013 and 2012, respectively, we had one, two, one and four customers, respectively, that accounted for 10% or more of our revenues:

       
  Percentage of Revenues in
Purchaser Name   Six months ended
June 30,
2014
  Six months ended
June 30,
2013
  Year ended
December 31,
2013
  Year ended
December 31,
2012
Hangzhou Sigma Trading Co., Ltd.         13.5 %      20.2 %      26.3 % 
Hangzhou Bai De Sheng Ou Ltd.     19.0 %      14.8 %          24.6 % 
Hangzhou Zaochuan Tech. Co., Ltd.                 10.6 % 
Shanghai Hengguan New Materials Co.                 10.5 % 

* Less than 10%

If we cannot maintain long-term relationships with these major customers, the loss of our sales to them could have an adverse effect on our business, financial condition and results of operations.

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We rely on third-party distributors for a substantial portion of our sales, which could affect our ability to efficiently and profitably distribute and market our products, maintain our existing markets and expand our business into other geographic markets.

Sales of our products through distributors constituted approximately 52% and 55% of our total sales in the years ended 2013 and 2012, 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 six months ended June 30, 2014, our two largest suppliers accounted for approximately 71% of our total purchases. During the six months ended June 30, 2013, our three largest suppliers accounted for approximately 51% of our total purchases. During the year ended December 31, 2013, our three largest suppliers accounted for approximately 56% of our total purchases. During the year ended December 31, 2012, our four largest suppliers accounted for approximately 72% of our total purchases. During each of the six months ended June 30, 2014 and 2013 and years ended December 31, 2013 and 2012, respectively, we had two, three, three and four suppliers that accounted for 10% or more of our purchases:

       
  Percentage of Purchases in
Supplier Name   Six months Ended
June 30,
2014
  Six months Ended
June 30,
2013
  Year Ended
December 31,
2013
  Year Ended
December 31,
2012
Tahe Xingzhongda Carbon Co.     22.4 %      14.8 %      22.8 %      27.5 % 
Zhejiang Longquan Zhixin Trading Co.     48.3 %      26.2 %      22.6 %      15.1 % 
Harbin Ding Xin Trading Co., Ltd.                 15.0 % 
Zhejiang Hongwen Industrial Co., Ltd.                 14.1 % 
Hangzhou Shencai Trading Co., Ltd.         10.3 %      10.0 %     

* Less than 10%

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

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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.

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 (particularly those who work with our EDLC products) to serve our customers. Many of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and retain our personnel. Moreover, our pool of available labor in Lishui is limited, as Lishui is a relatively small city in China. Accordingly, it may be difficult to recruit personnel to move to Lishui to work and to keep talented individuals from moving to other employers who recruit them. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be materially impaired.

Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects.

Our growth strategy includes building our brand, increasing market penetration of our existing products, developing new products, increasing our targeting of the home respiratory market in China, and increasing our

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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 logistical management techniques, which may hamper our efficiency and growth.

We have not yet implemented digital logistic management solutions and have not applied any advanced management techniques, such as enterprise resource planning or any structured logistical system and procedures, which may result in a loss of efficiency and require investment at a later stage. We have not yet committed to implement such systems and cannot guarantee that we will do so in the near future. To the extent we do not implement such techniques in a timely or efficient manner, we may be at a competitive disadvantage to those of our competitors who do.

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

We rely on a combination of patent, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own 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.

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

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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.

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.

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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 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, or the SAT, issued the Circular Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the SAT Notice 82, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or enterprise group. Pursuant to the SAT Notice 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took effect on September 1, 2011, to provide more guidance on the implementation of SAT Notice 82 and clarify the reporting and filing obligations of such “non-domestically incorporated resident enterprise.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination matters.

Because THL and USCNHK are controlled (although indirectly) by a foreign individual, rather than by a PRC enterprise or a PRC enterprise group, we do not believe that either THL or USCNHK is a PRC resident enterprise.

However, although both SAT Notice 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Notice 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals. If the PRC tax authorities determine that THL or USCNHK is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences

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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.

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

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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 parent/subsidiary 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 parent/subsidiary 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 additional capital contributions to our PRC subsidiaries, or we may make parent/subsidiary loans to our PRC subsidiaries.

We currently anticipate using approximately 85% of the gross proceeds from this offering to increase the registered capital of Bamboo Tech (after which time Bamboo Tech may apply such funds to the purposes described in “Use of Proceeds”). The increase in registered capital will require prior approval from (i) MOFCOM to increase Bamboo Tech’s registered capital, (ii) SAIC to alter Bamboo Tech’s business certificate to reflect the increase in registered capital and (iii) SAFE to allow Bamboo Tech’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. This approval process typically takes 30 to 90 days, and sometimes longer, from the time MOFCOM or its local branches receive all the required application documents to begin the process. The remaining approximately 15% of such gross proceeds will be used to pay expenses related to this offering and for other general corporate purposes. We plan to remit money to China using the capital contribution method. The approval from MOFCOM is the key approval in the capital contribution process, and we believe all other approvals are ministerial if MOFCOM approves such increase in registered capital. We have not yet initiated this process but intend to start the process immediately upon completion of the offering. We do not foresee any problem receiving necessary government approvals for a capital contribution; however, if our application is rejected, we would remit money to China through a parent/subsidiary loan instead. If we are unable to obtain these government approvals on a timely basis, we will not be able to use the proceeds of this offering and capitalize our PRC operations unless and until we are able to remit such funds to China, which could adversely affect our liquidity and our ability to fund and expand our business.

If we are unable to timely remit money to China using the capital contribution method, we would seek to remit money to China through a parent/subsidiary loan instead. Any parent/subsidiary loans to our PRC subsidiaries are subject to PRC regulations. For example, parent/subsidiary 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

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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.

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 June 1, 2007. The Bankruptcy Law provides that an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

Our PRC subsidiaries hold certain assets that are important to our business operations. If any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

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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 December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.

PRC regulation of direct investments and parent/subsidiary 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 parent/subsidiary 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.

If we make loans to our Company’s PRC subsidiaries, those parent/subsidiary loans are registered and approved by the local SAFE branch, generally receive approval within 20 working days and cannot exceed the difference between the total investment amount approved by SAFE and the registered capital of each of our PRC subsidiaries. As loans, they would bear interest and need to be repaid in the future in accordance with their terms. As our company is a British Virgin Islands company, repayment would also need government approval. In our case, we would be limited to making a parent/subsidiary loan of approximately $6,710,080 (RMB 41,600,000), which is the difference between Bamboo Tech’s total investment amount as approved by the foreign investment authorities (currently $19,614,080 (RMB121,600,000)), and Bamboo Tech’s registered capital (currently $12,904,000 (RMB80,000,000)).

If we make capital contributions instead, the total amount of investment in each of our Company’s PRC subsidiaries must be approved by several agencies or their local counterparts. A capital contribution requires (i) MOFCOM approval to increase the registered capital of the entity receiving funding, (ii) SAIC approval to alter the business certificate to reflect such increased registered capital and (iii) SAFE approval to allow Bamboo Tech’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. The process of completing a capital contribution generally requires 30 to 90 working days from the initial filing with MOFCOM, rather than 20 working days for a parent/subsidiary loan. On the other hand, there is no limit to the amount we can fund through a capital contribution, and capital contributions do not require repayment or, as a result, payment of interest. For these reasons, although the process of receiving approval is more arduous, we prefer to (and plan to) fund Bamboo Tech’s operations through a capital contribution rather than a parent/subsidiary loan.

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.

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Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Our trading business relies heavily on exchange rate fluctuations. We seek to match suppliers and potential purchasers, which may be located in different geographic areas, and to lock in the exchange rates in order to ensure an appropriate profit margin on such sales. To the extent we are unable to obtain favorable exchange rates, we may find lower profits or losses than we expect.

We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive income (loss).” For years ended December 31, 2013 and 2012, we had adjustments of $928,686 and $816,491, 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.

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

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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.

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.

We have guaranteed the bank loan of a related party; if this related party fails to pay the bank loan, our property may be subject to foreclosure.

We have guaranteed the bank loan of a related party, Forasen Group, in the amount of RMB19.35 million (approximately $3.1 million) on June 25, 2012 and RMB25 million (approximately $4.1 million) on April 8, 2014. Although we guaranteed certain loans of Forasen Group, we do not intend to guarantee liabilities of related parties in the future once the current loans have matured.

In connection with these loan guarantees, we pledged our building valued at approximately $8.9 million as collateral for Forasen Group's loans. These loans will expire on June 25, 2015 and April 8, 2017, respectively.

At the time we offered these guarantees, we believed Forasen Group would be able to repay (and would in fact repay) such loans based on the following factors:

1. Forasen Group, like our Company, is controlled by Ms. Yefang Zhang and Mr. Zhengyu Wang. For this reason, we are aware that Forasen Group has historically had a strong credit history with the banks with which it does business.

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2. As of September 30, 2014, we understand that Forasen Group had approximately RMB15.7 million in cash, RMB383.8 million in current assets and RMB463 million in total assets, compared with approximately RMB306.3 million in current liabilities, RMB36.5 million in loans and RMB34.8 million in notes payable, resulting in a current ratio of 1.25 at such date. Moreover, for the nine months ended September 30, 2014, Forasen Group recorded net income of RMB7.2 million on revenue of RMB437.9 million and gross profit of RMB14 million.

Notwithstanding our perception of Forasen Group’s ability to repay such loans, if it for any reason fails to fully repay these bank loans under its contractual obligation, our buildings may be subject to foreclosure by the bank.

Entities controlled by our employees, officers and/or directors will control a majority of our common shares, decreasing your influence on shareholder decisions.

Upon completion of this offering, entities controlled by our employees, officers and/or directors will, in the aggregate, beneficially own approximately 85.2% of our outstanding shares. As a result, our employees, officers and directors will possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in this offering. See “Principal Shareholders.”

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 common 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.

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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.

