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Tantech Holdings Ltd – IPO: ‘F-1/A’ on 9/30/14

On:  Tuesday, 9/30/14, at 5:16pm ET   ·   Private-to-Public:  Document/Exhibit ¶  –  Release Delayed   ·   Accession #:  1144204-14-58780   ·   File #:  333-198788

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/30/14  Tantech Holdings Ltd              F-1/A¶                 2:3.9M                                   Toppan Vintage/FA

Document/Exhibit                   Description                      Pages   Size 

 1: F-1/A       Pre-Effective Amendment to Registration Statement   HTML   1.08M 
                by a Foreign Private Issuer                                      
 2: CORRESP   ¶ Comment-Response or Other Letter to the SEC         HTML     22K 

As filed with the Securities and Exchange Commission on September 30, 2014

Registration No. 333-198788

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 1 to

FORM F-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

TANTECH HOLDINGS LTD

(Exact name of registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s Name into English)

Copies to:

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

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

EXPLANATORY NOTE

This registration statement contains a prospectus to be used in connection with the initial public offering of 1,600,000 of the registrant’s common shares through the underwriter named on the cover page of that prospectus (the “IPO Prospectus”). In addition, the registrant is registering on this registration statement the resale of up to 1,600,000 common shares (the “Registrable Securities”) held by selling shareholders. Consequently, this registration statement contains a second prospectus to cover these possible resales (the “Resale Prospectus”) by certain of the registrant’s stockholders named under the Resale Prospectus (the “selling shareholders”). The IPO Prospectus and the Resale Prospectus are substantively identical, except for the following principal points:

The registrant has included in this Registration Statement, after the financial statements, alternate pages to reflect the foregoing differences.

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

Subject to Completion, Dated September 30, 2014

Tantech Holdings Ltd

1,600,000 Common Shares

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

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

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

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 $800,000 exclusive of the above commissions. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

This offering will remain open until the earlier of (i) a date mutually acceptable to us and our underwriter or (ii) December 1, 2014, subject to extension upon agreement with the underwriter. The underwriter expects to deliver the shares against payment in New York, New York, on or about ____, 2014.

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

Newbridge Securities Corporation

The date of this prospectus is                      , 2014.

Table of Contents

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                   , 2014 is authorized by us to be used in connection with our proposed initial public offering. The preliminary prospectus will only be distributed by us and the underwriter named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

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

 

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.

 

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

 

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.

 

 

Corporate Information

 

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

 

 

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

 

Post-Offering

 

If the selling shareholder, Tanbsok Group Ltd, sells all of the shares offered in the resale registration statement conducted concurrently with this offering, then the selling shareholder would hold 85.2% of our common shares and public shareholders would own 14.8% of such common shares at the completion of both offerings.

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.

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 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.

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:

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 year ended December 31, 2013, sales to our eight largest customers amounted in the aggregate to approximately 53.3% 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 years ended December 31, 2013 and 2012, respectively, we had one and four customers, respectively, that accounted for 10% or more of our revenues:

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

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

Sales of our products through distributors constituted approximately 52% 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 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 years ended December 31, 2013 and 2012, respectively, we had three and four suppliers that accounted for 10% or more of our purchases:

Because we purchase a material amount of our raw materials from these suppliers, the loss of any such suppliers could result in increased expenses for our company and result in adverse impact on our business, financial condition and results of operations.

Our bank accounts are not insured or protected against loss.

We maintain our cash with various banks and trust companies located in the PRC. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.

We are subject to risks relating to the banking facilities we use to overcome cash flow issues.

We generate a large proportion of our sales revenue through wholesale channels and distribution networks (supermarkets and chain stores) requiring us to extend net-90 day payment terms in most cases. These payment terms are difficult to negotiate given the significant bargaining power of the counterparties to the agreements. For this reason, we rely on banking facilities to overcome cash flow shortfalls between delivery and payment collection. Although we engage third-party debt collection agencies when required to manage counterparty risk, we cannot guarantee that we will receive payment in a timely fashion from our customers. To the extent we fail to receive payment in time to service our banking facilities, our business to be materially impacted.

