Tanke Biosciences Corporation

What they do

The company produces and sells animal nutrition and feed additives in China, primarily organic trace mineral additives. It operates a 34,000 square-meter manufacturing facility in Guangzhou and markets 26 branded feed additives, each in seven mixes for different animal life stages. Its products are sold to feed producers and large farming operations in China, with a small portion exported to Southeast Asia and Latin America.

Revenue drivers

• Organic Trace Mineral Additives — The largest product line, accounting for 86% of 2012 revenue and 79% of 2011 revenue. These additives are designed to improve livestock growth and health while reducing waste.
• Feed Acidifiers, Seasonings and Flavor Enhancers / Functional Regulation Additives — The second product category, representing 11% of 2012 revenue and 17% of 2011 revenue. These products are marketed for feed palatability and digestive support.
• Herbal Medicinal Additives — A small product line that accounted for about 1% of revenue in both 2011 and 2012, with a 10-Q noting it at 4% of revenue.

Recent performance

Annual revenue grew from $20.1M in 2010 to $28.6M in 2012, but net income swung from $2.7M in 2010 to a loss of $210,247 in 2012. Operating cash flow turned negative in 2012 at -$1.2M, compared to $4.4M in 2010. Quarterly revenue in the first three quarters of 2013 was $4.7M, $5.6M, and $6.0M. As of September 30, 2013, the company had total assets of $28.8M, total liabilities of $13.1M, and shareholder equity of $15.6M.

Strategy

Management emphasizes new product development, having launched a plant-based antioxidant additive in the first half of 2013 and several premixture products in the third quarter. The company expects additional product launches in the fourth quarter of 2013. It aims to capitalize on China's growing demand for safe food and the lower utilization of feed additives compared to the U.S. and Europe. The distribution network targets China's top 10 feed producers and 500 largest farming operations.

Risks

• Missing Land Use Right Certificate — The company lacks a required Land Use Right Certificate for its manufacturing facility, risking eviction or invalidation of its lease by the PRC government.
• VIE Structure Risk — The company operates through a variable interest entity in China, meaning investors hold stock in a Nevada corporation with no direct equity ownership in the operating business.
• Negative Operating Cash Flow — Operating cash flow was -$1.2M in 2012, down from $3.7M in 2011, indicating potential liquidity strain.
• Customer Concentration and Credit Risk — The company extends loans to customers and suppliers and has significant receivables, with estimates required for collectability.

Outlook

Management stated that several new products are in the pipeline for 2013, including a plant-based antioxidant additive and premixture products, with more expected in the fourth quarter. The company believes growth opportunities exist as Chinese farmers adopt more sophisticated feed additives. However, the company did not provide specific financial guidance in the excerpts.