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”). The Forasen Group’s primary business areas are investment, rubber trading, foodstuff production, and financial management. We also have historically engaged in rubber trading. Although we have significantly reduced our trading in rubber at Tantech to immaterial levels, both businesses were for a time trading similar products. Mr. Wang and Ms. Zhang work with the Forasen Group’s rubber trading department and other advisors to locate opportunities that meet the Forasen Group’s investment criteria. As Tantech has significantly reduced its rubber trading activities, they anticipate that any rubber trading opportunities would be presented to and considered by the Forasen Group rather than by Tantech.

Although his business working time at Forasen Group is flexible, Mr. Wang has historically devoted approximately 30% of his time to matters concerning Forasen Group and approximately 70% of his time to matters for Tantech. Ms. Zhang has historically devoted approximately 95% of her time to matters concerning Forasen Group and approximately 5% of her time to matters for Tantech. 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. Although Mr. Wang has entered into a non-competition agreement with Tantech, this non-competition agreement contemplates that Mr. Wang will continue to be employed by Forasen Group and that his efforts on behalf of Forasen Group will be permitted. Ms. Zhang does not have a non-competition agreement with Tantech.

In addition, Forasen Group currently occupies approximately 500 square meters of our Tianning Street facility. We have not historically charged Forasen Group for renting this office space, but plan to do so in the near future. Although we believe we engage in sound corporate governance practices, there remains the risk that our company may be negatively affected by our directors’ or executive officers’ conflicts of interest.

An insufficient amount of insurance could expose us to significant costs and business disruption.

While we have purchased insurance to cover our certain assets and property of our business, the amounts and scope of coverage could leave our business inadequately protected from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected.

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Risks Related to Our Initial Public Offering and Ownership of Our Common Shares

Investors risk loss of use of funds subscribed, with no right of return, during the offering period.

We cannot assure you that all or any shares will be sold. Our Placement Agent is offering our shares on a best efforts all-or-none basis. We have no firm commitment from anyone to purchase all or any of the shares offered. If subscriptions for 3,200,000 shares are not received on or before close of business on March 15, 2015 (subject to extension to March 30, 2015 with our agreement with the Placement Agent), escrow provisions require that all funds received be promptly refunded. If refunded, investors will receive no interest on their funds. During the offering period, investors will not have any use or right to return of the funds.

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the stock may be volatile.

As a company conducting a relatively small public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. While our placement agent is required to sell shares in this offering to at least 300 round lot shareholders (a round lot shareholder is a shareholder who purchases at least 100 shares) in order to ensure that we meet NASDAQ Capital Market initial listing standards, we have not otherwise imposed any obligations on the placement agent as to the maximum number of shares it may place with individual investors. If, in the course of marketing the offering, the placement agent were to determine that demand for our shares was concentrated in a limited number of investors and such investors determined to hold their shares after the offering rather than trade them in the market, other shareholders could find the trading and price of our shares affected (positively or negatively) by the limited availability of our shares. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate.

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.

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

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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:

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;

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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 descried in the “Placement” 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 2015, 2016 and 2017. 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 20,000,000 shares will be outstanding before the consummation of this offering and 21,600,000 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. In addition, we have agreed to register the resale of a total of 1,600,000 common shares held by the selling shareholder in connection with the offering. Upon registration, such shares will be freely transferable and will not be subject to any form of lock-up. 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 $1.40 or approximately 35% 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

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distributions paid by the Company with respect to its shares during the three preceding taxable years (or the period in which the U.S. Holder held such shares if shorter).

In addition, a portion of any gain recognized by a U.S. Holder upon the sale of our shares may be recharacterized as ordinary income. Further, any dividends received from the Company, if the Company is treated as a PFIC, will not constitute qualified dividend income and will not be eligible for the reduced 20% rate of tax even if such rate would be available otherwise. If a U.S. Holder holds our shares during any taxable year in which we are treated as PFICs, such shares will generally be treated as stock in a PFIC for all subsequent years.

We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company.

Our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

In addition, British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

Lastly, under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our amended and restated memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the articles and memorandum.

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 placement discount and offering expenses payable by us, we expect to receive net proceeds of approximately $5.3 million 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 parent/subsidiary loans, subject to approvals from or registrations with relevant PRC government authorities. We plan to use the capital contribution to fund Bamboo Tech. We expect that a properly submitted application will be approved in the ordinary course of business; however, we cannot guarantee such an approval will occur or be timely. If our application for a capital contribution is denied, we will use the parent/subsidiary loan method of funding Bamboo Tech.

As mentioned, we currently anticipate financing our subsidiaries by means of capital contributions. We currently anticipate using approximately 85% of the gross proceeds from this offering to increase the registered capital of Bamboo Tech (after which time Bamboo Tech may apply such funds to the purposes described herein). The increase in registered capital will require prior approval from (i) MOFCOM to increase Bamboo Tech’s registered capital, (ii) SAIC to alter Bamboo Tech’s business certificate to reflect the increase in registered capital and (iii) SAFE to allow Bamboo Tech’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. This approval process typically takes 30 to 90 days in total, and sometimes longer, from the time MOFCOM or its local branches receive all the required application documents to begin the process. The remaining approximately 15% of such gross proceeds will be used to pay expenses related to this offering as well as for other general corporate purposes.

We plan to remit money to China using the capital contribution method. The approval from MOFCOM is the key approval in the capital contribution process, and we believe all other approvals are ministerial if MOFCOM approves such increase in registered capital. We have not yet initiated this process but intend to start the process immediately upon completion of the offering. We do not foresee any problem receiving necessary government approvals for a capital contribution; however, if our application is rejected, we would remit money to China through a parent/subsidiary loan instead. If we were to provide funding to Bamboo Tech through parent/subsidiary loans (rather than the capital contribution method), the total amount of such loans may not exceed $6,710,080 (RMB41,600,000), which is the difference between Bamboo Tech’s total investment amount as approved by the foreign investment authorities (currently $19,614,080 (RMB121,600,000)), and Bamboo Tech’s registered capital (currently $19,614,080 (RMB121,600,000), and Bamboo Tech’s registered capital (currently $12,904,000 (RMB80,000,000). Such parent/subsidiary 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. We have not yet initiated the process of remitting money to China using either method but will begin to do so promptly upon completion of this offering. See “Risk Factors — Risks Related to Doing Business in the PRC — PRC regulation of parent/subsidiary 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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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.

We will not receive any of the proceeds from the sale of our common shares by the selling shareholder. Notwithstanding the foregoing, the selling shareholder has agreed with us and our Placement Agent to pay $500,000 from the proceeds it will receive in this Offering into an account for the sole purpose of indemnifying the Placement Agent against liability in connection with this offering. Such amount will not reduce the amount of proceeds our Company receives in this Offering. We do not have any contribution or cross-indemnification agreement with the selling shareholder, and the Placement Agent is not required to exhaust its remedies against our company before looking to funds in this escrow account for indemnification.

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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. On May 27, 2013, the unpaid balance of the dividends payable in the amount of $444,706 was used to offset receivables from an affiliated company owned by the same shareholders.

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:

       
  December 31, 2013   December 31, 2012
US$:RMB exchange rate     Period End
    $ 0.1636       Period End     $ 0.1605  
       Average     $ 0.1613       Average     $ 0.1585  

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
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     6.0220       6.0720       6.2195       5.9778  
2014     6.1411       6.1463       6.1758       6.0924  
July     6.1667       6.1687       6.2080       6.1527  
August     6.1434       6.1591       6.1716       6.1434  
September     6.1547       6.1577       6.1649       6.1377  
October     6.1348       6.1403       6.1543       6.1235  
November     6.1343       6.1412       6.1467       6.1319  
December     6.1460       6.1353       6.1464       6.1217  
2015     6.1265       6.1464       6.1732       6.1172  
January     6.1598       6.1382       6.1599       6.1172  
February     6.1602       6.1512       6.1732       6.1398  
March (through March 23)     6.1265       6.1515       6.1646       6.1263  

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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.

[GRAPHIC MISSING]

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Capitalization

The following table sets forth our capitalization as of January 31, 2015 on an actual and a pro forma as adjusted basis giving effect to the completion of the offering at a public offering price of $4.00 per share and to reflect the application of the proceeds after deducting the estimated placement 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.”

Pre- and Post-Offering Capitalization
 
As of January 31, 2015

   
  Actual   Pro forma(1)
Indebtedness:
                 
Short-term debt   $ 2,110,458     $ 2,110,458  
Long-term debt            
Total indebtedness     2,110,458       2,110,458  
Shareholder’s Equity:
                 
Common shares $0.001 par value per share, 50,000,000 shares authorized, 20,000,000 shares issued and outstanding gives effect to a simultaneous 1,000 for 1 share split and repurchase and cancellation of 30,000,000 shares on November 25, 2014; pro forma reflects 21,600,000 shares issued and outstanding     20,000       21,600  
Additional paid-in capital(2)     9,473,230       14,765,393  
Statutory reserves     5,318,035       5,318,035  
Retained earnings     40,052,494       40,052,494  
Accumulated other comprehensive gain     3,307,254       3,307,254  
Total shareholders’ equity     58,171,013       63,464,776  
Total capitalization   $ 60,281,471     $ 65,575,234  

(1) Gives effect to completion of the offering, at a public offering price of $4.00 per share and to reflect the application of the proceeds after deducting the estimated placement discounts and our estimated offering expenses. (See note 2 below.)
(2) Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting placement discount, underwriter expense allowance and other expenses. We expect to receive net proceeds of approximately $5,293,763 ($6,400,000 offering, less placement discount of $320,000, non-accountable expense allowance of $80,000 and offering expenses of approximately $706,237).

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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 June 30, 2014 was $50,764,008, or approximately $2.54 per common share outstanding as of January 20, 2015. Net tangible book value per common share represents the amount of total assets less intangible assets and total liabilities, divided by the number of common shares outstanding, giving effect to completion of a simultaneous (a) 1,000-for-1 split of our common shares and (b) pro-rata repurchase for par value and cancellation of 30,000,000 total shares. At completion of such transaction, we had 20,000,000 shares issued and outstanding. We present such net tangible book value per common share based on 20,000,000 shares rather than 50,000,000 as of June 30, 2014 because purchasers in this offering will see dilution based on the number of shares now issued and outstanding, rather than the number issued and outstanding at June 30, 2014.