We are substantially dependent upon our senior management and key research and development personnel.

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially on our chief executive officer, Mr. Zhengyu Wang, and our chief financial officer, Mr. Ningfang Liang, to manage our operations. Mr. Wang has been involved in the bamboo charcoal industry for more than ten years. Due to his experience in the industry in general and our company in particular for such a long period of time, he would be difficult to replace. In addition, locating a qualified chief financial officer with experience in US GAAP and fluency in English to replace Mr. Liang in a small market like Lishui would be difficult. We also depend on our chief technical officer, Dr. Zaihua Chen, for the development of new technology and products. Dr. Chen is an expert in charcoal in general and, in particular bamboo charcoal and the use of charcoal for EDLC carbon. He would be difficult to replace in a city the size of Lishui.

While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel (particularly for those who work with our EDLC products) is intense, and the pool of suitable candidates is limited. We may be unable to quickly locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

We compete for qualified personnel with other technology companies and research institutions. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

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 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:

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 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:

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.

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 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 volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

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

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

We currently anticipate financing our subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart, which approval process typically takes 30 to 90 days, and sometimes longer, from the time the MOFCOM or its local branches receive all the required application documents. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to use the proceeds of this offering and capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

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

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

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

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

Governmental control of currency conversion may affect the value of your investment. 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

We are a holding company and we rely for funding on dividend payments from our subsidiaries, which are subject to restrictions under PRC laws.

We are a holding company incorporated in the British Virgin Islands, and we operate our core businesses through our subsidiaries in the PRC. Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from these PRC subsidiaries. If our subsidiaries incur debt or losses, their ability to pay dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC subsidiaries calculated according to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends to us. These restrictions on the availability of our funding may impact our ability to pay dividends to our Shareholders and to service our indebtedness.

Our business may be materially and adversely affected if any of our PRC subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.

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

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

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

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

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

Fluctuations in exchange rates could adversely affect our business and the value of our securities. 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

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

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

We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive income (loss).” For 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 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.

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 88.89% 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.

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.

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

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors. 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may decline.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2014 annual report on Form 20-F to be filed in 2015, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

The requirements of being a public company may strain our resources and divert management’s attention.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

We also expect that being a public company and these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

The market price of our common shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for our common shares will be determined through negotiations between the underwriter and us and may vary from the market price of our common shares following our initial public offering. If you purchase our common shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our common shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our common shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

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 “Underwriting” section. The initial public offering price may not be indicative of prices that will prevail in the trading market.

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

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. auditors that we did not require prior to this offering, and we will have annual payments for listing on a stock exchange if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1 million per year that we did not experience prior to commencement of this offering.

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 $1.63 or approximately 32.64% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or a PFIC, for any taxable year for which either (i) at least 75% of its gross income consists of certain types of “passive income” or (ii) at least 50% of the average value of the corporation’s assets produce, or are held for the production of, those types of passive income. For purposes of these tests, passive income includes rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business) and does not include income derived from the performance of services.

If we are treated as a PFIC, U.S. Holders would ordinarily be able to mitigate certain of the negative tax consequences if they are able to make: (i) a timely qualified electing fund (“QEF”) election; (ii) a protective QEF election; or (iii) a mark to market election with respect to the first taxable year in which we are considered a PFIC during the U.S. Holder’s holding period in its shares.

We are not committing to provide our U.S. Holders with the information required for making a QEF election or protective QEF election. If we fail to provide such information, a QEF election with respect to such entity generally will not be available. In such event, the rules described in the next paragraph generally will apply.

If we are treated as a PFIC, a U.S. Holder that does not make a QEF election generally will be subject to a special tax and an interest charge upon the sale of its shares or receipt of an “excess distribution” with respect to its shares. A U.S. Holder will be treated as receiving an “excess distribution” if the amount of the distributions received by the U.S. Holder in any taxable year is more than 125% of the average annual distributions paid by the Company with respect to its shares during the three preceding taxable years (or the period in which the U.S. Holder held such shares if shorter).

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.

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.

Use of Proceeds

After deducting the estimated Underwriting discount and offering expenses payable by us, we expect to receive net proceeds of approximately $6.8 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 loans, subject to approvals from or registrations with relevant PRC government authorities. We intend to initiate this process immediately upon completion of this offering. 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 MOFCOM or its local counterparts. Such approval process typically takes 30 to 90 days, and sometimes longer, from the time the MOFCOM or its local branches receive all the required application documents. 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. If we were to provide funding to Bamboo Tech through loans, the total amount of such loans may not exceed $6,710,080 (RMB41,600,000) which is the difference between $19,614,080 (RMB121,600,000), that is Bamboo Tech’s total investment amount as approved by the foreign investment authorities, and $12,904,000 (RMB80,000,000), that is Bamboo Tech’s registered capital. Such loans must also be registered with the SAFE, which registration usually takes no more than 20 working days after application to complete. The cost for obtaining such approvals and completing such registration is minimal. We cannot assure you that we will be able to complete these government registrations or obtain the relevant approvals on a timely basis, if at all. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the funds in China until remittance is completed. See “Risk Factors—Risks Related to Doing Business in the PRC—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

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

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.

Dividend Policy

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

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

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

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

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

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

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:

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).

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.

Capitalization

The following table sets forth our capitalization as of April 30, 2014 on a pro forma as adjusted basis giving effect to the completion of the offering at an assumed public offering price of $5.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting fees. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

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

U.S. Dollars

As of July 31, 2014

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 December 31, 2013 was $45,295,528 or approximately $2.26 per common share. Net tangible book value per common share as of December 31, 2013 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 of 600 of such shares.

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 December 31, 2013, will be approximately $52,089,291 or $2.41 per common share. This would result in dilution to investors in this offering of approximately $2.59 per common share or approximately 51.8% from the assumed offering price of $5.00 per common share. Net tangible book value per common share would increase to the benefit of present shareholders by $2.74 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 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.

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 approximately 72.6% of total revenue for the year ended December 31, 2013 and approximately 69.1% for the year ended December 31, 2012.

The largest category of our household products is purification and deodorization products. Made from dry distilled carbonized bamboo, our purification and deodorization products have the ability to absorb harmful substances and air-borne odors, including benzene, formaldehyde, ammonia and carbon tetrachloride. These products also come in many shapes and varieties for a multitude of purposes including pillows, cushion insoles, wrist pads and clothes hangers and etc. Bamboo vinegar is an additive that can be used in food processing, medical and hygiene products and fertilizer. Although it currently only accounts for a small portion of our revenue, bamboo vinegar product is crucial for us to maintain close ties with the agricultural industry which we believe will be a key area for growth in the coming years. Cleaning products, including disinfectants, detergents, lotions, specialized soaps and toilet cleaners are relatively new in our household products but provide us another opportunity for growth. Purchased from third parties and sold through our distribution channel, barbecue charcoals designed for domestic market are also a key source of revenue for us in recent years.

Currently, household products are sold via our 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 March 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 approximately 14.3% of revenue for the year ended December 31, 2013 and approximately 13.2% for the year ended December 31, 2012. 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.

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

Our trading business accounted for approximately 13.1% of revenue for the year ended December 31, 2013 and approximately 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 operation. Because of our experience in trading charcoal and in order to improve our cash flows, we also engaged in rubber trading through this entity until September 2013. We usually imported rubber from overseas markets and then sold it in local markets within a short time. The fluctuation in the exchange rate between U.S. dollar and RMB had certain effects on the profitability of our trading business, and we usually mitigated such risk by selling the imported rubber within a short period of time. As our trading business only accounts for a small portion of our total revenue, we believe our exposure to foreign exchange risk is insignificant. The profit of our trading business has been relatively low, and as of September 2013, we started reduce our trades of rubber. While we may have sporadic trades of rubber in the future and while we are still authorized to engage in rubber trading, it will not be a focus of our Company.