Upon completion of this offering, we will have 21,600,000 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 June 30, 2014, will be approximately $56,057,771 or $2.60 per common share. This would result in dilution to investors in this offering of approximately $1.40 per common share or approximately 35% from the initial offering price of $4.00 per common share. Net tangible book value per common share would increase to the benefit of present shareholders by $0.06 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)
Offering price per common share   $ 4.00  
Net tangible book value per common share before the offering   $ 2.54  
Increase per common share attributable to payments by new investors   $ 0.06  
Pro forma net tangible book value per common share after the offering   $ 2.60  
Dilution per common share to new investors   $ 1.40  

(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
Per Share
     Amount   Percent   Amount   Percent
Existing shareholders     20,000,000       92.59 %    $ 18,319,500       74.11 %    $ 0.92  
New investors     1,600,000       7.41 %    $ 6,400,000       25.89 %    $ 4.00  
Total     21,600,000       100.00 %    $ 24,719,500       100.00 %    $ 1.14  

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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, Bamboo Tech. Bamboo Tech is engaged in the production and distribution of household products. Through Bamboo Tech’s wholly-owned Chinese subsidiary, Tantech Charcoal, we conduct trading business, including the export of charcoal products; through Bamboo Tech’s wholly-owned Chinese subsidiary, Energy Tech, 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 84.1%, 75.2%, 72.6% and 69.1% of total revenue for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012, respectively.

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, clothes hangers and other products. Bamboo vinegar is an additive that can be used in food processing, medical and hygiene products and fertilizer. Although it currently only accounts for a small portion of our revenue, bamboo vinegar products are crucial for us to maintain close ties with the agricultural industry which we believe will be a key area for growth in the coming years. Cleaning products, including disinfectants, detergents, lotions, specialized soaps and toilet cleaners are relatively new in our household products but provide us another opportunity for growth. Purchased from third parties and sold through our distribution channel, barbecue charcoals designed for China’s domestic market have also been a key source of revenue for us in recent years.

Currently, household products are sold via our 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 September 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.

EDLC carbon and BBQ charcoal for international market accounted for 12.9%, 12.6%, 14.3% and 13.2% of revenue for the six months ended June 30, 2014 and 2013 and for the years ended December 31, 2013 and 2012, respectively. We have annual production capacity of 10,000 tons of BBQ charcoal products for international markets and the production lines are fully automated. Major markets for these products are Japan, Europe and the Middle East.

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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 3.0% and 12.2% of revenue for the six months ended June 30, 2014 and 2013, respectively. It accounted for 13.1% of revenue for the year ended December 31, 2013 and 17.7% for the year ended December 31, 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 operations. Because of our experience in trading charcoal and in order to improve our cash flows, we also engaged in rubber trading through this entity until September 2013. We historically imported rubber from overseas markets and then resold it in local markets shortly thereafter. The fluctuation in the exchange rate between U.S. dollar and RMB affected 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. 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.

Factors Affecting Our Results of Operations

Government Policy May Impact our Business and Operating Results

We have not seen any impact of unfavorable government policy upon our business in recent years. However, our business and operating results will be affected by China’s overall economic growth and government policy. Unfavorable changes in government policies could affect the demand for our products and could materially and adversely affect our results of operations. Our bamboo charcoal based consumer products are currently not subject to the government restrictions, however, any future changes in the government’s policy upon bamboo charcoal industry may have a negative effect on the supply of our raw materials. As current demand for our EDLC carbon is mainly from the transportation sector in China, any future changes in the government policy affecting the transportation industry may impact our revenue generated from sales of EDLC carbon.

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Price Inelasticity of Raw Materials May Reduce Our Profit

As a specialized manufacturer of bamboo charcoal based products, we rely on the continuous and stable supply of bamboo charcoal to ensure our operation and expansion. Although bamboo (and as a result bamboo charcoal) is a renewable supply, price inelasticity at any given time may increase the likelihood of bidding wars, resulting in an increase in raw material prices and thus reduce our profit. In addition, as we are competing based upon low price, we will risk losing customers by increasing our selling prices.

Competition in Consumer Product 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. Many of such competitors’ products are not bamboo-based; instead, we compete based on our products’ functional use. Many such competitors are able to provide functionally similar products without relying on bamboo or bamboo charcoal components.

Although our Charcoal Doctor brand is one of the largest and most famous in the charcoal bag and bamboo charcoal market, the bamboo charcoal based consumer product industry is relatively fragmented and subject to relatively low barriers of entry.

Our Charcoal Doctor air purification products compete with products from charcoal-based competitors such as Zhejiang Maitanweng Ecological Development Co., Ltd, Zhejiang Jiejiegao Charcoal Industry Co., Ltd, and Quzhou Modern Charcoal Industry, Co., Ltd.

Our Charcoal Doctor toilet cleaner competitors include non-charcoal-based competitors such as SC Johnson & Son (Shanghai) Inc. (which makes the Mr. Muscle brand in China), Blue Moon Chinese Co., Ltd., Shanghai White Cat Group Ltd., Beijing Green Umbrella Chemical Co., Ltd. and Weilai (Guangzhou) Household Products Co., Ltd.

Our BBQ charcoals also face competition from similar products that are not made of bamboo-based charcoal. For example, our Algold grand shisha charcoal competes with Henan Universe Charcoal Co. Ltd’s Torch brand shisha charcoal. While our shisha charcoal is a popular bamboo-charcoal based product, the competitor product is more popular but not bamboo-charcoal based. Our other key international competitors in this area include Puyang Univers Charcoal, Co., Ltd, Fujian Zhongyuan Charcoal Industry Co., Ltd., Haiwan International Trading Co., Ltd., Nanxiong Guizhu Charcoal Co., Ltd. In addition to these companies, we compete domestically with Fujian Ouhai Jianou Charcoal Co., Ltd., Jiangshan Green Charcoal Co., Ltd, Pujiang Fuli Bamboo & Wood Co., Ltd, Shangrao Wenhui Machine Charcoal Co., Ltd and Sanhe Senyuan Charcoal Co., Ltd.

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. We only started commercial production a short time ago and may not have the resources and marketing strategy to compete in the market. Thus our revenue and profit from EDLC carbon may not be sustainable.

Delays in third party developments in the EDLC industry or weaker-than-expected demand for EDLC products may negatively affect demand for our EDLC carbon.

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.

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Some of our Products are Subject to Cyclical Sales.

Our BBQ charcoal products and solid bamboo charcoal products are subject to cyclical sales. We typically see our highest sales of BBQ charcoal products in April and May and then again between August and October. The first peak marks our customers’ preparation for the summer outdoor barbeque season, and the second peak is related to their purchase of our BBQ charcoal products for heating and cooking indoors in the colder months.

The peak season for our solid bamboo charcoal products is between October and November, and sales are lowest in February and March as a result of Chinese New Year, as consumers tend to purchase such products prior to the holiday, rather than after.

While we have seen higher sales near the end of the year for our liquid products, we believe our sales volume for such products is too low to consider such fluctuations cyclical. As such products are primarily for export, demand for our liquid products is most likely to be affected by seasonal and other fluctuations in the purchasing country rather than in China.

Demand for our EDLC carbon (also too new a product line for us to draw conclusions as to cyclical sales) is subject to fluctuation based on economic conditions, primarily government economic policies that provide subsidies to encourage the use of mass transportation and low-pollution vehicles, which rely on EDLCs, which in turn drive demand for EDLC carbon. As such, while we believe EDLC carbon sales may be affected by general economic conditions, such sales have been more affected by governmental policies.

Notwithstanding the effects of seasonality, we believe the key drivers for us to maintain a competitive position in the market and positive financial performance continue to be brand recognition, product innovation and the application of new technology.

Recent Trends

We have noted the existence of the following trends since the beginning of 2013, all of which are likely to affect our business to the extent they continue in the future:

The bamboo charcoal industry has been growing quickly, both around the world and particularly in China.  A recent report by Beijing Guochuangtiancheng Investment Consultant Co. Ltd. notes that worldwide revenues in the bamboo charcoal industry have increased by 8.0% in 2013 and 7.3% in the first quarter of 2014 compared to the respective prior year periods. Moreover, China revenues in the bamboo charcoal industry have increased by 28.5% in 2013 and 27.4% in the first quarter of 2014 compared to the respective prior year periods. The following table taken from this report shows relative worldwide and China growth in bamboo charcoal revenues since 2009:

       
Year   World Revenues
(USD Millions)
  Worldwide
Growth Rate
  China Revenues
(USD Millions)
  China
Growth Rate
2013     4,376       8.0 %      787       28.5 % 
2012     4,050       7.4 %      601       26.0 % 
2011     3,771       6.7 %      466       30.0 % 
2010     3,535       8.6 %      342       31.0 % 
2009     3,254       5.7 %      259       21.4 % 

Raw material inventory levels have been managed to build in the early part of the year to meet second half-year requirements.  We have focused on controlling our inventory levels to meet demand for our products, without accumulating too much inventory. In order to do this, we pay attention to the seasonal demands for our products. We have tried to stay near $220 thousand in monthly inventory storage for Bamboo Tech and near $150 thousand for Energy Tech. We typically see our inventories increase between May and August to prepare for our second-half year peak sales.

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    Bamboo Tech   Energy Tech
Year   Month   Raw Material   Product   Raw Material   Product
2013     1       172,591       141,944       106,458       127,427  
       2       374,216       190,334       117,749       130,653  
       3       338,730       167,752       141,944       112,910  
       4       340,343       220,981       146,783       174,204  
       5       962,961       230,659       150,009       151,622  
       6       982,317       232,272       130,653       172,591  
       7       1,424,279       267,758       120,975       179,043  
       8       1,669,455       240,337       148,396       146,783  
       9       651,652       212,916       161,300       117,749  
       10       621,005       272,597       153,235       120,975  
       11       596,810       267,758       156,461       132,266  
       12       358,086       209,690       153,235       146,783  
       Total       8,492,445       2,654,998       1,687,198       1,713,006  
2014     1       388,733       175,817       140,331       90,328  
       2       387,120       187,108       187,108       62,907  
       3       374,216       148,396       430,671       100,006  
       4       381,942       272,919       653,369       107,723  
       5       359,658       186,814       456,814       376,591  
       6       409,036       265,893       181,549       319,993  
       7       379,659       203,895       188,323       148,406  
       8       389,288       259,127       97,100       147,315  
       9       373,500       181,762       195,821       164,108  

The number of stores that carry our products has increased most quickly in cities under 500,000; however, such stores tend to be smaller stores. On the other hand, our increases in mid-sized and larger cities have focused on supermarkets and larger stores.  We have seen growth from our existing distribution channel also from our new distribution channel. We believe there are a number of untapped markets to sell our products in China, as our national coverage rate is still relatively low. China has more than 2,000 small and mid-sized cities (defined as cities with population of less than 500,000 residents), and our products are sold in approximately 100 cities in China.

Our product prices have generally remained stable, with increases in prices being most common in lower-per-item-priced products, such as automotive air purification accessories, refrigerator deodorants and the like.  During 2013 and 2014, our average monthly price for some of our main products as been as follows:

           
Year   Month   Bamboo
charcoal bag
(USD/kg)
  Indoor
decorative
air purifiers
(USD/kg)
  Multi-function
deodorizers
(USD/kg)
  BBQ charcoal
(USD/kg)
  EDLC carbon
(USD/kg)
2013     1       6.46       6.38       3.87       0.77       37.57  
       2       6.50       6.26       3.82       0.77       39.98  
       3       6.49       6.49       3.76       0.77       30.33  
       4       6.50       6.47       3.44       0.77       41.36  
       5       5.71       6.46       3.88       0.77       30.34  
       6       5.68       6.20       3.69       0.77       30.32  
       7       5.71       5.93       3.85       0.77       47.83  
       8       5.72       6.41       3.60       0.77       31.02  
       9       5.72       6.24       3.87       0.77       30.35  
       10       5.72       6.48       3.89       0.77       30.39  
       11       5.72       6.50       3.86       0.77       30.34  
       12       5.72       6.50       3.89       0.77       30.33  

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Year   Month   Bamboo
charcoal bag
(USD/kg)
  Indoor
decorative
air purifiers
(USD/kg)
  Multi-function
deodorizers
(USD/kg)
  BBQ charcoal
(USD/kg)
  EDLC carbon
(USD/kg)
2014     1       5.64       6.47       3.73       0.77       38.49  
       2       5.73       6.50       3.89       0.77       41.36  
       3       5.72       6.47       3.90       0.77       30.33  
       4       5.76       5.10       4.72       0.77       30.71  
       5       5.75       5.07       4.61       0.77       30.49  
       6       5.77       5.05       4.74       0.77       30.56  
       7       5.75       5.07       4.72       0.77       30.67  
       8       5.78       5.10       4.74       0.77       30.62  
       9       5.76       4.93       4.52       0.77       30.56  

Our raw material costs have remained generally stable during the last fiscal year and the first part of 2014.  Our primary raw materials in production of our products are charcoal pieces, charcoal granules, charcoal powder, raw bamboo vinegar, fabric (for our charcoal bags and other household products), charcoal additives and caustic potash. Prices for each of such raw materials have fluctuated within a range of only a few percentage points over the course of a year.

Our employee salaries increased by approximately 9% from 2012 to 2013, but this increase was offset by increased productivity rates, which caused the percentage of labor costs compared to revenues to decrease.  Because we have been able to improve productivity rates among our employees by improved training and production skill, the increased salaries were not accompanied by an increase in labor expenses as a percentage of revenues.

We have seen encouraging policies from the Chinese government for new resources in 2013 and expect to see continued support in 2014. Due to challenges faced in the development in China’s solar energy and wind power industries, we believe EDLCs (and by extension components of EDLCs like our carbon products) are poised for growth in 2014.  In the current 12th Five-year Plan, China’s central government set as one of its five main goals the improvement of the environment. In connection with the implementation of the main Five-year Plan, other agencies within the central government further expound upon the ideas from the main Plan. For example, the automotive Five-year Plan states that the country will devote resources to electric cars, and while lithium-ion batteries will receive the primary focus, the automotive Five-year Plan also says that the government will devote research to supercapacitors, which would benefit EDLCs and, as a result, EDLC carbon manufacturers like our company. This goal has been further developed in the 2012 – 2020 Automobile Industry Plan, which notes that industries that support electric cars, such as the battery industry, will also be supported by the government. To grow the industry, the government sets goals of 500,000 electric vehicles by 2015 and two million by 2020. To this end, China has implemented tax benefits for purchasing electric vehicles. We believe these policies and others that may be developed in response to the main 12th Five-year Plan are likely to benefit environmentally friendly industries; to the extent we are able to position our products effectively, we believe such policies are also likely to benefit our company.

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Results of Operations

Six Months Ended June 30, 2014 and 2013

The following table summarizes the results of our operations during six months ended June 30, 2014 and 2013, respectively, and provides information regarding the dollar and percentage increase or decrease during such periods.

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

           
  Six-month Ended
June 30, 2014
  Six-month Ended
June 30, 2013
  Dollar ($)
Increase
(Decrease)
  Percentage
Increase
(Decrease)
Statement of Operations Data:   Dollars in
thousands
  As a
percentage of
sales revenue
  Dollars in
thousands
  As a
percentage of sales revenue
Revenues   $ 27,235       100.0 %    $ 23,783       100.0 %    $ 3,452       14.5 % 
Cost of revenues     18,560       68.1 %      16,824       70.7 %      1,736       10.3 % 
Gross profit     8,675       31.9 %      6,959       29.3 %      1,716       24.7 % 
Operating expenses
                                                     
Selling expenses     561       2.1 %      591       2.5 %      (30 )      -5.1 % 
General and administrative expenses     847       3.1 %      1,568       6.6 %      (721 )      -46.0 % 
Research and development expenses     312       1.1 %      98       0.4 %      214       218.4 % 
Total operating expenses     1,720       6.3 %      2,257       9.5 %      (537 )      -23.8 % 
Income from operations     6,955       25.5 %      4,702       19.8 %      2,253       47.9 % 
Other income (expenses)
                                                     
Interest income     106       0.4 %      60       0.3 %      46       76.7 % 
Interest expense     (403 )      -1.5 %      (384 )      -1.6 %      (19 )      -4.9 % 
Government subsidy income     0       0.0 %      10       0.0 %      (10 )      -100.0 % 
Other income     331       1.2 %      304       1.3 %      27       8.9 % 
Total other income (expenses)     34       0.1 %      (10 )      0.0 %      44       440.0 % 
Income before income taxes     6,989       25.7 %      4,692       19.7 %      2,297       49.0 % 
Provision for income taxes     1,327       4.9 %      724       3.0 %      603       83.3 % 
Net income     5,662       20.8 %      3,968       16.7 %      1,694       42.7 % 
Net income attributable to the noncontrolling interest     283       1.0 %      198       0.8 %      85       42.9 % 
Net income attributable to common stockholders   $ 5,379       19.8 %    $ 3,770       15.9 %    $ 1,609       42.7 % 

Revenues.  Revenues increased approximately $3.5 million, or 14.5%, to approximately $27.2 million in the six months ended June 30, 2014 from approximately $23.8 million in the same period in 2013. The increase was primarily attributable to the increased sales from our consumer product segment and energy segment which were partially offset by the decreased sales from our trading segment.

In our consumer product segment, revenues increased to approximately $22.9 million in the six months ended June 30, 2014 from approximately $17.9 million in the same period of 2013. The increase in revenue was primarily attributable to the increased sales of our purification and deodorization products, especially the air purification products and the barbecue charcoal. While the quantities of air purification products sold remained little changed, our customers’ shifting preference for higher-cost premium products increased the average selling price per product. As a result, our sales of air purification products increased 50.7% to approximately $7.3 million year over year. Our sales of barbecue charcoal increased 26.8% to approximately $6.0 million in the six months ended June 30, 2014 compared with the same period in 2013 as the demand from restaurants and families continued to be strong.

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In our trading segment, revenues were approximately $834,000 in the six months ended June 30, 2014, a decrease of 71.2% compared with approximately $2.9 million in the same period in 2013. The decrease was attributable to our reduction of rubber trades in 2014. We sold approximately $2.5 million worth of rubber in the six months ended June 30, 2013.

In our energy segment, we realized sales of approximately $3.5 million in the six months ended June 30, 2014, an increase of approximately $498,000 compared with the same period in 2013. The increase in sales revenue was primarily attributable to the increased sales of EDLC carbon. We continued to sell EDLC carbon through two main distributors in 2014 and we sold 105 tons of EDLC carbon in the first six months in 2014, compared with 91 tons sold in the same period in 2013. The average selling price of our EDLC carbon was approximately $30,088 per ton as compared with approximately $30,209 per ton in the same period in 2013.

Cost of revenues.  Our cost of revenues increased by approximately $1.7 million or 10.3% to approximately $18.6 million in the six months ended June 30, 2014 from approximately $16.8 million in the same period in 2013. As a percentage of revenue, the cost of revenues decreased by approximately 2.6% to 68.1% in the six months ended June 30, 2014 from 70.7% in the same period in 2013. The decrease in cost of revenues as a percentage of revenues was primarily attributable to the change in our product mix in the six months ended June 30, 2014. In specific, we reduced sales of lower gross profit margin industrial rubber in our trading segment while increased sales of products with higher gross profit margin, such as the air purification products in consumer product segment and EDLC carbon in our energy segment in the first half of 2014.

Gross profit.  Our gross profit increased by approximately $1.7 million, or 24.7% to approximately $8.7 million in the six months ended June 30, 2014 from approximately $7.0 million in the same period in 2013. Gross profit margin was 31.9% in the six months ended June 30, 2014, as compared with 29.3% in the same period in 2013. The increase of 2.6 percentage points in gross profit margin was primarily attributable to the increased sales of purification and deodorization products and EDLC carbon products in the first half of 2014.