We expect our sales of household products will continue to grow in the coming years with the increased brand awareness and growing demand for our bamboo charcoal products. As EDLC devices are increasingly used in the mass transportation and automobile industries, we expect our sales of EDLC carbon will increase. We are otherwise unaware of any specific known trends, uncertainties or events that are reasonably likely to have a material effect on our sales or revenue of household products and EDLC carbon. As we have significantly decreased our trades of rubber starting September 2013, our revenue from our trading segment is likely to decrease in future years. If we cannot increase our household products and EDLC carbon revenues to offset such decreases, our total revenue is likely to decrease. In addition to the likely decrease in revenue, our selling expenses and general and administrative expenses are expected to grow in the following years as we increase our marketing efforts and incur higher personnel expenses. All of these may negatively impact our operating results and profitability. Therefore, our reported financial information may not necessarily be indicative of future operating results or financial condition.

Factors Affecting Our Results of Operations

Government Policy May Impact our Business and Operating Results

We 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.

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 none to our knowledge 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.

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:

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.

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:

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 1.2% 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 2 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.

Results of Operations

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)

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.

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 pct (“percentage point”) 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.

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 $241,000 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:

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:

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.

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)

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.

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 $962,000 in 2012. Our self-produced BBQ charcoal was mainly sold in overseas markets where the demand for our products decreased in the fourth quarter of 2013, leading to a decrease 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 profit of approximately $308,000 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 $2.5 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.

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 are conducting technical seminars in September 2014 to introduce this technology and will conduct initial training between October and November 2014 in anticipation of the roll-out in late 2014.

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.

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, some of our PRC subsidiaries incurred losses and may not be allowed to pay dividends to us. In specific, Tantech Charcoal incurred a loss of approximately $718,000 and Energy Tech had a loss of approximately $561,000 in 2013. 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 $2.17 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 $3.33 million. Energy Tech incurred debt of approximately $4.17 million in a loan from Shanghai Pudong Development Bank Co. Ltd. To secure this debt, Energy Tech has granted a mortgage on property in Lishui valued at approximately $10.4 million. Finally, Tantech Charcoal has 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.

Years Ended December 31, 2013 and 2012

As of December 31, 2013, we had cash and cash equivalents of approximately $1.7 million and restricted cash of approximately $3.6 million. As of December 31, 2013, we did not have any foreign cash and short-term investments. Our current assets were approximately $48.8 million and our current liabilities were approximately $20.2 million, which resulted in a current ratio of 2.42:1. Total shareholders’ equity as of December, 31 2013 was approximately $45.5 million. The following table sets forth summary of our cash flows for the periods indicated:

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

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

Operating Activities

Net cash used in operating activities was approximately $1.9 million in 2013, compared to cash provided by operating activities of approximately $11.1 million in 2012. The increase in net cash used in operating activities was primarily attributable to the following factors:

Investing Activities

Net cash provided by investing activities was approximately $4.0 million in 2013, an increase of approximately $7.3 million from net cash used in investing activities of approximately $3.3 million in 2012. The increase in net cash provided by investing activities in 2013 was primarily attributable to the net collection of loans to related parties and loans to third parties of approximately $9.1 million in 2013 compared to net loans to related parties and third parties of approximately $1.3 million in 2012. As of the filing date, all loans to related parties have been repaid. The increase in net cash provided by investing activities was partially offset by a) the increase in the long-term prepayments of approximately $4.0 million we made to purchase equipments related to the production of EDLC carbon and to develop software related to the improvement of manufacturing process; b) the addition of intangible assets of approximately $774,000 in 2013.

Financing Activities

Net cash used in financing activities was approximately $995,000 in 2013, compared to approximately $7.3 million in 2012. The decrease in net cash used in financing activities in 2013 was primarily attributable to the lower net repayments of banks acceptance notes payable and bank loans compared to 2012.