Selling expenses.  Selling expenses decreased by approximately $30,000 or 5.1% to approximately $561,000 in the six months ended June 30, 2014 compared with approximately $591,000 in the same period in 2013. As a percentage of sales, our selling expenses decreased to 2.1% of revenues in the six months ended June 30, 2014, as compared with 2.5% of revenues in the same period in 2013. The decrease in selling expenses was primarily attributable to a decrease of approximately $77,000 in travel and other sales-related expenses as we reduced rubber trading business, which has historically carried higher sales-related expenses, in the first half of 2014. The decrease was partially offset by an increase of approximately $46,000 in salary expenses and expenses related to (i) participating trade exhibitions; and (ii) expanding sales space in retail stores.

General and administrative expenses.  Our general and administrative expenses decreased by approximately $721,000 or 46.0%, to approximately $847,000 in the six months ended June 30, 2014 from approximately $1.6 million in the same period in 2013. As a percentage of revenues, general and administrative expenses decreased 3.5% to 3.1% in the six months ended June 30, 2014, compared with 6.6% in the same period in 2013. The decrease was primarily attributable to the following factors:

(a) There was no provision for doubtful accounts necessary for the six months ended June 30, 2014, compared with approximately $228,000 related to other receivables and approximately $21,000 related to accounts receivable in the six months ended June 30, 2013.

As a percentage of accounts receivable, our reserve balance decreased 0.4% to 5.1% as of June 30, 2014 from 5.5% as of December 31, 2013. The decrease in reserve balance as a percentage of accounts receivable in the six months ended June 30, 2014 was primarily attributable to the increase in the balances of accounts receivable that had short aging;

As a percentage of advances to suppliers, our reserve balance increased to 1.4% as of June 30, 2014 from 1.2% as of December 31, 2013. The increase in reserve balance as a percentage of advances to suppliers in the six months ended June 30, 2014 was primarily attributable to the decrease in advances to suppliers balances; and

(b) a decrease of approximately $239,000 related to the financial and legal consulting services received in the six months ended June 30, 2014 compared with the same period in 2013; and

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(c) a decrease in property tax of approximately $129,000 and maintenance expenses of approximately $56,000 related to our new office buildings and a decrease in administrative expenses of approximately $48,000 in the six months ended June 30, 2014 compared with the same period in 2013.

Research and development expenses.  Our research and development expenses increased approximately $214,000 to approximately $312,000 in the six months ended June 30, 2014 compared with approximately $98,000 in the same period in 2013 as we increased our research and development activities, especially those related to our EDLC carbon products.

Interest expenses.  Our interest expenses increased by approximately $19,000, or 4.9% to approximately $403,000 in the six months ended June 30, 2014, from approximately $384,000 in the same period in 2013. The increase in interest expenses was primarily attributable to higher discount rate associated with our discounting of bankers acceptance notes in 2014.

Government subsidy income.  We did not have government subsidy income in the six months ended June 30, 2014, as compared with subsidy income of approximately $10,000 in the same period in 2013. Our government subsidy income in the six months ended June 30, 2013 was all granted by local governments in recognizing our achievements in different areas. All subsidies we received in the six months ended June 30, 2013 were one-time grants and may not occur again in the future. We cannot predict the likelihood or amount of any future subsidies.

In the six months ended June 30, 2013, we received discretionary subsidies from various agencies within Lishui City, as described in more detail above in our full-year discussion of such government subsidies. See “Management Discussion and Analysis of Financial Condition and Results of Operations — Years Ended December 31, 2013 and 2012 — Government subsidy income.”

Other Income.  Other income was approximately $331,000 and approximately $304,000 in the six months ended June 30, 2014 and 2013, respectively. Other income was primarily related to the consulting fees that we charged to a third party company using our patent in its production of doors with air treatment functionality. The increase year over year was primarily attributable to higher fees we received in the first six months ended June 30, 2014 compared with the same period in 2013.

Income before income taxes.  Our income before income taxes was approximately $7.0 million in the six months ended June 30, 2014, an increase of approximately $2.3 million or 49.0% compared with approximately $4.7 million in the same period in 2013. The increase was primarily attributable to an increase of approximately $1.7 million in the gross profit and a decrease of approximately $721,000 in general and administrative expenses in the six months ended June 30, 2014 compared with the same period in 2013.

Provision for income taxes.  Our provision for income taxes was approximately $1.3 million in the six months ended June 30, 2014, an increase of approximately $603,000 or 83.3% from approximately $724,000 in the same period in 2013. The increase was primarily attributable to (i) an increase of approximately $2.3 million in income before income tax in the six months ended June 30, 2014 compared with the same period in 2013; and (ii) our effective income tax rate increased 4% year over year due to the prior year true-up adjustments in the first half of 2014. A common local practice in our region is to pay a portion of anticipated taxes on a quarterly basis and then, upon the year-end calculation of total taxes due, to make a catch-up payment in order to ensure that the total required tax rate is paid.

Bamboo and Energy are subject to a preferential income tax rate of 15% as Bamboo was granted High Tech Industry Enterprise Certificate in 2008 and Energy was granted the Certificate in 2013. Bamboo is currently in the process of renewing its Certificate and we anticipate it will continue to be qualified for the Certificate. Bamboo may be subject to the unified income tax rate of 25% if it fails to renew the Certificate.

Net income attributable to common stockholders.  Our net income attributable to common stockholders in the six months ended June 30, 2014 was approximately $5.4 million, an increase of approximately $1.6 million from approximately $3.8 million in the same period in 2013. The increase was attributable to the factors described above.

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Segment Information

The following table sets forth sales information about our product mix in the six months ended June 30, 2014 and 2013, respectively.

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

       
  Six Months Ended June 30,
     2014   2013
     Revenue   Percentage of
Net Revenue
  Revenue   Percentage of
Net Revenue
Consumer Products   $ 22,896       84.1 %    $ 17,878       75.2 % 
Trading     834       3.0 %      2,898       12.2 % 
Energy     3,505       12.9 %      3,007       12.6 % 
     $ 27,235       100.0 %    $ 23,783       100.0 % 

Consumer Product Segment

Our consumer product segment is the largest among our three segments. Revenue from the consumer product segment was approximately $22.9 million and $17.9 million in the six months ended June 30, 2014 and 2013, respectively. Our revenue from consumer products was primarily generated through sales of our purification and deodorization products and cleaning products under “Charcoal Doctor” brand and barbecue charcoals designed for China’s domestic market. Revenue increased approximately $5.0 million in the six months ended June 30, 2014 compared with the same period in 2013.

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 $3.4 million to approximately $15.1 million in the six months ended June 30, 2014 compared with approximately $11.7 million in the same period in 2013. Gross profit increased approximately $1.6 million to approximately $7.8 million in the six months ended June 30, 2014 from approximately $6.2 million in the same period in 2013. Gross profit margin was 34.0% in the six months ended June 30, 2014 compared with 34.5% in the same period in 2013. The small decrease in gross profit margin was primarily attributable to relatively higher sales tax in the six months ended June 30, 2014.

Profit in our consumer product segment increased approximately $933,000 to approximately $5.7 million in the six months ended June 30, 2014 compared with approximately $4.8 million in the same period in 2013. The increase in segment profit was primarily attributable to approximately $1.6 million increase in gross profit in the six months ended June 30, 2014. The increase was partially offset by (i) an increase in general and administrative expenses of approximately $162,000 and (iii) an increase in income tax expenses of approximately $487,000 in the six months ended June 30, 2014 as a result of increased sales.

Trading Segment

Our trading segment generated approximately $834,000 in sales revenue in the six months ended June 30, 2014 compared with approximately $2.9 million in the same period in 2013. The revenue from trading segment was primarily related to our export of charcoal products and the wholesale purchase and resale of imported rubber in local market. As we started to reduce trades of rubber from September 2013, the revenue from our trading segment decreased accordingly in 2014. Our revenue from trading segment decreased approximately $2.1 million or 71.2% in the six months ended June 30, 2014 from the same period in 2013. 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 us.

Cost of revenue was approximately $836,000 in the six months ended June 30, 2014 compared with approximately $2.7 million in the same period in 2013. The gross loss was approximately $2,000 in the six months ended June 30, 2014 compared with a gross profit of approximately $160,000 in the same period in 2013. Gross profit margin was a negligible loss in the six months ended June 30, 2014 and 5.5% in the same period in 2013. The decrease in gross profit margin was primarily attributable to the higher costs related to the export of our bamboo charcoal products.

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We recorded a loss of approximately $265,000 in the trading segment in the six months ended June 30, 2014, compared with a loss of approximately $407,000 in the same period in 2013. The decrease in segment loss was primarily attributable to a decrease of approximately $279,000 in general and administrative expenses and a decrease of approximately $52,000 in selling expenses as we reduced our rubber trades in the first half of 2014.

The interest expenses in the trading segment were primarily related to the discounting of bankers acceptance notes. We can either ask our banks to issue bankers acceptance notes to pay our vendors directly or to factor these notes through discounting agents before they become due. Starting from 2013, all our bankers acceptance notes were discounted through discounting agents.

Our trading segment discounted RMB30 million (approximately $4.9 million) of bankers acceptance notes with a maturity of six months in May 2014 and RMB30 million (approximately $4.9 million) in May 2013. The interest expenses were approximately $149,000 and approximately $128,000 related to the discounting of bankers acceptance notes in the six months ended June 30, 2014 and 2013, respectively.

Energy Segment

Our energy segment consists of BBQ charcoal for international market and EDLC carbon. The revenue from BBQ charcoal was approximately $361,000 in the six months ended June 30, 2014 compared with approximately $246,000 in the same period in 2013. Our self-produced BBQ charcoal was mainly sold in overseas markets where the demand for our products increased slightly in the first half of 2014, leading to an increase in our revenue. The cost for BBQ charcoal for international markets was approximately $430,000 in the six months ended June 30, 2014 compared with approximately $351,000 in the same period in 2013. The losses were approximately $69,000 in the six months ended June 30, 2014 and approximately $105,000 in the same period in 2013.

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. In the six months ended June 30, 2014, our sales revenue of EDLC carbon was approximately $3.1 million, an increase of approximately $383,000 or 13.9% compared with sales revenue of approximately $2.8 million in the same period in 2013. The gross profit was approximately $950,000 in the six months ended June 30, 2014 compared with approximately $743,000 in the same period in 2013. The increase in gross profit in the six months ended June 30, 2014 was primarily attributable to economy of scale because the unit production cost decreased as we improved the production efficiency by implementing new technologies.

We have recently developed two technology improvements in our production process. One of these improvements allows us to improve voltage resistance in one of our EDLC carbon products from 2.5 – 2.6V to more than 2.85V, which allows a supercapacitor to increase its energy density by 20%. This process innovation required us to invest approximately RMB 600,000 (in addition to approximately RMB 300,000 invested by the Lishui Science and Technology Bureau) to research and refine the process, but no additional costs or equipment to implement. The technique has been well received by our customers in trial runs started in November and December 2013. Based on feedback from customers through March 2014, we began to market it in April 2014 for sales commencing in May 2014.

We have also developed a coating technique for our EDLC carbon at an estimated total cost of approximately RMB 870,000, including payments to a co-developer and resources expended on our own account. In the past, most EDLC production lines and techniques in China relied on EDLC carbon from Japan. As a result, technical production parameters have been based on Japanese companies’ models, especially the coating technique, one of the fundamental aspects of producing EDLC. In cooperation with the Harbin Institute of Technology, we developed a coating technique that suits our products and allows us to provide both products and technical support for our EDLC products. Pursuant to our cooperation with Harbin Institute of Technology, we own the intellectual property rights to the coating technique. We plan to work with local government bureau to conduct technical seminars and initial training to introduce this technology in early 2015.

With the development of these technologies used in the production process, we believe our EDLC carbon products will become an important source of revenue growth and profitability.

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We recorded profit of approximately $217,000 in the first six months ended June 30, 2014 compared with a loss of approximately $284,000 in the same period in 2013 in our energy segment. The increase in profit was primarily attributable to (i) an increase in gross profit of approximately $242,000; and (ii) a decrease of approximately $487,000 in general and administrative expenses as we incurred lower bad debt expenses and consulting expenses in the six months ended June 30, 2014 compared with the same period in 2013. The increase in profit was partially offset by an increase of approximately $221,000 in research and development expenses as we conducted more research and development activities related to our EDLC carbon production in the first six months of 2014.

Years Ended December 31, 2013 and 2012

The following table summarizes the results of our operations during the fiscal years ended December 31, 2013 and 2012, 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)

           
  2013   2012   Dollar ($)
Increase
(Decrease)
  Percentage
Increase
(Decrease)
Statement of Operations Data:   Dollars in
thousands
  As a
percentage of
sales revenue
  Dollars in thousands   As a
percentage of
sales revenue
Revenues   $ 61,220       100.00 %    $ 50,519       100.0 %    $ 10,701       21.2 % 
Cost of revenues     44,064       72.0 %      36,516       72.3 %      7,548       20.7 % 
Gross profit     17,156       28.0 %      14,003       27.7 %      3,153       22.5 % 
Operating expenses
                                                     
Selling expenses     1,451       2.4 %      1,094       2.2 %      357       32.6 % 
General and administrative expenses     3,140       5.1 %      948       1.9 %      2,192       231.2 % 
Research and development expenses     732       1.2 %      174       0.3 %      558       320.7 % 
Total operating expenses     5,323       8.7 %      2,216       4.4 %      3,107       140.2 % 
Income from operations     11,833       19.3 %      11,787       23.3 %      46       0.4 % 
Other income (expenses)
                                                     
Interest income     200       0.3 %      84       0.2 %      116       138.1 % 
Interest expense     (867 )      (1.4 )%      (200 )      (0.4 )%      (667 )      333.5 % 
Government subsidy income     49       0.1 %      371       0.7 %      (322 )      (86.8 )% 
Other income     691       1.1 %      265       0.5 %      426       160.8 % 
Total other income (expenses)     73       0.1 %      520       1.0 %      (447 )      (86.0 )% 
Income before income taxes     11,906       19.4 %      12,307       24.4 %      (401 )      (3.3 )% 
Provision for income taxes     (1,820 )      (3.0 )%      (1,893 )      (3.7 )%      73       (3.9 )% 
Net income     10,086       16.5 %      10,414       20.6 %      (328 )      (3.1 )% 
Net income attributable to the noncontrolling interest     (505 )      (0.8 )%      (521 )      (1.0 )%      16       (3.1 )% 
Net income attributable to common stockholders   $ 9,581       15.7 %    $ 9,893       19.6 %    $ (312 )      (3.2 )% 

Revenues.  Revenues increased approximately $10.7 million, or 21.2%, to approximately $61.2 million in 2013 from approximately $50.5 million in 2012. The increase was primarily attributable to the increased sales from our consumer product segment and energy segment which were partially offset by the decreased sales from our trading segment.

In our consumer product segment, revenue increased to approximately $44.5 million in 2013 from approximately $34.9 million in 2012. The increase was primarily attributable to the increased sales in purification and deodorization products in 2013 as the demand for our products was strong, especially in the fourth quarter of 2013 as air pollution intensified in some large cities in China. We sold approximately 4.3 million pieces of air purification products in 2013 compared to approximately 2.8 million pieces in 2012 while the average selling price remained little changed year over year.

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In our trading segment, the revenue was approximately $8.0 million in 2013, a decrease of 11.1% compared with approximately $9.0 million in 2012. The decrease was attributable to the decreased rubber wholesale business in 2013 as we started to reduce our trades of rubber significantly in the fourth quarter of 2013.

In our energy segment, we realized sales of approximately $8.7 million, an increase of approximately $2.1 million as compared with 2012. The increase in sales revenue was primarily attributable to the increased sales of EDLC carbon in 2013. As the demand for our EDLC carbon continued to grow, we increased EDLC carbon sales through one of our main customers. We sold 272 tons of EDLC carbon in 2013 compared to 224 tons sold in 2012. The average selling price of our EDLC carbon increased 7.9% to approximately $30,106 per ton from approximately $27,895 per ton in 2012.

Cost of revenues.  Our cost of revenues increased by approximately $7.5 million or 20.7% to approximately $44.1 million in 2013 from approximately $36.5 million in 2012. As a percentage of revenues, the cost of revenue decreased by approximately 0.3% to 72.0% in 2013 from 72.3% in 2012. The decrease in cost of revenues as a percentage of revenues was primarily due to the increased revenues from EDLC carbon, which carries a higher profit margin.

Gross profit.  Our gross profit increased by approximately $3.2 million, or 22.5% to approximately $17.2 million in 2013 from approximately $14.0 million in 2012. Gross profit margin was 28.0% in 2013, as compared with 27.7% in 2012. The increase of 0.3 percentage points was primarily attributable to the increased gross profit margin in EDLC carbon sales in our energy segment in 2013.

Selling expenses.  Selling expenses increased by approximately $357,000 to approximately $1.45 million in 2013 compared to approximately $1.1 million in 2012. As a percentage of sales, our selling expenses increased to 2.4% of revenues in 2013, as compared with 2.2% of revenues in 2012. The increase in selling expenses was primarily attributable to an increase of approximately $103,000 in salary expenses at our sales department, an one-time expenses of approximately $161,000 related to the opening of our new sales office and an increase of approximately $93,000 of transportation expenses and other sales related expenses in 2013 as we continued to expand sales network in our consumer products. Our shipping and handling expenses increased approximately $54,000 to approximately $272,000 in 2013 as shipments of our products increased.

General and administrative expenses.  Our general and administrative expenses increased by approximately $2.2 million or 231.2%, to approximately $3.1 million in 2013 from approximately $948,000 in 2012. As a percentage of revenues, general and administrative expenses increased 3.2% to 5.1% in 2013, compared to 1.9% in 2012. The increase was primarily attributable to the following factors:

(a) an increase in bad debt expenses related to our accounts receivable of approximately $201,000 in 2013. Based on results of aging analysis performed in 2013, we set aside approximately $1.0 million as allowance for potentially uncollectable accounts receivable balances. Approximately $723,000 of the accounts receivable balances that we had recorded allowances in prior years were collected in 2013. We reversed the allowance by the same amount and recorded bad debt expenses related to accounts receivable of approximately $290,000 in 2013. As a result, our bad debt expenses related to accounts receivable increased approximately $201,000 in 2013, compared to the bad debt expenses related to accounts receivable of approximately $89,000 in 2012.

As a percentage of accounts receivable, our reserve balance decreased 0.7% to 5.5% as of December 31, 2013 from 6.2% as of December 31, 2012; and

(b) a decrease in bad debt expenses related to our advance to suppliers of approximately $88,000 in 2013. Based on results of our aging analysis and consideration of specific information related to each individual account, we recorded approximately $139,000 in bad debt expenses related to our advances to suppliers in 2013. While approximately $459,000 of advances to suppliers that we previously recorded allowances were either utilized by receiving delivery from our vendors or returned to us, we reversed the allowance by the same amount and recorded a net decrease in bad debt expenses related to our advances to suppliers of approximately $320,000 in 2013. As a result, our bad debt expenses related to advances to suppliers decreased approximately $88,000 in 2013, compared to a net decrease in bad debt expenses related to advances to suppliers of approximately $232,000 in 2012.

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As a percentage of advances to suppliers, our reserve balance decreased to 1.2% as of December 31, 2013 from 9.2% as of December 31, 2012. The decrease in reserve balance as a percentage of advances to suppliers in 2013 was primarily attributable to the reversal of allowances as explained above and the increase in advances which had short aging; and

(c) an increase in bad debt expenses related to other receivables of approximately $229,000 in 2013 based on our analysis of collectability of individual accounts; and

(d) an increase in depreciation expenses of approximately $480,000, property tax of approximately $422,000 and repair expenses of approximately $232,000 related to our new office building which was put into use at the end of 2012; and

(e) an increase of approximately $293,000 related to the financial and legal consulting services received in 2013; an increase in personnel and administrative expenses of approximately $282,000; and

(f) included in the general and administrative expenses in 2012 was an one-time recovery of prior year VAT write-off of approximately $195,000 which reduced general and administrative expenses by the same amount.

Research and development expenses.  Our research and development expenses increased approximately $558,000 to approximately $732,000 in 2013 compared with approximately $174,000 in 2012 as we continued to increase research and development activities, especially those related to our EDLC carbon products in 2013.