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

Our primary source of cash is currently generated from the sales of our products and bank borrowings. In the coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raise, we are confident that we can meet cash requirements only by cash flows generated from our operating activities.

Loan Facilities

We repaid approximately $2.1 million in bank loans and borrowed approximately $2.1 million in bank loans for our working capital needs during the year ended December 31, 2013. We also repaid approximately $20.0 million of bankers acceptance notes payable and secured approximately $20.0 million of bankers acceptance notes payable in 2013. As a result, the balance of all our bank loans and bankers acceptance notes payable as of December 31, 2013 was approximately $13.4 million, which includes long-term bank loans – current portion of approximately $4.1 million, short-term bank loans of approximately $2.1 million and bankers acceptance notes payable of approximately $7.2 million.

As of December 31, 2013, the details of all our short-term bank loans and bankers acceptance notes payable are as follows: 

(All amounts are in U.S. dollars)

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 bills receivable, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least for the next twelve months. We 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.

Credit and Mortgage Agreements

On April 14, 2010, Energy Tech entered into a Fixed Assets Loan Contract with Shanghai Pudong Development Bank Co., Ltd. Lishui Branch. Under the agreement, Energy Tech borrowed RMB 25 million (approximately $4.2 million) for four years at an interest rate to float according to rates set by the People’s Bank of China. As of the date of the loan agreement, the interest rate was 6.336%. The interest rate is set on January 1 of each year, and interest is payable quarterly, on the 20th day of the last month of each quarter. Under the loan, Bamboo Tech, the Forasen Group Co. Ltd., Ms. Yefang Zhang and Mr. Zhengyu Wang have agreed to jointly guarantee performance, and Energy Tech has agreed to grant a mortgage. To secure the rights of the lender under this and a previous similar agreement, Energy Tech entered into a Maximum Mortgage Contract dated June 25, 2012. Under this mortgage agreement, Energy Tech grants a mortgage to Shanghai Pudong Development Bank Co., Ltd. Lishui Branch for debts up to RMB 62.37 million (approximately $10.5 million). The mortgage covers all debts and obligations existing between the parties prior to June 25, 2012 and all new obligations arising from June 25, 2012 through June 25, 2015. The property securing this mortgage consists of our Shuige Industrial Zone facility, valued at RMB 62.73 million.

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 $2.2 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. 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.

Obligations Under Material Contracts

Below is a table setting forth all of our contractual obligations as of December 31, 2013, which consists of our short-term and long-term loan agreements, loans from third parties and due to related parties:

Statutory Reserves

Under PRC regulations, all our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses.

Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have these restrictions on our net assets as of December 31, 2013 and December 31, 2012. We are also party to certain debt agreements that are secured with mortgages on our real property, but such debt agreements do not restrict our net assets and instead only impose restrictions on the mortgaged property. To the extent we wish to transfer mortgaged property, we are able to do so subject to the obligation that we settle or transfer such mortgage in connection with such transfer; accordingly, we deduct the amount of such mortgage from the value of the underlying property and reflect the balance in our net assets.

The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of December 31, 2013 and December 31, 2012.

Total restricted net assets accounted for approximately 8.4% of our consolidated net assets as of December 31, 2013. As our subsidiaries usually set aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses, we believe the potential impact of such restricted net assets on our liquidity is limited.

Capital Expenditures

We had capital expenditures of approximately $1.2 million and $2.0 million for the years ended December 31, 2013 and 2012, respectively for the addition and renovation of our workshops and office buildings; purchasing of equipment in connection with our business activities.

In 2014 and 2015, our capital expenditures are expected to be approximately $5.8 million and $3.2 million, respectively, and will be primarily related to the construction of two new production lines for our household products, to increase the capacity and improve the technology used in the production of EDLC carbon and to establish R&D center for EDLC carbon. Specifically, we will continue to

We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from our subsidiaries’ operations to fund our capital commitments in the past and anticipate using such funds and proceeds received from our initial public offering to fund capital expenditure commitments in the future.