Interest expense.  Our interest expense increased by approximately $667,000, or 333.5% to approximately $867,000 in 2013, from approximately $200,000 in 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 caused by discounting more bankers acceptance notes payable in 2013.

Government subsidy income.  Our government subsidy income was approximately $49,000 in 2013 compared to approximately $371,000 in 2012. Our government subsidy income in 2013 was all granted by local governments in recognizing our achievements in different areas. The government’s subsidy income in 2012 was primarily related to the subsidy income of approximately $214,000 granted by local government for our EDLC carbon production and approximately $90,000 subsidy income granted by the Zhejiang Province government. All subsidies we received in 2013 and 2012 were one-time grants and may not occur again in the future. We cannot predict the likelihood or amount of any future subsidies.

In 2012, we received discretionary subsidies from various agencies within Zhejiang Province, Lishui City and Liandu District of Lishui. We received $371,510 in the aggregate in grants in 2012. Our 2012 subsidies consisted of the following grants:

     
Recipient   Bamboo Tech
Date of grant   6/6/12   8/31/12   9/10/12
Amount (USD)   $90,330   $45,165   $1,585
Government entity making the grant   Zhejiang Province Science
& Technology Bureau
  Lishui Science &
Technology Bureau
  Lishui Government
Reason for grant   Fund for bamboo
activated carbon project
for tobacco use
(province level grant)
  Fund for bamboo
activated carbon project
for tobacco use (local
funds equal to half of
the amount of province
level grant)
  Grant for recruiting
highly skilled
employees
to come to Lishui

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Recipient   Tantech Charcoal
Date of grant   11/06/12
Amount (USD)   $12,139
Government entity making the grant   Liandu District Treasury
Reason for grant   Grant for establishing and operating export-related foreign trade company
in Lishui

   
Recipient   Energy Tech
Date of grant   9/10/12   12/19/12
Amount (USD)   $213,939   $8,352
Government entity making the grant   Lishui Economic Development Zone   Lishui Economic Development Zone
Reason for grant   Locally administered provincial grant made for reaching annual reaching
capacity of 3,000 tons of EDLC
carbon
  Grant for establishing and operating
export-related foreign trade company
in Lishui

In 2013, we received discretionary subsidies from various agencies within Zhejiang Province, Lishui City and Liandu District of Lishui. We received $48,659 in the aggregate in grants in 2013. Our 2013 subsidies consisted of the following grants:

     
Recipient   Bamboo Tech
Date of grant   2/4/13   11/14/13   12/26/13
Amount (USD)   $1,613   $4,840   $24,201
Government entity making the grant   Lishui Government   Lishui Science &
Technology Bureau
  Lishui Science &
Technology Bureau
Reason for grant   Grant for recruiting
highly skilled
employees to come
to Lishui
  Role Model Enterprise
Award in recognition of
receipt of numerous
patents
  Grant for high level
talent training program

 
Recipient   Energy Tech
Date of grant   1/30/13
Amount (USD)   $8,341
Government entity making the grant   Lishui Economic Development Zone
Reason for grant   Grant for establishing and operating export-related foreign trade company
in Lishui

 
Recipient   Tantech Charcoal
Date of grant   11/18/13
Amount (USD)   $9,664
Government entity making the grant   Liandu District Treasury
Reason for grant   Grant for small and mid-sized enterprise development

Other Income.  Other income was approximately $691,000 and $265,000 in 2013 and 2012, respectively. Other income was primarily related to the consulting fee that we charged to a third party company using our patent in its production of doors with air treatment functionality. The increase was primarily due to higher fees we received in 2013 compared to 2012.

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Income before income taxes.  Our income before income taxes was approximately $11.9 million in 2013, a decrease of approximately $401,000 compared with approximately $12.3 million in 2012. The decrease was primarily attributable to higher general and administrative expenses, interest expenses and research and development expenses in 2013.

Provision for income taxes.  Our provision for income taxes was approximately $1.8 million in 2013, a decrease of approximately $73,000 or 3.9% from approximately $1.9 million in 2012. The decrease was primarily attributable to lower income before income taxes while our effective income tax rate stayed unchanged from 2012 to 2013.

Net income attributable to common stockholders.  Our net income attributable to common stockholders in 2013 was approximately $9.6 million, a decrease of approximately $312,000 from approximately $9.9 million in 2012. The decrease was attributable to the factors described above.

Segment Information

The following tables set forth sales information about our product mix in the years ended December 31, 2013 and 2012, respectively.

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

       
  Year Ended December 31,
     2013   2012
     Revenue   Percentage of
Net Revenue
  Revenue   Percentage of
Net Revenue
Consumer Product   $ 44,477       72.6 %    $ 34,907       69.1 % 
Trading     7,995       13.1 %      8,962       17.7 % 
Energy     8,748       14.3 %      6,650       13.2 % 
     $ 61,220       100.0 %    $ 50,519       100.0 % 

Consumer Product Segment

Our consumer product segment is the largest among our three segments. Revenue from the consumer product segment was approximately $44.5 million and $34.9 million in the year ended December 31, 2013 and 2012, respectively. Our revenue from consumer products was primarily 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 $9.6 million in 2013 compared to 2012. Our consumer products are considered to be environmentally friendly not only because of the lifespan and fast growth rate of bamboo, but also the minimum waste in the process of producing our products. In addition, our products feature a high raw material utilization rate and have met the standards set for designation of “environmentally friendly” enterprises by the Chinese Society for Environmental Sciences. Moreover, our facilities have received ISO 14001:2004 certification, which reflects our focus on measuring and managing our environmental impact.

A recent study conducted in Shanghai’s Lianhua Supermarket found that, given equivalent products, 85% of the consumers preferred environmentally friendly products and were willing to pay prices up to 5% higher than traditional products. We anticipate that growing consumer preferences for environmentally friendly products over traditional household cleaning products and increasing consumer awareness of our brand as an “environmentally friendly” enterprise will drive revenue from our consumer products in the coming years.

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 $7.5 million to approximately $30.1 million in 2013 compared to $22.6 million in 2012. Gross profit increased approximately $2.1 million to approximately $14.4 million in 2013 from approximately $12.3 million in 2012. Gross profit margin was 32.4% in 2013 compared 35.2% in 2012. The decrease was primarily the result of decreased gross profit in our air purification products as the freight costs and cost of direct labor increased in 2013.

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Profit for our consumer product segment increased approximately $2.0 million to approximately $11.5 million in 2013 compared to approximately $9.5 million in 2012. The increase in segment profit was primarily attributable to approximately a $2.1 million increase in gross profit and approximately $452,000 increase in other income in our consumer product segment in 2013. The increase was partially offset by higher selling expenses of approximately $287,000 and an increase of approximately $217,000 in tax expenses in 2013.

Trading Segment

Our trading segment generated approximately $8.0 million sales revenue in 2013 compared to approximately $9.0 million in 2012. The revenue from trading segment was primarily related to our wholesale purchase and resale of imported rubber in local market and the export of charcoal products. As we started reduce our trades of rubber starting from September 2013, the revenue from our trading segment decreased approximately $1.0 million or 10.8% in 2013. 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.

Cost of revenue was approximately $7.9 million in 2013 compared to approximately $8.4 million in 2012. The gross profit was approximately $142,000 in 2013 compared to approximately $603,000 in 2012. Gross profit margin was 1.8% in 2013 and 6.7% in 2012. The decrease in gross profit was primarily attributable to the lower profit in our rubber business as the weaker demand in market reduced our average selling price.

We recorded a loss of approximately $718,000 for the trading segment in 2013, compared to a profit of approximately $157,000 in 2012. The decrease in segment profit was primarily attributable to a decrease of approximately $461,000 in gross profit, an increase of approximately $319,000 in interest expenses and higher selling expenses in our trading segment in 2013 compared to 2012.

Such interest expenses in the trading segment were primarily related to the discounting of bankers acceptance notes. We usually asked our banks to issue bankers acceptance notes to pay our vendors directly or to factor these notes through discounting agents before they become due. As all of bankers acceptance notes at our trading segment were used for direct payments to our vendors before 2013, there was no interest expenses associated with these notes. However, starting from 2013, all our bankers acceptance notes were discounted through discounting agents and resulted in an increase in our interest expenses.

Our trading segment discounted RMB30 million (approximately $4.9 million) of bankers acceptance notes with a maturity of six months in May 2013 and RMB30 million in November 2013. The interest expenses were approximately RMB 1.9 million (approximately $319,000) related to the discounting of notes in 2013. Our trading segment did not incur discounting interests related to bankers acceptance notes in 2012.

Energy Segment

Our energy segment consists of BBQ charcoal for the international market and EDLC carbon. The revenue from BBQ charcoal was approximately $559,000 in 2013 compared to approximately $401,000 in 2012. Our self-produced BBQ charcoal was mainly sold in overseas markets where the demand for our products increased in the fourth quarter of 2013, leading to an increase in our revenue for the whole year of 2013. The cost for BBQ charcoal for international markets was approximately $786,000 in 2013 compared to approximately $654,000 in 2012, which resulted in a loss of approximately $227,000 in 2013 and a loss of approximately $253,000 in 2012.

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. Our sales revenue of EDLC carbon was approximately $8.2 million in 2013, an increase of approximately $2.0 million or 32.3% compared to sales revenue of approximately $6.2 million in 2012. The gross profit was approximately $2.8 million in 2013 compared to approximately $1.4 million in 2012. The increase in gross profit in 2013 was primarily attributable to the economy of scale as unit production cost was lowered with the increase in production volume.

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We recorded a loss of approximately $561,000 in 2013 compared to profit of approximately $740,000 in 2012 in our energy segment. Although we recorded approximately $1.5 million increase in gross profit in 2013 compared to 2012, the increase in gross profit was partially offset by (a) increased bad debt expenses of approximately $754,000; (b) increase in depreciation expenses and repair expenses of approximately $690,000 related to the new office building; (c) increased research and development expenses of approximately $505,000 as we incurred more research and development activities in 2013; (d) increase in interest expenses of approximately $289,000 compared to 2012 as the interest expenses related to the current portion of long-term bank loans was no longer capitalized in 2013; and (e) a one-time recovery of prior year VAT write-off of approximately $195,000 recorded in 2012, which decreased G&A expenses for the same amount; and (f) a decrease of approximately $214,000 in government grant income in 2013 compared to 2012 as the government grant income was one-time and may not occur again in the future.