Off-balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there was no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Revenue recognition

Our revenue is generated from the sale of our products to wholesalers and retailers. We recognize revenue when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of delivery for sales, which is the point when risk of loss and title passes to the customer.

We sell our products either under free on board (“FOB”) warehouse term or under FOB destination term. For sales under free on board (“FOB”) warehouse term, we recognize revenue when product leaves our warehouse or production facility. Product delivery is evidenced by warehouse shipping log as well as signed shipping bills from the shipping company. For sales under FOB destination term, we recognize revenue when product is delivered and accepted by customer. Product delivery is evidenced by signed receipt document and title transfers upon delivery. Revenue recognized under such method accounted for approximately 80% and 75% of our total revenue for the years ended December 31, 2013 and 2012, respectively.

Revenue is reported net of all value added taxes. We do not routinely permit customers to return products and historically, customer returns have been immaterial.

Allowance for accounts receivable and advance to suppliers

We establish an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivable and advance to suppliers. A considerable amount of judgment is required in assessing the amount of the allowance.

We consider the historical level of credit losses and apply percentages to aged receivable categories when we decide the allowance for accounts receivable. Additional specific provision is made against accounts receivable to the extent which they are considered to be doubtful. Bad debts are written off when identified and we do not accrue interest on trade receivables. Collectability conditions are assessed on individual receivable accounts when we determine an allowance is necessary.

As a significant portion of our accounts receivable balances as of December 31, 2013 were from a few large customers who have good payment records and credit history with us, we evaluated the collectability of these accounts and determined whether the allowance was reasonable based on the analysis of these individual accounts.

We have not granted special payment terms to large customers and we review our allowance levels periodically in order to ensure our methodology used to determine allowances is reasonable. Our most recent review of collection information indicated that approximately 92.8% of the accounts receivable balances as of December 31, 2013 have been collected by the end of August 2014. Of the remaining 7.2% (equivalent to approximately $2.2 million), approximately $1.1 million is from our two largest customers who have made commitments to pay us in October 2014. Based on the results of the review, we believe that our allowance for accounts receivable as of December 31, 2013 is reasonable.

The allowance for advances to suppliers represents prepayment to our supplier(s) that are deemed partially or wholly unrecoverable based on management’s evaluation of the credibility of the supplier. Our decision on whether to set aside allowance and the percentage of allowance is based on our evaluation of the credit worthiness, financial information and payment history of individual supplier. We generally apply the result of aging analysis to the determination of allowance for advances to suppliers. We usually set aside 50% of the balance of advances with an aging greater than six months but within one year as the allowance and 100% of the balance of advances with an aging greater than one year as the allowance based on our past experience and analysis on the collection history. In addition to the general allowance policy, we also consider specific information related to each individual supplier and utilize regular evaluation performed by our purchasing department to determine whether to record an allowance for an individual supplier. If an advance deemed uncollectable is returned to us or goods are delivered later, we record a reversal of the allowance.

Our advances to suppliers balances continued to grow in recent years as we increased raw materials purchases from a few large suppliers. Since these large suppliers have good on-time delivery record and lower credit risks, our allowance for advances to suppliers decreased accordingly. We evaluate our allowance level periodically in order to ensure our methodology used to determine allowances is reasonable.

Our most recent review of utilization information indicated that approximately 97.2% of the advance balances as of December 31, 2013 have been utilized or is expected to be utilized before the year-end. Based on the results of the review, we believe that our allowance for advances to suppliers as of December 31, 2013 is reasonable.

While our credit losses have historically been insignificant, we may experience higher credit loss rates in the future than we had in the past. Our accounts receivable are concentrated in relatively few customers, with one customer accounting for approximately 10% of our total accounts receivable, net as of December 31, 2013 and four of our customers in the aggregate accounting for approximately 85% of our total accounts receivable, net as of December 31, 2012. A significant change in the liquidity or financial position of our significant customer would require us to increase our allowance for doubtful accounts and negatively affect our working capital.

Income Tax

We account for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or future deductibility is uncertain.

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