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, one of our PRC subsidiary, Tantech Charcoal incurred a loss of approximately $265,000 for the six months ended June 30, 2014 and may not be allowed to pay dividends to us. We have relied on direct payments of expenses by our subsidiaries (which generate revenues), to meet our obligations to date. To the extent payments are due in US Dollars, we have occasionally paid such amounts in RMB to an entity controlled by our management capable of paying such amounts in US dollars. Such transactions have been made at prevailing exchange rates and have resulted in immaterial losses or gains on currency exchange but no other profit.

Bamboo Tech has incurred debt of approximately $2.1 million in a loan from Bank of China Ltd. Lishui Branch. To secure this debt, Bamboo Tech has granted a mortgage on property and land use rights valued at approximately $3.3 million. Tantech Charcoal incurred debt of approximately $73,000 in a loan from Bank of China Ltd. Lishui Branch. To secure this debt, Tantech Charcoal pledged deposit of RMB 500,000 (equivalent of $81,250) as collateral for the loan. Bamboo Tech and Tantech Charcoal have incurred short term debts through use of several six-month bankers acceptance notes payable.

Further, although instruments governing the current debts incurred by our PRC subsidiaries do not have restrictions on their abilities to pay dividend or make other payments to us, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiaries and its ability to pay dividends out of its earnings. We cannot assure you that our PRC subsidiaries will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.

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Six Months Ended June 30, 2014 and 2013

As of June 30, 2014, we had cash and cash equivalents of approximately $72,000 and restricted cash of approximately $3.7 million. As of June 30, 2014, we did not have any foreign cash and short-term investments. Our current assets were approximately $51.9 million and our current liabilities were approximately $16.4 million, which resulted in a current ratio of 3.16:1. Total shareholders’ equity as of June 30, 2014 was approximately $50.6 million. The following table sets forth summary of our cash flows for the periods indicated:

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

   
  Six Months
Ended
June 30, 2014
  Six Months
Ended
June 30, 2013
Net cash provided by (used in) operating activities   $ 5,093     $ (3,585 ) 
Net cash provided by (used in) investing activities     (2,600 )      670  
Net cash provided by (used in) financing activities     (4,073 )      11,611  
Effect of exchange rate changes on cash     (7 )      99  
Net increase (decrease) in cash     (1,587 )      8,795  
Cash, beginning of period     1,659       618  
Cash, end of period   $ 72     $ 9,413  

Operating Activities

Net cash provided by operating activities was approximately $5.1 million in the six months ended June 30, 2014, compared with net cash used in operating activities of approximately $3.6 million in the same period in 2013. The increase in net cash provided by operating activities was primarily attributable to the following factors:

Net income increased by approximately $1.7 million in the six months ended June 30, 2014 compared with the same period in 2013;
Advances to suppliers decreased by approximately $1.7 million in the six months ended June 30, 2014 compared with an increase of approximately $8.5 million in the same period in 2013. In the first half of 2013, we increased prepayments to one of our main suppliers in order to ensure the stable supply of raw material, bamboo charcoal. As our purchase stabilized and inventory management continued to improve, our advances to suppliers decreased in the first six months in 2014. However, our advances to suppliers balance may still experience fluctuations in the future as we may need to make more prepayments in order to secure our supply of bamboo charcoal, especially during peak time in production.
Inventory decreased by approximately $817,000 in the six months ended June 30, 2014 compared with an increase of approximately $5.1 million in the same period in 2013. In the first half of 2013, our inventory level increased because of the rubber trading business. As we reduced our rubber trading business, our inventory level decreased accordingly in the six months ended June 30, 2014.

The increase in net cash provided by operating activities was partially offset by:

Accounts receivable increased by approximately $2.3 million in the six months ended June 30, 2014 compared with a decrease of approximately $4.6 million in the same period in 2013. In the first half of 2014, we continued to increase sales of consumer products to large supermarket chains nationwide and our accounts receivable balances increased accordingly compared with the same period in 2013 when we saw a decrease in accounts receivable balances. As our sales continue to increase and our customer basis becomes more diversified, we anticipate that our accounts receivable balance may increase in the coming years.
A decrease of accounts payable of approximately $856,000 in the six months ended June 30, 2014 compared with a decrease of approximately $2.1 million in the same period in 2013; and a decrease of tax payable of approximately $250,000 in the six months ended June 30, 2014 compared with a decrease of approximately $1.0 million in the same period in 2013.

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Investing Activities

Net cash used in investing activities was approximately $2.6 million in the six months ended June 30, 2014, an increase of approximately $3.3 million from net cash provided by investing activities of approximately $670,000 in the same period in 2013. The increase in net cash used in investing activities in the six months ended June 30, 2014 was primarily attributable to a an increase of loans made to a related party of approximately $2.6 million compared with repayments of loans to related parties of approximately $1.7 million in the same period in 2013. The largest aggregate amount outstanding at any point during 2014 was approximately $3.4 million. The balance of $2.6 million loans made to related party as of June 30, 2014 was repaid in full in October 2014. The increase in net cash used in investing activities was partially offset by the return of advance payment of approximately $814,000 in the first half of 2014. The advance payment was made in 2013 to develop software related to the improvement of our EDLC carbon manufacturing process and the payment was returned to us in May 2014.

Financing Activities

Net cash used in financing activities was approximately $4.1 million in the six months ended June 30, 2014, compared with net cash provided by financing activities of approximately $11.6 million in the same period in 2013. The increase in net cash used in financing activities in the six months ended June 30, 2014 was primarily attributable to the repayment of approximately $4.1 million long-term bank loan in April 2014. In the six months ended June 30, 2013, we obtained approximately $11.0 million related party loans and had a net borrowing of approximately $1.2 million from bankers acceptance notes.

Our material cash requirements in the next twelve months include

(i) Investments of approximately $2.0 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 $1.2 million for marketing activities related to our household products, specifically the advertising expenditures on our “Charcoal Doctor” brand in local and national media.

Our primary source of cash is currently generated from the sales of our products and bank borrowings. Our cash balances decreased significantly in the six months ended June 30, 2014. As explained above, the primary reason for the decrease was the repayment of a long-term bank loan of approximately $4.1 million in April 2014. The long-term bank loan was related to the construction of our new factory buildings and was expired in April. We repaid the loan fully and did not ask for a renewal as we believe that we can meet our cash requirements by utilizing cash generated from our operating activities in the next twelve months. We may increase our bank borrowings when deemed necessary in the future and we will consider the cash requirements and financing costs before making any decision on 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 raise, we are confident that we can meet cash requirements only by cash flows generated from our operating activities.

Loan Facilities

We repaid approximately $6.2 million in bank loans and borrowed approximately $2.2 million in bank loans for our working capital needs during the six months ended June 30, 2014. We also repaid approximately $7.2 million of bankers acceptance notes and secured approximately $7.2 million of bankers acceptance notes in the six months ended June 30, 2014. As a result, the balance of all our bank loans and bankers acceptance notes payable as of June 30, 2014 was approximately $9.3 million, which includes short-term bank loans of approximately $2.2 million and bankers acceptance notes payable of approximately $7.1 million.

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As of June 30, 2014, 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     Short-term Bank Loan       Bank of China       2014-01-08 to 2015-01-07       1 year     $ 2,112,500  
2     Short-term Bank Loan       Bank of China       2014-06-27 to 2014-12-26       6 months     $ 73,125  
3     Bankers acceptance notes payable       Bank of China       2014-01-09 to 2014-07-09       6 months     $ 1,137,500  
4     Bankers acceptance notes payable       Bank of China       2014-01-09 to 2014-07-09       6 months     $ 1,137,500  
5     Bankers acceptance notes payable       Bank of China       2014-05-19 to 2014-11-19       6 months     $ 1,137,500  
6     Bankers acceptance notes payable       Bank of China       2014-05-19 to 2014-11-19       6 months     $ 1,137,500  
7     Bankers acceptance notes payable       Bank of China       2014-05-26 to 2014-11-26       6 months     $ 1,300,000  
8     Bankers acceptance notes payable       Bank of China       2014-05-27 to 2014-11-27       6 months     $ 1,300,000  

Expired loans and bankers acceptance notes payable were all repaid as of the date of this filing.

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 bankers acceptance notes, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through the next twelve months. We are not dependent upon this initial offering to meet our liquidity needs for the next twelve months. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.

We collected the loans to related party of approximately $2.6 million and as a result, our cash balance was approximately $2.7 million as of October 27, 2014.

Credit and Mortgage Agreements

On January 8, 2014, Bamboo Tech entered into a Liquidity Capital Loan Contract with Bank of China Ltd. Lishui Branch. Under this agreement, Bamboo Tech borrowed RMB 13 million (approximately $2.1 million) for 12 months at 6.9% interest. Bamboo Tech is required to make quarterly interest payments on the 21st day of the last month of each quarter and to repay the principal on the loan on January 7, 2015. This loan has been repaid in full as of the date of this filing. Under the loan, Bamboo Tech has agreed to joint liability with Mr. Dexian Zhang and Mr. Zhengyu Wang. To secure the rights of the lender under this and a previous similar agreement, Bamboo Tech entered into a Maximum Mortgage Contract dated January 29, 2013. Under this mortgage agreement, Bamboo Tech grants a mortgage to Bank of China Ltd. Lishui Branch for debts up to RMB 20 million (approximately $3.3 million). The mortgage covers all debts and obligations existing between the parties prior to January 29, 2013 and all new obligations arising from January 29, 2013 through July 29, 2014. The property securing this mortgage consists of our Tianning Street facility and land use rights for such property, collectively valued at RMB 20 million (approximately $3.3 million).

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Obligations Under Material Contracts

Below is a table setting forth all of our contractual obligations as of June 30, 2014, which consists of our short-term and long-term loan agreements, loans from third parties and due to related parties: