UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)
     
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
     
OR
     
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the fiscal year ended December 31, 2016
     
OR
     
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
     
OR
     
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report……………

 

For the transition period from                            to

 

Commission file number 001-37602

 

Fuling Global Inc.
(Exact name of Registrant as specified in its charter)
 
Cayman Islands
(Jurisdiction of incorporation or organization)
 
Southeast Industrial Zone, Songmen Town
Wenling, Zhejiang Province
People’s Republic of China 317511
(Address of principal executive offices)
 
Gilbert Lee, Chief Financial Officer
+1-610-366-8070 – telephone

ir@fulingplasticusa.com

Fuling Plastic USA, Inc.

6690 Grant Way, Allentown, PA 18106
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Ordinary Shares, par value $0.001 per share    Nasdaq

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 15,756,500 Ordinary Shares

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

☐ Yes    ☒ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

☐ Yes    ☒ No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

☒ Yes    ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

☐ Yes    ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer ☒

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☒  

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☐

  Other

 

 

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

☐ Item 17    ☐ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

☐ Yes    ☒ No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

☐ Yes    ☒ No

 

 

 

 

 

Table of Contents

 

      Page
PART I    
  Item 1. Identity of Directors, Senior Management and Advisers 1
  Item 2. Offer Statistics and Expected Timetable 1
  Item 3. Key Information 1
  Item 4. Information on the Company 16
  Item 4A. Unresolved Staff Comments 42
  Item 5. Operating and Financial Review and Prospects 42
  Item 6. Directors, Senior Management and Employees 66
  Item 7. Major Shareholders and Related Party Transactions 72
  Item 8. Financial Information 74
  Item 9. The Offer and Listing 75
  Item 10. Additional Information 76
  Item 11. Quantitative and Qualitative Disclosures About Market Risk 82
  Item 12. Description of Securities Other than Equity Securities 83
       
PART II    
  Item 13. Defaults, Dividend Arrearages and Delinquencies 84
  Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 84
  Item 15. Controls and Procedures 84
  Item 15T. Controls and Procedures 85
  Item 16. [Reserved] 85
  Item 16A. Audit Committee Financial Expert 85
  Item 16B. Code of Ethics 85
  Item 16C. Principal Accountant Fees and Services 85
  Item 16D. Exemptions from the Listing Standards for Audit Committees 85
  Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 86
  Item 16F. Change in Registrant’s Certifying Accountant 86
  Item 16G. Corporate Governance 86
  Item 16H. Mine Safety Disclosure 86
       
PART III    
  Item 17. Financial Statements 87
  Item 18. Financial Statements 87
  Item 19. Exhibits 87

 

 

 

Conventions Used in this Annual Report

 

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only, “we,” “us,” “our company,” “Company,” “our” and “Fuling” refer to:

 

  Fuling Global Inc., a Cayman Islands company (“FGI” when individually referenced), which is the parent holding company;
     
  Total Faith Holdings Limited, a British Virgin Islands company (“Total Faith” when individually referenced), which is a wholly owned subsidiary of FGI;
     
  Taizhou Fuling Plastics Co., Ltd., a PRC company (“Taizhou Fuling”), which is a wholly owned subsidiary of Total Faith;
     
  Domo Industry Inc., a New York company (“Domo”), of which Total Faith owns 49% of the equity but maintains effective control;
     
  Direct Link USA LLC, a Delaware company (“Direct Link”), which is a wholly owned subsidiary of Taizhou Fuling;
     
  Fuling Plastic USA, Inc., a Pennsylvania company (“Fuling USA”), which is a wholly owned subsidiary of Taizhou Fuling;
     
  Zhejiang Great Plastics Technology Co., Ltd., a PRC company (“Great Plastics”), which is a wholly owned subsidiary of Taizhou Fuling; and
     
  Taizhou Fuling established Wenling Changli Import and Export Co., Ltd., a PRC company (“Wenling Changli”), which is a wholly owned subsidiary of Taizhou Fuling.

 

This annual report contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. The exchange rates in effect as of December 31, 2016 and 2015 were US $1.00 for RMB 6.94477 and RMB 6.4917, respectively. The average exchange rates for the years ended December 31, 2016 and 2015 were US $1.00 for RMB 6.64410 and RMB 6.2288, respectively. We use period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

For the sake of clarity, this annual report follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of the Chief Operating Officer and Chair of our board of directors will be presented as “Guilan Jiang,” even though, in Chinese, Ms. Jiang’s name is presented as “Jiang Guilan.”

 

We obtained the industry and market data used in this annual report or any document incorporated by reference from industry publications, research, surveys and studies conducted by third parties and our own internal estimates based on our management’s knowledge and experience in the markets in which we operate. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report. We have sought to provide current information in this annual report and believe that the statistics provided in this p annual report remain up-to-date and reliable, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under “Item 3—Key Information—Risk Factors,” “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects,” and elsewhere in this report, as well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission (the “SEC”) or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.

 

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

 

 

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable for annual reports on Form 20-F.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable for annual reports on Form 20-F.

 

Item 3. Key Information

 

A. Selected Financial Data

 

The following table presents the selected consolidated financial information for our company. The selected consolidated statements of comprehensive income data for the two years ended December 31, 2016 and 2015 and the selected consolidated balance sheets data as of December 31, 2016 and 2015 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and presented in accordance with US GAAP.

 

(All amounts in thousands of U.S. dollars, except Dividend per share in Renminbi and Shares outstanding)

 

Statement of operations data:

 

  

For the year ended

December 31,

 
   2016   2015 
Revenues  $104,882   $91,294 
Gross profit  $25,241   $23,648 
Operating expenses  $16,724   $14,678 
Income from operations  $8,518   $8,970 
Provision for Income taxes  $2,030   $1,442 
Net income  $7,943   $7,948 
Income from operations per share  $0.54   $0.73 
Net income per share (basic and diluted)  $0.50   $0.65 
Dividend per share in USD  $0   $0 
Dividend per share in Renminbi  ¥0   ¥0 

 

Balance sheet data:

 

   As of December 31, 
   2016   2015 
Current assets  $47,830   $49,846 
Total assets  $94,265   $75,729 
Current liabilities  $42,281   $32,411 
Total liabilities  $44,793   $32,411 
Total shareholders’ equity (net assets)  $49,472   $43,319 
Capital stock  $16   $16 
Shares outstanding   15,756,500    15,732,795 

 

1

Table of Contents 

 

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 ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:

 

   December 31, 2016  December 31, 2015
US $1: RMB exchange rate  Period End   6.94477   Period End   6.4917 
   Average   6.64410   Average   6.2288 

 

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.

 

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

 

   Midpoint of Buy and Sell Prices for U.S. Dollar per RMB 
Period  Period-End   Average   High   Low 
2012   6.3090    6.3115    6.3862    6.2289 
2013   6.1090    6.1938    6.3087    6.1084 
2014   6.1484    6.1458    6.2080    6.0881 
2015   6.4917    6.2288    6.4917    6.0933 
2016   6.9448    6.6441    7.0672    6.4494 
September   6.6702    6.6745    6.6878    6.6636 
October   6.7740    6.7272    6.7821    6.6679 
November   6.8872    6.8432    6.9243    6.7595 
December   6.9448    6.9330    7.0672    6.8826 
2017(through March 10, 2017)   6.9121    6.8877    6.9535    6.8466 
January   6.8817    6.8987    6.9535    6.8466 
February   6.8689    6.8723    6.8842    6.8541 
March (through March 10, 2017)   6.9121    6.8968    6.9131    6.8781 

 

As of March 10, 2017, the exchange rate is RMB 6.9121 to $1.00.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

2

Table of Contents 

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Risks Related to Our Business and Industry

 

Our U.S. competitors are significantly larger than our company.

 

The three largest U.S. suppliers of foodservice disposables account for a significant percentage of the industry. As of 2012, Dart Container Corporation, Reynolds Group/Pactiv and Georgia-Pacific collectively held approximately 29% of the U.S. market share in the foodservice disposables industry. The overall industry consists of a small number of competitors, with approximately 50% of our market controlled by the top 10 companies in the industry.

 

Concentration in the foodservice disposables industry varies widely within specific market segments, with some segments dominated by a small number of producers. For example, Dart Container is the leading supplier of plastic foodservice beverage cups, followed by Pactiv and Berry Plastics. By contrast, the market for cutlery is more fragmented, with a growing portion of the market supplied by contract manufacturers in China.

 

Nevertheless, we may be unable to compete effectively against such larger, better-capitalized companies, which have well-established, long-term relationships with the large customers we serve and seek to serve.

 

We are subject to risks related to our dependence on the strength of restaurant, retail and commercial sectors of the economy in various parts of the world.

 

Our business depends on the strength of the restaurant, retail and commercial sectors of the economy in various parts of the world, primarily in North America, and to a lesser extent Europe, Canada, Central and South America, the Middle East, Africa, and China. These sectors of the economy are affected primarily by factors such as consumer demand and the condition of the retail industry, which, in turn, are affected by general economic conditions. Challenging economic conditions in our target markets may exert considerable pressure on consumer demand, and the resulting impact on consumer spending may have an adverse effect on demand for our products, as well as our financial condition and results of operations.

 

Our projections and assumptions underlying may be inaccurate, resulting in slower than anticipated growth.

 

All statements, except historical data, are forward-looking statements. Although we believe the projections in these forward-looking statements are reasonable, we cannot guarantee these projections will happen. Our operational results in the future may be different from our estimates for many reasons, including but not limited to the oil price (our products are by-products of oil, so we are heavily impacted by oil price), shrinking fast food industry production caused by increased production cost and changed consumption habits of food industry, failure to grow capacity and capacity utilization as quickly as anticipated or at all, losing or failing to secure customers and customer orders, shutdown of important clients, and replacement of plastics industry by paper and wood products industry.

 

Our plans to continue to improve productivity and reduce costs may not be successful, which would adversely affect our ability to compete.

 

Our success depends on our ability to continually improve our manufacturing operations to gain efficiencies, reduce supply chain costs and streamline selling, general and administrative expenses in order to produce products that are reasonably priced, while still allowing our Company to invest in innovation.

 

In particular, we are in the midst of installing additional production lines in Allentown, Pennsylvania. Our goal is to manufacture in this facility certain products that are not efficient to manufacture and ship from China. This project may not be completed completely as planned, may be more costly to implement than expected, may have delays in implementation, or may not result in, in full or in part, the savings and other benefits anticipated. In addition, such initiatives require the Company to implement a significant amount of organizational changes, which could have a negative impact on employee engagement, divert management’s attention from other concerns, and if not properly managed, impact the Company’s ability to retain key employees, cause disruptions in the Company’s day-to-day operations and have a negative impact on the Company’s financial results.

 

Price increases in raw materials and sourced products could harm the Company’s financial results.

 

Our primary raw materials are (1) plastic resin (primarily polypropylene (“PP”), polystyrene (“PS”) which includes General Purpose Polystyrene (“GPPS”) and High Impact Polystyrene (“HIPS”), and polyethylene terephthalate (“PET”)), (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4) plastic colorants, (5) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and (6) labeling materials. These raw materials are subject to price volatility and inflationary pressures. Our success is dependent, in part, on our continued ability to reduce our exposure to increases in those costs through a variety of programs, including sales price adjustments based on adjustments in such raw material costs, while maintaining and improving margins and market share. We also rely on third-party manufacturers as a source for our products. These manufacturers are also subject to price volatility and labor cost and other inflationary pressures, which may, in turn, result in an increase in the amount we pay for sourced products. Raw material and sourced product price increases may more than offset our productivity gains and price increases and may adversely impact the Company’s financial results.

 

3

Table of Contents 

 

Our reliance on third party logistics providers may put us at risk of service failures for our customers.

 

Although some of our larger competitors have integrated logistics and delivery service companies, we rely on third parties to ship our products from China to our customers. Even after completing installation of the production lines in our Allentown facility, we will continue to rely on third parties for transportation within the United States. One of the bases on which we compete (particularly with regard to our QSR customers) is service. To the extent we are unable to meet their demand for products or do not deliver products on time, we stand a substantial risk of losing key accounts. Because we rely on third parties for logistics services, we may be unable to avoid supply chain failures, even if we are able to meet our manufacturing obligations to customers.

 

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, domain name and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own thirty-three patents in China and one patent in U.S. covering our designs and production technology.

 

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.

 

Our Chinese patents and registered marks may not be protected outside of China due to territorial limitations on enforceability.

 

In general, patent and trademark rights have territorial limitations in law and are valid only within the countries in which they are registered.

 

At present, Chinese enterprises may register their trademarks overseas through two methods. One is to file an application for trademark registration in each single country or region in which protection is desired, while the other is to apply via the Madrid system for international trademark registration. By the second way, under the provisions of the Madrid Agreement concerning the International Registration of Marks (the “Madrid Agreement”) or the Protocol Relating to the Madrid Agreement concerning the International Registration of Marks (the “Madrid Protocol”), applicants may designate their marks in one or more member countries via the Madrid system for international registration.

 

As of the date of the filing, we have registered one trademark at the International Bureau of the World Intellectual Property Organization (“WIPO”) under the Madrid Agreement and Protocol. We have also applied for territorial extension by designating 15 member countries through WIPO. Currently the registration for this trademark is valid in 13 foreign member countries, including the U.S.

 

Similar with trademarks, Chinese enterprises may also register their patents overseas through two methods. One is to file an application for patent registration in each single country or region, and the other is to file international application with the China Intellectual Property Office or the International Bureau of World Intellectual Property Organization under the Patent Cooperation Treaty. However, such international application may relate to invention or utility model patents, but does not include industrial design patents.

 

As of the date of the filing, we have registered one design patent at the United States Patent and Trademark Office. This registration is only valid in the U.S. For more details, please see the disclosure of our patents

 

Currently, most of our patents and trademarks are registered in China. If we do not register them in other jurisdictions, they may not be protected outside of China. As a result, our business and competitive position could be harmed.

 

4

Table of Contents 

 

We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

 

Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States and other countries in Asia. The validity and scope of claims relating to patents in our industry involve complex scientific, legal and factual questions and analysis and, as a result, may be highly uncertain. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:

 

  pay damage awards;
     
  seek licenses from third parties;
     
  pay ongoing royalties;
     
  redesign our branded products; or
     
  be restricted by injunctions,

 

each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition and results of operations.

 

Outstanding bank loans may reduce our available funds.

 

We have approximately $17.8 million in outstanding bank loans as of December 31, 2016. The loans are held at multiple banks and entities and are secured by some of our land and property in China and the U.S. as the collateral for the debt. While we believe we have adequate capital to repay these bank loans at present, there can be no guarantee that we will be able to pay all amounts when due or to 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.

 

We may be unable to refinance our short-term loans.

 

We expect to be able to refinance its short-term loans based on past experience and our good credit history. We do not believe failure to refinance from certain banks will have significant negative impact on our normal business operations. In both 2016 and 2015, our operating cash flow was positive. In addition, our related parties including our major shareholders and affiliate companies are willing to provide us financial support. However, it is possible for us to have negative cash flow in the future, and for our related parties to be unable or unwilling to provide us financial support as needed. As a result, the failure to refinance our short-term loans could potentially affect our capital expenditure and expansion of business.

 

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 either mortgages on our real and other business property or guarantees by some of our shareholders. 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.

 

5

Table of Contents 

 

We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.

 

We may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking additional financing in the immediate future, any additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:

 

  limit our ability to pay dividends or require us to seek consent for the payment of dividends;
     
  increase our vulnerability to general adverse economic and industry conditions;
     
  require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and
     
  limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.

 

The loss of any of our key customers could reduce our revenues and our profitability.

 

Our key customers are principally multinational QSRs, third party distributors, and retail stores, mainly located in the U.S. For the year ended December 31, 2016, sales to our ten largest customers amounted in the aggregate to approximately 54.0% of our total revenue. For the year ended December 31, 2015, sales to our nine largest customers amounted in the aggregate to approximately 50.9% 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, 2016 and 2015, respectively, we had one and one customer that accounted for 10% or more of our revenues.

 

Customer Name 

Year Ended

December 31,

2016

  

Year Ended

December 31,

2015

 
Lollicup USA Inc.   13.0%   12.9%

 

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 buy our supplies from a relatively limited number of suppliers.

 

During the year ended December 31, 2016, our four largest suppliers accounted for approximately 60% of our total purchases. During the year ended December 31, 2015, our four largest suppliers accounted for approximately 50% of our total purchases. During the years ended December 31, 2016 and 2015, respectively, we had three and two suppliers that accounted for 10% or more of our purchases.

 

Supplier Name 

Year Ended

December 31,

2016

  

Year Ended

December 31,

2015

 
Brilliance Resources Company Limited   22.0%   14.7%
Koco Group Ltd   13.2%   * 
Grand Chemical Group   19.1%   17.3%

 

* Less than 10% during the period.

 

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.

 

6

Table of Contents 

 

Our bank accounts are not fully insured or protected against loss.

 

We maintain our cash with various banks and trust companies located in mainland China, Hong Kong and the United States. Our cash accounts in the PRC are not insured or otherwise protected. To the extent our U.S. and Hong Kong accounts were to exceed statutory amounts, they would also not be fully protected against loss. 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 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. Xinfu Hu, and our Chief Operating Officer and Chair, Ms. Guilan Jiang, to manage our operations. Ms. Jiang and Mr. Hu are husband and wife and have been involved in the plastic industry for more than twenty years. Due to their experience in the industry and long relationships with our customer base, they would be difficult to replace.

 

While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key person 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 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.

 

In our efforts to develop new products and methods of manufacturing, we compete for qualified personnel with 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.

 

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 increasing market penetration of our existing products, developing new products and increasing the number and size of customers we serve. Pursuing these strategies has resulted in, and will continue to result in substantial demands on management resources. In particular, the management of our growth will require, among other things:

 

  continued enhancement of our research and development capabilities;
     
  stringent cost controls and sufficient liquidity;
     
  strengthening of financial and management controls;
     
  increased marketing, sales and support activities; and
     
  hiring and training of new personnel.

 

If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.

 

Risks Related to Doing Business in China

 

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.

 

7

Table of Contents 

 

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 shareholders.

 

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 shareholder 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. On January 29, 2014, the SAT issued Announcement of the State Administration of Taxation on Recognizing Resident Enterprises Based on the Criteria of de facto Management Bodies, to further clarify the reporting and filing procedure for offshore entities controlled by a Chinese enterprise or enterprise group and recognized as a resident enterprise.

 

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 FGI or its subsidiaries 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 ordinary shares, or the gain our non-PRC stockholders may realize from the transfer of our ordinary shares, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. 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 ordinary shares, 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.

 

We are 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 laws.

 

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 laws 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.

 

8

Table of Contents 

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct a substantial amount 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 some of 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.

 

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. FGI receives revenues and purchases raw materials primarily in U.S. dollars but incurs other expenses primarily in RMB. Although our main suppliers are based in mainland China or based in Hong Kong with Chinese operating subsidiaries, some of them provide quotations in U.S. dollars. We choose quotations based on price competitiveness. In the past, U.S. dollars quotations were more competitive so we purchase almost all of our raw materials in U.S. dollars. However, recently several RMB quotations were more competitive and we accepted them and paid in RMB.

 

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

 

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

 

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

 

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

 

9

Table of Contents 

 

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

 

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 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 Ordinary 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.

 

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, 2016 and 2015, we had a negative adjustment of $1,913,200 and a negative adjustment of $702,167, 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 and our reputation and could result in a loss of your investment in our shares, 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 some 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 and our business. 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 shares 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.

 

The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

 

10

Table of Contents 

 

SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.

 

If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

Ms. Jiang has completed her SAFE Circular 37 registration. Ms. Sujuan Zhu, Mr. Qian Hu, Mr. Xinzhong Wang, Mr. Jinxue Jiang and Mr. Yongjun Guo have applied to SAFE’s local branch in Taizhou for registration, but we cannot provide any assurances that such registration will be completed in a timely manner. Moreover, we may not be fully informed of the identities of all our beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE registration requirements.

 

As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

China’s proposed foreign investment law may impose new burdens on our company.

 

On January 19, 2015, MOFCOM released the draft Foreign Investment Law for public comment (the “Draft FI Law”). The Draft FI Law proposed fundamental changes to the existing foreign investment legal regime in China. If implemented in its current status, the Draft FI Law, once effective, will require Taizhou Fuling to submit an annual report to the foreign investment authority. The information required by the annual report may be extensive and burdensome, such as the foreign invested company’s main products, import and export, employment, financial status, transactions with our affiliates and material disputes. If we fail to make such reporting timely or if there is any concealment in such reporting, we may be subject to fines or other regulatory sanctions.

 

Risks Related to Our Corporate Structure and Operation

 

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

 

We are a public company in the United States. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act 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 to increase our legal, accounting and financial compliance costs and make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a public company than those incurred by similarly sized foreign private issuers. 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 Ordinary Shares could decline.

 

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

 

Entities controlled by our employees, officers and/or directors, in the aggregate, continue to own a majority of our outstanding shares. As a result, our employees, officers and directors 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 Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders. See “MAJOR SHAREHOLDERS.”

 

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

 

We are publicly listed company in the United States. As a publicly listed company, we are 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 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 are governed by U.S. laws that our non-publicly traded competitors 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.

 

11

Table of Contents 

 

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 are 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 are required to issue quarterly reports or proxy statements. We are not required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers are required to report equity holdings under Section 16 of the Exchange Act and are not subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we are also 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 are still 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.

 

As a foreign private issuer, we are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. If we opt to rely on such exemptions in the future, such decision might afford less protection to holders of our ordinary shares.

 

Section 5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent, and Section 5605(d) and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination of directors. As a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. We have agreed with our underwriters that we do not opt to follow home country practice in lieu of such requirements for two years after the completion of our initial public offering. See “Item 16.G. Corporate Governance.” After this period, however, we could decide to follow home country practice. Our board of directors could make such a decision to depart from such requirements by ordinary resolution. The remainder of this risk factor, therefore, discusses risks to shareholders in the event the board of directors were to depart from some of such Nasdaq requirements and instead follow home country practices.

 

The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our board of directors would not consist of independent directors if we relied on the foreign private issuer exemption, fewer board members would be exercising independent judgment and the level of board oversight on the management of our company might decrease as a result. In addition, we could opt to follow Cayman Islands law instead of the Nasdaq requirements that mandate that we obtain shareholder approval for certain dilutive events, such as an issuance that will result in a change of control, certain transactions other than a public offering involving issuances of 20% or greater interests in the company and certain acquisitions of the shares or assets of another company. For a description of the material corporate governance differences between the Nasdaq requirements and Cayman Islands law, see “Description of Share Capital — Differences in Corporate Law” in our registration statement on Form F-1 (File no. 333-205894), filed with the SEC on July 28, 2015, as amended.

 

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 Chief Operating Officer and Chair, Guilan Jiang, owns 50% of Wenling Fulin Plastic Products Co. Ltd. Ms. Jiang is also its legal representative and general manager. While this company was previously engaged in the plastics industry and, as a result, may have competitive overlap with our company, we do not believe it currently competes with our company. Wenling Fulin Plastic Products Co. Ltd. is a holding company with no investment in any competing business with us, although it has investment in a local commercial bank and leases its land to a restaurant. While the company was previously in our industry, this privately held company’s operations, but not the name, have changed. Notwithstanding the foregoing, if this company were to begin to operate within our industry, we might find a conflict of interest.

 

Although her business working time at this company is flexible, Ms. Jiang has historically devoted very limited time to matters concerning Wenling Fulin Plastic Products Co. Ltd., and most of her time to matters for FGI. If Ms. Jiang devotes any significant time and effort to this other company in the future, such business activities could both distract her from focusing on FGI and pose a conflict of interest to the extent her activities at Wenling Fulin Plastic Products Co. Ltd. compete with our company.

 

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

 

While we have purchased insurance, including export transportation, product liability and account receivable insurance, to cover certain assets and property of our business, the amounts and scope of coverage could leave our business inadequately protected from loss. For example, not all of our subsidiaries have coverage of business interruption insurance. 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.

 

12

Table of Contents 

 

Risks Related to Ownership of Our Ordinary 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 Ordinary 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 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 Ordinary 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 Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share 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, are 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 Ordinary Shares may decline.

 

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with this annual report on Form 20-F, we are 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 is 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 our initial public 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 Ordinary 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 are 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 nonetheless increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases 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 and current reports with respect to our business and operating results. In addition, as long as we are listed on The Nasdaq Capital Market, we are also required to file semi-annual financial statements.

 

As a result of disclosure of information in this annual report 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 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.

 

13

Table of Contents 

 

The market price of our Ordinary 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 price you paid.

 

The trading price for our Ordinary Shares has fluctuated since we first listed our Ordinary Shares. Since our Ordinary Shares became listed on the Nasdaq on November 4, 2015, the trading price of our Ordinary Shares has ranged from US $1.68 to US $5.27 per common share, and the last reported trading price on March 10, 2017 was $3.1 per Ordinary Share. The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
     
  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

To the extent we determine that the proposed uses set forth in in the section titled “Use of Proceeds” in our initial public offering registration statement 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 received from our initial public offering. However, we advise shareholders as required in our annual reports on Form 20-F of any changes in application of funds and will file a current report on Form 6-K to the extent we determine such changes in application must be disclosed more quickly.

 

Our management has 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 Ordinary Shares if the market price of our Ordinary Shares increases.

 

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

 

As a public company, we 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 as a private company, and we have annual payments for listing on Nasdaq. 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 incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses, we expect that we incur expenses of between $500,000 and $1 million per year that we did not experience as a private company.

 

14

Table of Contents 

 

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.

 

Most of 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 much of 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, Cayman 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 Cayman 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 Cayman 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 Cayman Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman 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 Cayman Islands, there is little statutory law for the protection of minority shareholders. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our First 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 Cayman 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 First Amended and Restated 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.

 

Our board of directors may decline to register transfers of ordinary shares in certain circumstances.

 

Our board of directors may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our directors may also decline to register any transfer of any share unless (i) the instrument of transfer is lodged with us, accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; (ii) the instrument of transfer is in respect of only one class of shares; (iii) the instrument of transfer is properly stamped, if required; (iv) in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; (v) the shares conceded are free of any lien in favor of us; or (vi) a fee of such maximum sum as Nasdaq may determine to be payable, or such lesser sum as our board of directors may from time to time require, is paid to us in respect thereof.

 

If our directors refuse to register a transfer they shall, within one month after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.

 

You may be unable to present proposals before general meetings or extraordinary general meetings not called by shareholders.

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our First Amended and Restated Articles of Association allow our shareholders holding shares representing in aggregate not less than 20% of our voting share capital in issue, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting.

 

15

Table of Contents 

 

Although our First Amended and Restated Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders, any shareholder may submit a proposal to our board of directors for consideration of inclusion in a proxy statement. Advance notice of at least ten calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in our company.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Fuling Global Inc. (“FGI”) was incorporated in the Cayman Islands on January 19, 2015. FGI has an indefinite term. FGI, its subsidiaries and its variable interest entity (“VIE”) (collectively the “Company”) are principally engaged in the production and distribution of environmentally-friendly plastic serviceware in the People’s Republic of China (“PRC” or “China”) and United States (“U.S.”). Most products are exported to the U.S. and Europe and sold to major fast food chains and wholesalers.

 

The address of FGI’s principal place of business is Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of China 317511. FGI’s phone number is +86-576-86623058. We have appointed C T Corporation System (The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801) as our agent to receive service of process with respect to any action brought against us in the courts of the State of Delaware under the federal securities laws of the United States or under the securities laws of the State of Delaware.

 

Taizhou Fuling Plastics Co., Ltd. (“Taizhou Fuling”) was established on October 28, 1992 as a Sino-Foreign joint venture under the laws of the People’s Republic of China (“China” or “PRC”) with initial registered capital of $510,000.

 

On April 26, 2004, Total Faith Holdings Limited (“Total Faith”) was incorporated in British Virgin Islands.

 

In May 2005, Total Faith became one of Taizhou Fuling’s shareholders. The other shareholder was Wenling County Songmen Plastic Co., Ltd. (“Wenling Songmen”). In the same month, Wenling Songmen and Total Faith added $846,300 and $289,700, respectively, to the registered capital of Taizhou Fuling.

 

In December 2005, Taizhou Fuling changed its name to Zhejiang Fuling Plastic Co., Ltd. Wenling Songmen and Total Faith added $745,000 and $255,000, respectively, to the registered capital.

 

In November 2006, Taizhou Fuling changed its name from Zhejiang Fuling Plastic Co., Ltd. to Taizhou Fuling Plastics Co., Ltd. and extended its term from 15 years to 25 years. In July 2015, Taizhou Fuling extended its term from 25 years to 45 years. Therefore, its term is from October 28, 1992 to October 27, 2037.

 

In November 2007, Wenling Songmen and Total Faith added $670,500 and $229,500, respectively, to the registered capital.

 

On March 12, 2009, Wenling Songmen, one of Taizhou Fuling’s two investors, changed its name to Wenling Fulin Plastic Products Co. Ltd.

 

In May 2014, Total Faith added $7,530,000 of registered capital to Taizhou Fuling. Wenling Songmen waived its right to add registered capital. As a result, Total Faith and Wenling Songmen held 76% and 24%, respectively, of the equity interests in Taizhou Fuling at the time. The total registered capital was increased to $11,110,000.

 

On May 28, 2014, Total Faith acquired Wenling Songmen’s 24% interest in Taizhou Fuling for RMB 29 million, which was funded by a loan from Wenling Songmen for RMB 12.6 million and capital investment from Ms. Jiang for RMB 16.4 million. In compliance with Chinese business regulations, in order to update business registration with State Administration for Industry and Commerce, the consideration should be determined based on “fair value” of the interest transferred, which was determined to be RMB 29 million, compared to RMB 16.4 million, the registered capital owned by Wenling Songmen. Total Faith, Wenling Songmen agreed that loan would be settled automatically after the RMB 12.6 million paid to Wenling Songmen, which is the excess to the register capital. As a result of the acquisition, Taizhou Fuling changed its entity type from a Sino-Foreign joint venture to a wholly foreign owned enterprise (“WFOE”). Taizhou Fuling is now 100% owned by Total Faith.

 

Taizhou Fuling has three wholly-owned subsidiaries, Zhejiang Great Plastics Technology Co., Ltd. (“Great Plastics”), Fuling Plastic USA, Inc. (“Fuling USA”), and Direct Link USA LLC (“Direct Link”).

 

Great Plastics was incorporated in China in March 2010 and principally engaged in the production of drinking straws, cup and plate items. Fuling USA was incorporated in the Commonwealth of Pennsylvania in 2014. Fuling USA is establishing the Company’s first production factory in the U.S. and will principally engage in the production of cutlery and straw items. Direct Link was incorporated in the State of Delaware in 2011. Great Plastics and Fuling USA serve as import trading companies of Taizhou Fuling in the United States.

 

Prior to the incorporation of Fuling USA, we incorporated a similarly-named wholly-owned subsidiary in New York named Fuling Plastics USA Inc. (“Old Fuling USA”) in 2009. (Note that Fuling USA’s name is the singular Fuling Plastic, rather than the plural Fuling Plastics.) Old Fuling USA served as a trading company that imported certain products from our China facilities and sold them to our customers in the U.S. Since we incorporated Fuling USA in 2014 in Pennsylvania to coordinate our Allentown project, we no longer needed to maintain Old Fuling USA and reduced its operations in January 2014. Old Fuling USA was dissolved on April 8, 2015.

 

16

Table of Contents 

 

Total Faith effectively controls Domo Industry Inc. (“Domo”), a U.S. company established in the State of New York in October 2007, based on the fact that Domo’s equity at risk is not sufficient to permit it to carry on its activities without additional subordinated financial support from Total Faith. Total Faith is obligated to absorb a majority of the risk of loss from Domo’s activities and to receive the majority of Domo’s residual returns. Based on this arrangement, Total Faith has gained effective control over Domo and Domo is considered a Variable Interest Entity (“VIE”) under Accounting Standards Codification (“ASC”) 810-10-05-08A. Accordingly, Total Faith consolidates Domo’s operating results, assets and liabilities.

 

On January 9, 2015, Fuling USA transferred 100% of its interest in Direct Link to Taizhou Fuling, and Ms. Jiang transferred her 49% interest in Domo to Total Faith, both in connection with the reorganization of our corporate structure in preparation for our initial public offering. On February 19, 2015, Ms. Jiang transferred her interest in Total Faith, which is 100% of the equity of Total Faith, to FGI. At the completion of these transactions, (i) Total Faith owns 49% of the equity of Domo but maintains effective control; (ii) Taizhou Fuling owns 100% of the equity of Direct Link; (iii) FGI owns 100% of the equity of Total Faith; and (iv) eight shareholders own 100% of the equity of FGI.

 

In November 2015, we completed our initial public offering, in which we offered and sold an aggregate of 4,038,423 ordinary shares. We received approximately US $20 million in proceeds before expenses. Our ordinary shares are listed on the Nasdaq under the symbol “FORK.”

 

In November 2015, Total Faith increased Taizhou Fuling’s registered capital from $11.11 million to $21.63 million.

 

In September 2016, Taizhou Fuling established Wenling Changli Import and Export Co., Ltd. (“Wenling Changli”) in China. Wenling Changli’s main business is to export materials from China to our Allentown facility.

 

We are in the process of constructing our Wenling factory and expanding our Allentown factory. During construction of our new Wenling factory, our three factories in China reached or exceeded 100% capacity. To avoid delay on customer orders, we added some temporary capacity by renting factory space in Wenling since May 2016 until we can move into the new factory in the second quarter of 2017.

 

B. Business Overview

 

We have been in business since 1992. In the beginning, however, we did not produce the disposable serviceware products we produce today. Instead, for our first 10 years, we sold plastic household articles, baskets and other plastic products mainly in Europe. During this time, we were a relatively small company generating a few million dollars per year in revenue.

 

In 2003, the focus of our company changed dramatically. We met a company from Pennsylvania at the China Import and Export Fair in 2003, and they were looking for a supplier of disposable plastic serviceware products to serve one of their large customers. Although we had not, at that time, ever produced cutlery of any type, we saw the opportunity to help this company, which had more than 70 years of operating history, meet its production requirements for a large customer.

 

Many of our competitors turned away from an opportunity like this, since the production of disposable serviceware was seen as a low profit venture. Although the profit margins were lower, the revenues were significantly higher, allowing us to reach revenues of more than $10 million per year in 2003 and 2004.

 

Our customer was pleased with the quality of our products, and we began to increase our production levels to meet the new demand. There were, of course, some challenges along the way as we learned the requirements and increasing environmental sensitivities of our new industry. For example, we were initially unprepared for the audits conducted by QSR chains when the customer’s Shanghai branch first visited our factory. After failing that first inspection, we tirelessly worked to address all of the issues noted and succeeded in passing the audit just seven short days later.

 

As we increased our business supplying our first QSR chain, other customers sought us out to provide disposable serviceware products as well. Continued growth raised our sales to approximately $20 million per year in 2008.

 

In 2009, we started to work directly with U.S. customers rather than through intermediaries. Although this decision has been an important component of our long-term success, our orders temporarily decreased, affecting our sales during the period, as some distributors sourced products from some of our competitors that lacked the ability to compete directly with such intermediaries.

 

We saw these challenges as an opportunity to continue growing our business. We began our own research and development efforts to differentiate our company from the numerous small Chinese factories that were capable of filling existing demand but lacked the ability to develop new materials and production machines. We have also retained Mr. John Kunes, an experienced executive in the U.S. plastic foodservice disposable industry, who was instrumental in helping us build direct relationships with QSR chains. Mr. Kunes currently serves as an Executive Vice President of Fuling USA.

 

As we have grown into a mature company in our industry, we have developed four main types of customers:

 

1. Dealers

 

2. QSRs

 

3. Manufacturers

 

4. Retailers

 

17

Table of Contents 

  

Our Industry

 

Foodservice Disposables — Generally

 

The foodservice disposables industry is segmented into (1) packaging, (2) serviceware and (3) napkins and other disposables. According to a 2013 report by the Freedonia Group, demand for the entire foodservice disposable industry is projected to reach $19.7 billion by 2017, representing compound annual growth of 3.6% per year from 2012 sales of $16.5 billion. This projected growth rate is based on a historical compound annual growth rate of 3.7% from 2007 through 2012. The industry projection consists of a blended compound annual growth rate of 4.1% in packaging, 3.2% in serviceware and 2.2% in napkins and other disposables, compared with historical compound annual growth rates of 4.1%, 3.5% and 2.3%, respectively, in the 2007 to 2012 period.

 

Serviceware Segment

 

Our products consist predominantly of serviceware, which includes cutlery, drinking straws, cups and plates. Approximately 45.5% of foodservice disposable sales were for disposable serviceware:

 

 

 

(The Freedonia Group, Inc.)

 

Serviceware segment’s total revenues in 2012 were $7.5 billion, compared with $6.3 billion in 2007. By far, the largest component of serviceware products is cups, including beverage cups and portion cups, which accounted for approximately 55% of demand in the segment in 2012. According to 2014 polls conducted by Experian, nearly 65% of U.S. households use disposable cups and plates, and of those who use such products, more participants said they use the store brand (26.5%) than the next highest brand preference (20.1%). For companies like ours, which produce products under the brand names of our customers, the absence of strong brand loyalty in our industry is positive news.

 

Demand for serviceware has been driven by continued strength in QSR demand and the growth of limited service restaurants and retailer in-store cafes and snack bars.

 

18

Table of Contents 

 

Raw Materials in Foodservice Disposables Industry

 

Foodservice disposables use a variety of materials, depending on the intended use of such disposables. Approximately 7.3 billion pounds of raw materials were used in manufacturing foodservice disposables in 2012:

 

 

 

(The Freedonia Group, Inc.)

 

Paper products are commonly used for bags, soda and coffee cups, napkins and wrapping papers. Aluminum foil products are often found in limited service restaurant take-out containers and foil/paper laminated wraps. Plastics (including a variety of polystyrene (“PS”), polypropylene (“PP”), polyethylenes and degradable resins) are seen in utensils, straws, clamshell containers, cups and container lids.

 

Plastics have an important role in the foodservice disposables industry, due to their impressive range of appropriate uses: keeping food hot, keeping food cold, low cost, light weight, water-tightness, clarity, flavor neutrality and malleability for different uses.

 

While we believe we are able to produce products that can be used for a variety of uses, we also recognize that specific products may be better suited for desired uses: for example, while we produce plastic drinking straws and are able to produce plastic wrappers for such straws, our customers typically prefer that we obtain paper wrappers for the straws we provide to them, both for cost reasons and also for safety reasons, as wet plastic wrappers may become pose accident risks on QSR floors.

 

Moreover, even where plastic products are well suited to specific uses, consumer preferences may affect demand. For example, few materials are better suited to keeping coffee warm (and avoiding burning the hands holding that coffee) than foamed polystyrene cups; however, due to environmental concerns some QSRs and other customers have chosen paper cups and cardboard sleeves as an alternative to foamed polystyrene. Indeed, some municipalities and states in the United States have proposed regulations that would prevent such cups from being sold.

 

To address these consumer requirements and to anticipate local ordinances, manufacturers like our company have researched and developed environmentally-friendly alternatives to traditional plastic products. As of 2012, degradable products accounted for almost 2% of the total foodservice disposables revenue in the United States. Cups and containers made up approximately 75% of that demand. Degradable plastics consist primarily of starch-based plastics and polylactic acid (“PLA”).

 

Our Products

 

While a majority of our products purchased by our customers use the above-mentioned PP, PS including General Purpose Polystyrene (“GPPS”) and High Impact Polystyrene (“HIPS”), and PET, we focused on developing more environmentally-friendly solutions in order to continue to compete as our target markets’ environmental laws become more stringent. We have already seen products like foamed polystyrene banned or heavily restricted in some of our target markets. We believe that by providing biodegradable disposable food service items, we may find a competitive advantage over companies that produce only traditional, less environmentally-friendly products.

 

We have collaborated with the Technical Institute of Physics and Chemistry, Chinese Academy of Sciences in research regarding foodservice disposables technology in materials, processes and systems. Under the terms of the Technology Development & Cooperation Contract between Taizhou Fuling and Chinese Academy of Sciences, the right to apply for a patent of an invention or creation and the right to use the know-how achieved in cooperative development shall be jointly owned by the parties thereto. Moreover, according the PRC Contract Law, if the Chinese Academy of Sciences transfers the right to apply for a patent, Taizhou Fuling has the right of first refusal under the same conditions.

 

It is through these collaborations that we have secured important breakthroughs resulting in proprietary knowledge and patents. Currently our research focuses on the latest biodegradable materials, including Polybutylene Succinate (“PBS”), PLA, and cellulose.

 

19

Table of Contents 

 

  1. PBS is crystallized biodegradable polyester. As PBS decomposes naturally into water and carbon dioxide, it is a biodegradable alternative to some common plastics. It is both a green and environmentally-friendly material. It has high mechanical performance, good toughness, good thermal stability, and a wide range of processing temperature and high heat deflection temperature. PBS can be processed by various molding ways with normal equipment. To meet the requirements of various products, it can be mixed with other biodegradable or natural materials, such as PLA, polypropylene carbonate (“PPC”), polyhydroxyalkanoates (“PHAs”), Polycaprolactone (“PCL”) and starch or wood powder.
     
  2. PLA is a biodegradable thermoplastic aliphatic polyester derived from renewable resources, such as corn starch (in the United States), tapioca roots, chips or starch (mostly in Asia), or sugarcane (in the rest of the world). In 2010, PLA had the second highest consumption volume of any bioplastic of the world.
     
  3. Cellulose is an organic compound. It is the most abundant organic polymer on Earth. Cellulose has no taste, is odorless, is insoluble in water and most organic solvents and is biodegradable. Hydroxyl bonding of cellulose in water produces a sprayable, moldable material as an alternative to the use of plastics.

 

Our advanced R&D center in Wenling, Zhejiang aims to develop five new products every year. While our ability to maximize use of biodegradable materials will ultimately hinge on customer demand, we seek to maximize the environmental friendliness of our products. For a list of some of our recent research projects, see “BUSINESS — Research and Development.”

 

Our Environmental Stewardship Measures

 

We endeavor to increase our production of environmentally-friendly products and reduce pollution in the production process. Because of our achievements in clean production, energy-savings, pollution control and environmental management, we have been recognized as a Zhejiang Advanced Enterprise on Clean Production, which is currently effective from 2012 to 2017. We have been awarded this recognition continuously since 2005.

 

We have formulated various environmental manuals and policies, including Environmental Targets, Environmental Measure Implementation Plan and Environmental Training Management Procedure. We also have founded an environmental management group whose members have relevant environmental management qualifications and experience. We keep complete records of our clean production files. We have implemented examination equipment for monitoring pollution and full operations records of our environmental protection facility. We strictly comply with laws and regulations about environmental protection and comprehensive utilization of resources. We have never been penalized by any environmental protection governmental agency.

 

We have obtained several environmental stewardship-related certificates for our management systems that are listed in the following table.

 

Fuling Environmental Stewardship-related Certificates

 

Issuing Authority   Certificate   Recipient   Standard   Applicable to   Valid Period
Beijing Zhong-An-Zhi-Huan Certification Center   Environmental Management System Certificate   Taizhou Fuling   GB/T 24001 — 2004/ISO 14001:2004   Plastic drinking cups and disposable plastic tableware production and service   2014-09-15 until 2017-09-14
                     
Beijing Zhong-An-Zhi-Huan Certification Center   Environmental Management System Certificate   Great Plastics   GB/T 24001 — 2004/ISO 14001:2004   Production and related activities of disposable plastic cutlery and plastic cups   2014-09-15 until 2017-09-14

 

Production Strategy

 

Product Mix

 

While we will continue to improve our traditional serviceware segment offerings, we plan to grow our packaging segment. Our customers in this segment are mainly retailers and wholesalers. While packaging materials currently constitute a small percentage of our sales revenue, we aim to achieve significant growth in this segment. Our decision is based on following reasons:

 

(1) Our packaging products have the same customer base as our serviceware products.

 

(2) Several big cities including New York have discussed or announced bans on some level of plastic foam containers. Many of these containers are made of a plastic resin known as expanded polystyrene. These polystyrene materials are difficult to recycle and do not bio-degrade naturally. Considering the amount of plastic foam containers consumed every day in big cities which will soon be banned and increasing political and socioeconomic pressures, we estimate that environmentally-friendly packaging products like ours will be competitive alternatives for a variety of new customers.

 

(3) Our R&D efforts and production facilities have prepared us to provide advanced environmentally-friendly packaging products to meet demand.

 

20

Table of Contents 

 

Manufacturing Location

 

The United States is one of the world’s largest users of foodservice disposables; however, the United States has historically relied on imported products, as U.S. manufacturing has been unable to meet the required pricing levels. We currently produce substantially all of our products in China and ship them to the United States for warehousing and sale. In 2014, we commenced construction of a facility in Allentown, Pennsylvania. Because of our success in automating the manufacturing process, we believe that the Allentown facility will provide us a platform to manufacture products in the United States, particularly where doing so is cost effective for us.

 

Of the three categories of products we produce, the production of cutlery will likely continue to occur in China, since our cutlery production process is already heavily streamlined and the cost savings we receive from labor cost differences between the U.S. and China, combined with our ability to pack shipments densely for transportation to the United States, makes it cost-effective to maintain production in China at present.

 

By contrast, cups and straws or similar hollow products are less cost effectively produced in China, since these products cannot be packed as tightly as cutlery. As a result, shipping costs tend to be a higher percentage of the total cost of these products. If we have substantial and consistent orders, we plan to fill the majority of such orders for drinking straws and cups from our Allentown factory.

 

The factors involved in determining where we will manufacture a given product generally consist of the following:

 

  1. Labor costs. Currently the United States is much more expensive per hour for laborers, although U.S. laborers tend to be more productive in the same amount of time.
     
  2. Raw materials. The United States is slightly more expensive for raw materials that we use in production of our products than China is.
     
  3. Electricity. Electricity needed to produce our products costs more in China than in the United States.
     
  4. Shipping. If we ship the products from China to the United States for sale, shipping costs can account for up to 40% of the price of the product, depending upon the location and the product.
     
  5. Taxes. Taxes on our income are higher for sales in the United States than for sales in China.

 

As a result of analyzing these factors, we determined that it was in the best interest of our company to invest in America, hire U.S. workers and produce certain of our products in Allentown. Because we expect labor costs in China will continue to approach U.S. rates and electricity and shipping costs from China will continue to be comparatively expensive, we look forward to expanding operations in our Allentown facility. We are manufacturing drinking straws in our Allentown facility. We will also consider investing in manufacturing cups in the United States.

 

Allentown Expansion

 

Decision to Invest in Allentown

 

Based on the above analysis of the merits of moving production of some of our products to the United States, our next decision was where to invest. We chose Allentown, Pennsylvania as the city to develop our first production line in the United States because of its superior geographic location, strong economic status, and ties to China.

 

Allentown is Pennsylvania’s third most populous city and is currently the fastest growing city in Pennsylvania. Part of the New York City Metropolitan Area, Allentown is 50 miles north-northwest of Philadelphia, the fifth most populous city in the United States; 90 miles east-northeast of state capital Harrisburg and 90 miles west of New York City, the nation’s largest city.

 

Four expressways run through the Allentown area, and the city is also a regional center for commercial freight rail traffic and is close to several major airports. As a result, we expect transportation of our products to our customers will be convenient and efficient.

 

Pennsylvania is home to fifty Fortune 500 companies. Pennsylvania’s 2013 total gross state product of $644 billion ranks the state 6th in the nation. If Pennsylvania were an independent country, its economy would rank as the 18th largest in the world. Moreover, Pennsylvania has a beneficial taxation policy that was attractive to our company in deciding where to locate manufacturing operations. In Pennsylvania, personal income tax is a flat 3.07%. The corporate net income tax is 9.9% and is levied on federal taxable income, without the federal net operating loss deduction. In addition, Pennsylvania allows a 20-year net operating loss carry forward of up to $2 million a year.

 

21

Table of Contents 

 

Finally, Pennsylvania has a strong trade relationship with China. Other than Canada and Mexico, China was the largest destination for exports from Pennsylvania, with $2.91 billion in exports in 2013.

 

Allentown Project Plan

 

Estimate of the amount of expenditures

 

The total investment spent on the project was roughly $7.5 million, including approximately $3.0 million of fixed asset investment, and $4.5 million of working capital. We plan to finance the project with additional capital investment of approximately $7.2 million in equipment and machinery in 2016 and 2017. If we choose to increase production capability, we will incur additional costs.

 

Schedule

 

We signed the lease of the factory and acquired property for our Allentown facility in 2013 for $235,089.18. For the year ended December 31, 2016, we paid rental fees of approximately $46,000 per month, including tax and insurance. As of the time of this filing, we have paid approximately $1.7 million for factory renovations.In addition, we rented a warehouse of 17,000 square feet nearby for approximately $10,000 per month since June 2016.

 

The preparatory work for the project began in the second half of 2013, and in October 2013 we committed with the Pennsylvania Department of Commerce to invest and build the factory in Pennsylvania.

 

We completed preparations for the preliminary stage of the project in early 2014. From May 2014 to December 2014, we finished the construction and renovation of the factory.

 

From January 2015 to May 2015, we purchased and installed the initial six straw production lines at a cost of approximately $1 million. As of June 2016, we installed an additional six straw production lines at a total cost of about $610,000. All twelve production lines have been in full operation and running 24/7 with 4 shifts of operators throughout the remainder of 2016.

 

Instead of putting in another 12 straw production lines as we originally planned, we plan to diversify our product offering in Allentown and use the space to bring in other manufacturing processes. From March 2016 to February 2017, we successfully tested and installed six automated straw packaging machines – one machine for every two lines. As of the end of 2016, we installed a ten-silo raw material storage and automatic distribution system was installed that is able to hold 430 metric tons of resin. As of February 2017, we have installed a semi-automated conveyor system to transport finished products to a centralized packing and palletizing station to further reduce labor.

 

The next project will be installation of injection molding machine of deli-containers which we anticipate will start operation in August 2017. We plan to bring in thermoforming production for containers in 2018.

 

Production Capacity

 

The designated annual capacity is 2,400 tons of straw series products with the 12 straw production lines put into operations. We aim to reach 80% capacity (2,000 tons) in 2017. We might add six more straw lines in Allentown in the future if space allows or we would have to look for additional space elsewhere.

 

Environmental Considerations

 

The products from the Allentown project are designed to meet the environmental protection trends in the United States. The project’s products are disposable plastic straws, which can be customized according to the specific needs of customers: either custom manufactured biodegradable products or general products. In the U.S. market, our customers are increasingly requesting biodegradable products. With the growing awareness of environmental protection and the implementation of local government initiatives limiting plastic use and/or favoring recyclable or biodegradable products, we expect we will see demand for biodegradable products increase in the future. We have designed the Allentown project to be able to deliver products that address these trends.

 

Our company will strictly follow applicable environmental regulations and policies including the National Environmental Policy Act, and other related policies such as the Clean Air Act and the Clean Water Act.

 

22

Table of Contents 

 

Location

 

Below is a diagram of the location of our Allentown facility.

 

 

 

As can be seen in the above map, the Allentown facility is located conveniently near the intersection of the Lehigh Valley Thruway (U.S. Route 22), which stretches from Cincinnati, Ohio to Newark, New Jersey, and Pennsylvania Route 100, which runs from Pleasant Corners through Philadelphia and into Chester County, Pennsylvania. In addition, the facility is less than 10 minutes from I-78, a major road that sees more than 4 million trucks annually and links New York City and New Jersey with western points.

 

In addition, its proximity to Lehigh Valley International Airport and Newark Liberty International Airport, both of which serve scheduled airlines and cargo traffic, executive aviation as well as various logistics cargos, makes this area attractive and fitting for this facility.

 

Facility

 

Our Allentown facility structure consists of 88,000 square feet on 7.7 acres of land:

 

 

 

23

Table of Contents 

 

The current build-out plan is as depicted below. The blue figures in the left lower corner represent our first 6 straw production lines that we installed in 2015. The green figures in the middle represent the second six straw production lines we installed in 2016. The red and green figures to the right represent injection molding and thermoforming equipment we plan to install.

 

 

 

Current Stage

 

We have installed (1) 12 straw production lines, (2) six automated straw packaging machines – one machine for every two lines; (3) a semi-automatic conveying system; and (4) a ten-silo raw material storage and automatic distribution system. Our total investment in manufacturing equipment has reached approximately $1.8 million.

 

Wenling Expansion

 

Decision to Build a New Factory in Wenling

 

We decided to invest in building a new factory in Wenling for the following reasons:

 

1) By building a new factory, we can meet the growing demand for our products. Currently the extent of utilization of our old factory in Songmen Town of Wenling has reached 100% as expected. A new factory will allow us to expand our production capacity.

 

2) The planned location of this new factory will be in the Eastern New District of Wenling, only 5 km from our Songmen factory, so it will be easy for us to integrate the new factory into our business operations and leverage our existing resources to grow the new facility.

 

3) The planned location of our new factory is only 15 km from the Longmen sea port, which is convenient for us to ship our products.

 

Wenling Project Plan

 

The project construction period is budgeted from April 2016 to December 2020, divided into three phases.

 

We estimate the total amount of expenditures is approximately $51.8 million. We plan to finance the expansion with IPO proceeds, self-generated cash flow and profits from operations. We have spent approximately $27.80 million on purchase of land use right, construction of facilities and equipment purchase. We plan to install 180 injection molding production lines and 33 vacuum thermoforming production lines. The 180 injection molding production lines will produce cutlery, plates, cups and bowls. We anticipate that 16 of the 33 vacuum thermoforming production lines will produce cups, and 17 of the vacuum thermoforming production lines will produce plates, cup lids and various types of containers, such as vegetable containers, fruit containers and packaging containers. Currently we have installed 40 injection molding production lines and 14 vacuum thermoforming production lines. We anticipate that the production capacity will be increased by 60,000 tons after completion of the build-out project.

 

24

Table of Contents 

 

The following chart shows the specific plan:

 

    Phase I   Phase II   Phase III
             
Estimated period   April 2016 – March 2017   February 2018 – December 2019   January 2020 – December 2020
             
Estimated expenditures required  

$27.80 million

1) Purchase of land use right: $10.24 million for 32.45 acres (197 mu);

2) Construction of

facilities: $12.95 million for 56,000 square meters of manufacturing facilities;

3) Equipment purchase:

$4.61 million.

 

$13 million

1) Construction of

facilities: $7 million;

2) Equipment purchase:

$5 million;

3) R&D: $1 million.

 

$11 million

1) Construction of

facilities: $3 million;

2) Equipment purchase:

$7 million;

3) R&D: $1 million.

             
Financing resources  

IPO proceeds and

self-generated cash flow

  Profit from operation in 2017 and 2018   Profit from operation in 2019
             
Anticipated increase in production capacity   20,000 tons   20,000 tons   20,000 tons
             
180 injection molding production lines   40 (capacity of 6,000 tons)   100 (capacity of 15,000 tons)   40 (capacity of 6,000 tons)
             
33 vacuum thermoforming production lines   14 (capacity of 14,000 tons)   5 (capacity of 5,000 tons)   14 (capacity of 14,000 tons)

 

25

Table of Contents 

 

Environmental Considerations

 

The production lines that we plan to install are capable of producing biodegradable products.

 

This new factory is located in the Eastern New District of Wenling. Below is a diagram of the planned location of our Wenling facility and the location of Longmen sea port which our facility will use. The star represents the proposed location of the factory, and the triangle represents the newly-built Longmen sea port.

 

 

Facility

 

Our new Wenling facility structure will consist of 107,800 square meters on 33.27 acres of land. We plan to build five workshop and warehouse buildings, four of which will occupy 16,000 square meters each and one of which will occupy 24,000 square meters. In addition to production buildings, we also plan to build an office building occupying 7,000 square meters and two dormitory buildings occupying 6,400 square meters each. The dormitory buildings will consist of 380 rooms and can accommodate 1,520 workers.

 

Seasonality

 

Our main business does not have significant seasonality.

26

Table of Contents 

 

Raw Materials

 

Our primary raw materials are (1) PP, PS which includes GPPS and HIPS, and PET, (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4) plastic colorants, (5) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and (6) labeling materials. We purchase our raw materials from a variety of suppliers, including more than ten suppliers of our key raw material, granular plastic resin. As we have a variety of options to supply us with raw materials for our products and the technical demands of preparing such raw materials are relatively low, we do not anticipate any difficulties in obtaining raw materials to produce our products. We are not reliant on a single supplier for any of our raw materials, and we expect we would be easily able to replace any of our suppliers if we needed to do so.

 

Plastic resin constituted approximately 79.39% of our raw material purchases in 2016. Plastic costs have recently been volatile as a result of significant fluctuations in petroleum prices. The company considers only plastic resin cost fluctuations to be material, given resin price volatility and plastic’s percentage of the cost of our products. We have historically been able to pass price fluctuations on to our customers. We do this in two ways.

 

First, for orders of our products by customers without long-term supply agreements with our company, we simply base the price quoted to the customers on current commodity prices. As raw material prices increase and decrease, we are able to adjust the price of our products as necessary.

 

Second, for our supply agreements for customers that have long-term supply agreements, such as a QSR that sources straws in a five-year agreement, we provide adjustable pricing that will fluctuate in part based on changes in plastic resin costs. Our client website maintains commodity prices to enable both parties to track such fluctuations.

 

For these reasons, we believe we will be able to adjust our pricing of products to allow us to maintain margins, serve our clients, and to avoid shortages in raw materials in the event of price increases.

 

Marketing Channels

 

We mainly rely on our sales person to market our products. In addition, we attend trade fairs both in China and in U.S. frequently. We also market our products through our websites.

 

Distribution Channels

 

Geographic Distribution of Revenues

 

Although the vast majority of our customers are in the United States, we sell our products around the world. Following is a summary of our total revenues by geographic market for each of our last three fiscal years. All amounts are presented in thousands of U.S. dollars. Please note that the revenue here does not include our income from sources other than our serviceware products, which are mainly sales of raw materials and recyclable waste.

 

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

 

Region  2016   2015 
United States  $94,899   $85,145 
Europe   3,194    2,588 
Australia   472    635 
Canada   982    1,082 
Central and South America   926    222 
Middle East and Africa   209    498 
China   4,200    1,124 
Total  $104,882   $91,294 

 

Markets and Customers

 

Our approach to competition in the market depends largely on the type of customer we seek to serve, as various customer industries have different priorities for their purchasing decisions. Historically, we have sold our serviceware products to four categories of customers (below estimates include sales through distributors to ultimate customers):

 

Type of Customer  Products Sold  Geographic Region 

Estimated
Sales %

In 2016

  

Estimated
Sales%

in 2015

 
Dealers  Serviceware, Straws,
Cups, Plates
  USA, Europe, Central
and South America,
Australia, Middle East,
Canada
   67%   60%
QSRs  Serviceware, Straws,
Cups
  USA   27%   31%
Retailers  Serviceware, Straws,
Cups, Plates
  USA, Australia   1%   5%
Manufacturers  Serviceware  USA   5%   4%
Total         100%   100%

 

27

Table of Contents 

 

Distribution Channels

 

When we began to produce serviceware, we sold our products through distributors that had existing relationships with the ultimate customers looking to purchase our products. Beginning in 2009, we began to sell directly to such purchasers. For the years ended December 31, 2016 and 2015, approximately 30% and 36% of our sales were made directly to end-users and retailers, respectively, and approximately 67% and 60% of our sales were made to distributors including dealers, respectively. Although we believe we benefit from having direct relationships with QSRs, retailers and other end users, we also believe that strong relationships with distributors can allow us to penetrate smaller markets where we do not have the marketing resources to deliver our products directly.

 

Methods of Competition

 

Regardless of our customers’ industry, our customers have clear expectations about the quality level and value they expect in purchasing disposable serviceware. We are subject to frequent quality audits on an ongoing basis from new and existing customers, and we constantly engage in product testing to ensure that our products meet our customers’ demands. Accordingly, although we describe below our interpretation of the relative weight given to purchasing decisions in our customer categories, you should not read the table to suggest that any of these features are unimportant to a customer. We have used four stars to reflect our belief that an element is crucial to the customer’s decision-making, three stars to suggest that the element is very important, two starts to suggest that it is important and one star to reflect that the element is less important.

 

Type of Customer  Quality  Delivery  R&D  Service  Price
Dealers  **  ***  ***  ****  ****
QSRs  ***  ****  *  ****  **
Retailers  ***  ****  ***  ***  ***
Manufacturers  ****  **  **  **  ***

 

Competitive Position

 

The largest producers of foodservice disposables in the United States are significantly larger than our company. A recent report by Freedonia estimates that three companies control approximately 29% of the foodservice disposable market in the United States, and the top ten companies accounted for approximately 50% of the market in 2012. Because the entire foodservice disposable market in the United States consists of packaging, serviceware and napkins, and other foodservice disposables — while we only compete in the serviceware segment — we occupy a relatively small competitive position in the market as a whole.

 

Concentration in the foodservice disposables industry varies widely within specific market segments, with some segments dominated by a small number of producers. For example, Dart Container is the leading supplier of plastic foodservice beverage cups, followed by Pactiv and Berry Plastics. By contrast, the market for cutlery is more fragmented, with a growing portion of the market supplied by contract manufacturers in China. Among U.S.-based suppliers of foodservice disposable cutlery are Berry Plastics, D&W Fine Pack, Dart Container (including Solo Cup), Georgia-Pacific, Maryland Plastics, Pactiv, and Waddington Group. Most of these firms offer a number of different cutlery lines and are diversified into the production of straws and other foodservice disposables. In April 2012, D&W Fine Pack expanded its cutlery and straw offerings through its acquisition of Jet Plastica Industries. Prior to the acquisition, Jet Plastica claimed to be the largest manufacturer of straws in the U.S. Other suppliers of foodservice straws include Cell-O-Core, Earth Straws, New WinCup, Pactiv (via Spirit Foodservice), Rockline Industries, Royer, Stalk Market Products, and Stone Straw (Wentworth Technologies).

 

28

Table of Contents 

 

Our primary competitors are the following companies. We have set forth our assessment of our companies’ relative strengths and challenges. This table represents our belief about our competitive position and is based on our observations, rather than objective data except the ranking. The ranking is provided by the China Chamber of Commerce for Import and Export of Light Industrial Products and Arts and Crafts regarding China’s plastic kitchenware and serviceware companies for exports. Our assessment may not be shared by others, including such competitors, but it does represent management’s assessment of our industry position. Moreover, the below statements of industry are based on our current knowledge in our industry; to the extent there are developments we have not learned about (for instance, if a competitor has licensing agreements with a founder, rather than obtaining a patent in its own name or if a competitor is in the midst of building an overseas manufacturing facility that has not yet been announced), the below information may be incomplete.

 

    Taizhou Fuling  

Jiaxing Zhongli

Plastic Co., Ltd.

 

Baohao Plastic &

Hardware

Production

(Jiangmen) Co Ltd

 

Ningbo Homelink

Plastic Product

Manufacture Co.,

Ltd.

Ranking  

2012: No. 1

2013: No. 2

2014: No. 3

2015: No. 3

2016: No. 2

 

2012: No. 3

2013: No. 5

2014: No. 5

2015: No. 6

2016: No. 8

 

2012: No. 5

2013: No. 3

2014: No. 2

2015: No. 2

2016: No. 6

 

2012: No. 2

2013: No. 1

2014: No. 1

2015: No. 1

2016: No. 1

                 
Products  

Disposable plastics

serviceware including cutlery,

cups, containers,

straws, etc.

 

Disposable plastic

serviceware including cutlery,

cups, straws, etc.

 

Plastic and hardware

household articles

and

gifts.

 

Disposable plastics

serviceware including

cutlery,

cups, straws, etc.

                 
Overseas sales, marketing and production  

Four warehouses and

distribution centers

in U.S. and two

warehouses in and

distribution centers.

The only one that

has established

overseas

manufacturing factory.

 

Sales office and

warehouse in U.S.

  Not known.  

Sales office and

warehouse in U.S.

                 
R&D and Patents  

Academician Expert

Workstation;

over 30 patents.

  Not known.   Not known.   56 patents.
                 
Customers  

Dealers, QSRs

including four of top

five, retailers,

manufacturers.

 

Dealers, QSRs,

retailers, manufacturers.

 

Dealers, restaurants,

retailers, manufacturers.

 

Dealers,

restaurants,

retailers, manufacturers.

                 
Product specification standard  

Participate in

initiating and

drafting the national

standard

General Requirement

Of Plastic Disposable Tableware.

  No participation.   No participation.   No participation.

 

Nevertheless, we have been one of China’s largest exporters of disposable serviceware. The China Chamber of Commerce for Import and Export of Light Industrial Products and Arts and Crafts has recognized Taizhou Fuling as Number 2 out of 10,113 plastic kitchenware and serviceware companies for exports from China in 2016, Number 3 out of 9,162 in 2015, Number 3 out of 7,382 in 2014, Number 2 out of 4,610 such companies in 2013 and Number 1 out of 4,365 such companies in 2012. In addition, we were rated one of top 10 enterprises of plastic industry (daily plastic) in China light industries in 2013 by China National Light Industry Council and China Plastic Processing Industry Association, based on our (1) revenue, (2) profit, (3) profit tax rate, and (4) business growth rate.

 

We have invested heavily ($10,730,289 since 2012 to 2016) in research and development to increase our future competitive position, seeking to increase our use of environmentally-friendly materials, develop degradable and biodegradable materials, and reduce reliance on fossil raw materials. In addition, we have developed advanced robotics to produce our products more efficiently and at lower cost to be more competitive in the face of rising wages and higher quality demands.

 

Awards and Recognition

 

The Company is fully ISO 9001 and 14001 certified and, importantly, has obtained HACCP, GMP and FDA food facility registration certifications.

 

29

Table of Contents 

 

In addition, our company is rated a Category A enterprise of China Customs, which provides streamlined customs clearance measures. Taizhou Fuling has been a Category A enterprise since 2007 and submits a report on business management status to the PRC Customs every year. We understand that the PRC Customs re-validate the rating of Category A enterprises on an irregular basis, and the most recent written decision on re-validating Taizhou Fuling’s rating of Category A enterprise was received on October 24th, 2014 from the PRC Customs.

 

Taizhou Fuling can maintain the rating of Category A enterprises of PRC Customs if Taizhou Fuling simultaneously meets the following requirements as a consignor and consignee of imported and exported goods according to the Measures of the PRC Customs for the Classified Administration of Enterprises promulgated by PRC General Administration of Customs:

 

  i. Having never committed the crime of smuggling, the act of smuggling or violation of the provisions on customs supervision and control for one consecutive year;
     
  ii. Having never been subject to any customs administrative punishment due to infringement on intellectual property rights by importing or exporting goods for one consecutive year;
     
  iii. Having not delayed nor defaulted on paying taxes or fines for one consecutive year;
     
  iv. Having gross import or export value of more than $500,000 in the previous year;
     
  v. Having an error rate of import and export declaration of less than 5% during the previous year;
     
  vi. Having sound accounting rules, as well as truthful and complete business records;
     
  vii. Having taken initiatives in cooperation with customs administration, timely handling various customs formalities, and providing truthful, complete and valid documents and certificates to PRC Customs;
     
  viii. Submitting the Report on Business Management Status every year;
     
  ix. Handling the formality for reissuing and altering the Register Document for Customs Declaration of Consignees or Consigners of Import or Export Goods of the Customs of the People’s Republic of China according to the provisions; and
     
  x. Having no bad records in the administrative departments and institutions of commerce, People’s bank, industry and commerce, taxation, quality inspection or foreign exchange and supervision for one consecutive year.

 

In the last ten years, we have earned a variety of national, provincial and local honors, awards and certifications for our quality products and scientific research efforts:

 

2017

 

  Outstanding Returned Project of Zhejiang Enterprise, 2016

 

2016

 

  Top 10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2016
     
  China Credible Enterprise published by State Administration for Industry and Commerce of China)
     
  Province Level Enterprise Research Institute – Zhejiang Fuling New Materials Research Institute
     
  Taizhou Top 20 Growing Enterprise

 

2015

 

  Deputy Chair of Zhejiang Plastics Industry Association
     
  Wenling Top 10 Industrial Enterprise
     
  Taizhou Export and Import Credit Enterprise (Grade A)

 

2014

 

  Zhejiang Famous Export Brand
     
  Zhejiang Famous Trademark
     
  Wenling Star Enterprise
     
  Taizhou Quality Enterprise Leader

 

30

Table of Contents 

 

2013

 

  Top 10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2013
     
  Zhejiang Credit Grade AAA Award
     
  Zhejiang Credit Management Model Enterprise
     
  Zhejiang High-Tech Enterprise
     
  Zhejiang High-Tech Enterprise R&D Center
     
  Zhejiang Quality Management Innovation Project

 

 

2012

 

  Zhejiang Academician Expert Workstation
     
  Zhejiang Energy Measurement Model Entity
     
  Taizhou High-Tech R&D Center
     
  Wenling Government Quality Award

 

2011

 

  Grade A Customs Enterprise
     
  Zhejiang May First Labor Award, recognizing compliance with the law, contribution to society and positive workplace environment
     
  Zhejiang Famous Brand Products
     
  Zhejiang Credit Grade AA Award
     
  Zhejiang Export Famous Brand
     
  First Academician Expert Workstation in Wenling (founded with Technical Institute of Physics and Chemistry, Chinese Academy of Sciences, devoted to research and development of plastic products)
     
  Taizhou Famous Brand

 

2010

 

  Executive Vice Chair Entity, Committee of the Plastic Household Products of China Plastic Processing Industry Association
     
  Zhejiang Hi-Tech Enterprise
     
  Zhejiang Science and Technology Oriented Small and Medium Enterprise
     
  Taizhou Hi-Tech Enterprise
     
  Taizhou Famous Brand Product
     
  Taizhou Export Famous Brand

 

2009

 

  Taizhou Export Famous Brand

 

2008

 

  Zhejiang Compliance Credit Export and Import Model Enterprise
     
  Zhejiang Credit Grade AA Award
     
  Taizhou Statistics Credit Entity

 

31

Table of Contents 

 

2007

 

  Taizhou Top 10 Export Processing Trade Enterprise
     
  Wenling Star Industrial Enterprise

 

2006

 

  AAA Credit Enterprise
     
  Taizhou Famous Trademark
     
  Wenling Star Industrial Enterprise

 

2005

 

  First recipient in Wenling of Zhejiang Green Enterprise Designation

 

2004

 

  Zhejiang Credit Grade AA Award

 

Regulations

 

We are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include intellectual property, competition, taxation, anti-money laundering and anti-corruption.

 

Foreign Investment Restrictions Regulations

 

The latest Guidance Catalogue of Industries for Foreign Investment (the “Catalogue”) was enacted according to the Provisions for Guiding the Foreign Investment Direction (the “Provisions”) and became effective on April 10, 2015. The provisions provide that the projects with foreign investment fall into four categories, namely permitted, encouraged, restricted and prohibited ones. The Catalogue lists the encouraged, restricted and prohibited categories for projects with foreign investment; projects with foreign investment that fall outside such enumerated categories are considered “permitted projects”.

 

According to the Provisions, the Catalogue may prescribe that an enterprise with foreign investment is “limited to equity joint venture, contractual joint venture”, “with Chinese party at the holding position” or “with Chinese party at the relatively holding position.” “Limited to equity joint venture and contractual joint venture” shall refer to that only Chinese-foreign equity joint venture and Chinese-foreign contractual joint venture are allowed, “with the Chinese parties at the holding position” means that the total investment proportion of the Chinese parties in a project with foreign investment shall be 51% or more, and “with Chinese parties at the relatively holding position” means that the total investment proportion of the Chinese parties in a project with foreign investment shall be higher than the investment proportion of any foreign party. Regarding the permitted projects with foreign investment which are not listed in the Catalogue, the business organization of the foreign-invested enterprises which produce “permitted” products and do not involve restricted or prohibited business will not be subject to those restrictions such as “limited to equity joint venture, contractual joint venture.” Therefore, there are no limits on the total investment proportion of the foreign investors in permitted projects. It means the proportion of such foreign investment could be 51% or more, and up to 100%.

 

According to the Catalogue, our products fall in the “permitted” category. Therefore, our proportion of the foreign investment may be up to 100%. As a result, FGI’s investment in our Chinese subsidiaries is in compliance with the Catalogue.

 

Draft Foreign Investment Law

 

On January 19, 2015, MOFCOM released the draft Foreign Investment Law for public comments (the “Draft FI Law”). The Draft FI Law proposed fundamental changes to the existing foreign investment legal regime in China. Currently China maintains a restrictive foreign investment regime, under which all foreign investments are subject to various government approvals, such as the approval of the foreign investment authority (i.e., MOFCOM or its local branches) or industry-specific approvals from relevant regulators, e.g. food and drug administration. The Draft FI Law introduces the principle of “national treatment” to foreign investors during the market-entry phase, by removing the foreign investment approval process. The Draft FI Law employs a “negative list” approach in which, unless a foreign investment falls within the “negative list”, foreign investors may invest in China on the same terms as Chinese domestic investors, without being subject to additional approvals or industry-specific restrictions.

 

32

Table of Contents 

 

The Draft FI Law allows the existing foreign investment companies to continue operating under their prior approvals (e.g. business scope, term of operation). However, they should review their existing corporate forms for any non-compliance and, within a three-year transition period, convert their corporate forms into corporations or partnerships under the PRC Company Law or relevant regulations.

 

The Draft FI Law provides for a new reporting regime under which foreign investors and foreign invested enterprises shall disclose relevant information on a regular basis. The reporting is to be made through the foreign investment information reporting system to be established by the foreign investment authority. The Draft FI Law, once effective, will require Taizhou Fuling to submit an annual report to the foreign investment authority. The information required by the annual report seems extensive and burdensome, such as the foreign invested company’s main products, import and export, employment, financial status, transactions with our affiliates and material disputes. If we fail to make such reporting timely or if there is any concealment in such reporting, we may be subject to fines or other regulatory sanctions.

 

The Draft FI Law may be subject to amendments which may substantially change its stipulations. In addition, it may take many years for the Draft FI Law to become effective.

 

Intellectual Property Rights Regulations

 

The Trademark Law of the PRC was adopted by the Standing Committee of the National People’s Congress (“NPC”) on August 23, 1982 and was amended on February 2, 1993 and October 27, 2001. The PRC Trademark Law Implementation Rules, or the Implementation Rules, were promulgated by the State Council on August 2, 2002 and became effective on September 15, 2002. The PRC is a signatory country to the Madrid Agreement and the Madrid Protocol. These agreements provide a mechanism whereby an international registration produces the same effects as an application for registration of the trademark made in each of the countries designated by the applicant.

 

According to the Trademark Law, the National Trademark Bureau under the SAIC is responsible for the registration and administration of trademarks throughout the country. A “first-to-file” principle with respect to trademarks has been adopted. If trademark owners deem an infringement to their trademarks constituted, they can file the dispute with the competent court or the relevant administrative department. Should the case be so serious as to constitute a crime, trademark owners may lodge a complaint with the relevant public security organization.

 

If the registered trademark owners intend to assign their registered trademark, a registered trademark transfer agreement shall be entered into between the owner and the assignee. The owner and assignee shall together apply to the National Trademark Bureau for registration of such assignment as prescribed under the Trademark Law.

 

Registered trademark owners may license other to use their registered trademark by concluding the registered trademark license agreement and such license agreements shall be subject to filing recordation with the National Trademark Bureau according to the Trademark Law. The licensor shall supervise the quality of the commodities on which such registered trademark is used, and the licensee shall guarantee the quality of such commodities.

 

The Measures for the Administration of Domain Names for the Chinese Internet, or the Domain Names Measures, were promulgated by the Ministry of Information Industry on November 5, 2004 and became effective on December 20, 2004. The Domain Names Measures govern registration of domain names with the internet country code “.cn” and domain names in Chinese. We have one website (www.fulingplastics.com.cn) governed by the Domain Names Measures.

 

The Measures on Domain Names Dispute Resolution, or the Domain Names Dispute Resolution Measures, were promulgated by the China Internet Infrastructure Center on February 14, 2006 and became effective on March 17, 2006. The Domain Names Dispute Resolution Measures require domain name disputes to be submitted to institutions authorized by the China Internet Network Information Center for resolution.

 

Regulations on Tax

 

The Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”), promulgated by NPC on March 16, 2007 and put into force on January 1, 2008, imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises, on all their income and a tax rate of 10% on non-resident enterprises on their income from the jurisdiction of PRC.

 

33

Table of Contents 

 

Attention shall be paid to the fact that non-resident enterprises may be considered resident enterprises for the purpose of EIT if their de facto management bodies are located within the PRC territory and therefore their global income is subject to a tax rate of 25%. The Notice of the State Administration of Taxation on Issues Relevant to Foreign-registered Chinese-invested Holding Enterprises Determined as Resident Enterprises in Accordance with Actual Management Organization Standard (“Circular 82”), promulgated by the State Administration of Taxation (“SAT”), provides that, a foreign Chinese-invested enterprise, if it concurrently satisfies the following conditions, for the purpose of the EIT, shall be determined to be a non-domestically-registered resident enterprise when: (1) The places where the top managers and the top management departments that are responsible for implementing the routine production, management and operation of the enterprise, perform their duties within the territory of China; (2) The financial decisions (such as borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (such as appointment, dismissal, remuneration payment, etc.) of the enterprise shall be made or be approved by the organization or the persons within the territory of China; (3) The primary properties, accounting books, company seals, summaries and archives of the board meetings and shareholders meetings shall be placed or kept within the territory of China; and (4) One half or more of the enterprise’s directors or top managers having rights to vote shall frequently reside within the territory of China. Our PRC counsel, Jingtian &Gongcheng Attorneys at Law advises that because we (“FGI”) are incorporated in Cayman Islands, we do not meet the conditions outlined in Circular 82, however, our tax residency status is subject to the discretion of the PRC tax authorities whose determination is hard to predict, so we will continue to monitor our tax residency status.

 

The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10% unless any such non-resident individuals’ jurisdiction has a tax treaty with China that provides for a preferential tax rate or a tax exemption.

 

The Interim Regulations of the People’s Republic of China on Value-added Tax, promulgated by State Council on November 10, 2008 came into force on January 1, 2009, impose a Value-Added Tax at the rate of 17% on the revenues from sales of goods. According to the Notice of the Ministry of Finance and the State Administration of Taxation on Raising the Export Tax Rebate Rates for Certain Commodities, promulgated by the Ministry of Finance and SAT on June 3, 2009, the export tax rebate rate is 13% for certain plastic products. In 2014, 99.6% of our products benefitted from the 13% export tax rebate.

 

Foreign Exchange Regulation

 

The Regulations of the People’s Republic of China on Foreign Exchange Control, promulgated by State Council on August 5, 2008, lays the legal framework for foreign exchange control in PRC. A number of notices, implementing rules, replies and circulars are promulgated thereunder to clarify the regulations on the foreign exchange. Under these regulations, payments of current account items, such as profit distributions, may be made in foreign currencies without prior approval from SAFE provided that certain procedure is complied with. Where, however, payments of capital account is involved, such as RMB is to be converted into foreign currency for the purpose of remitting out of China to retire foreign currency-denominated loans, approval from or registration with appropriate government authorities is required. According to the SAFE Circular 142 i.e., Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, promulgated by SAFE on August 29, 2008 and SAFE Circular 45, promulgated by SAFE on November 9, 2011, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes falling within the business scope approved by the relevant authority and may not be used for equity investments within the PRC. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any way be used to retire RMB loans where the proceeds of such loans have not been used.

 

The Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, promulgated by SAFE on November 19, 2012, materially amends and, therefore, simplifies the foreign exchange procedure then existing. Various special purpose foreign exchange accounts may be opened in different provinces, which was prohibited previously. The Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents, promulgated by SAFE in May 2013, provides for that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted through registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.

 

We have obtained all material approvals and permits necessary for our operation in the PRC from SAFE and other PRC government authorities.

 

SAFE Circular 37

 

The Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, promulgated by SAFE on October 21, 2005 and designed to replace the former circular commonly known as “SAFE Circular 75”, requires registration of PRC residents with local branches of SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in SAFE Circular 37 as “special purpose vehicle”), where such offshore entity are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally owned assets or equity into such entity.

 

34

Table of Contents 

 

SAFE Circular 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, divestiture or other material event.

 

Any violation of these registration requirements may, among other liabilities that may be imposed under PRC laws governing evasion of foreign exchange controls, cause the PRC subsidiaries of the special purpose vehicle be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and may cause the special purpose vehicle’s ability to contribute additional capital into its PRC subsidiary be restricted.

 

Regulation of Dividend Distribution

 

The Company Law of the People’s Republic of China, promulgated by Standing Committee of the NPC on December 28, 2013 and came into force on March 1, 2014, and the Wholly Foreign-owned Enterprise Law, promulgated and came into force on October 31, 2000 by Standing Committee of the NPC, provide that dividend may only be paid out of accumulated profits as determined in accordance with applicable accounting standards provided that: (1) all losses from prior fiscal years have been offset; and (2) a general reserve has been established and which shall amount to the 50% of the registered capital.

 

Labor Laws and Social Insurance

 

The Labor Contract Law was promulgated by the Standing Committee of the NPC on June 29, 2007 and became effective on January 1, 2008.

 

The Labor Contract Law requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employees long-term job security. Pursuant to the Labor Contract Law, employment contracts lawfully executed prior to the implementation of the Labor Contract Law and continuing as of the date of its implementation shall continue to be performed. If an employment relationship was established prior to the implementation of the Labor Contract Law with no written employment contract executed, a contract must be executed within one month after the implementation of the Labor Contract Law.

 

In addition, according to the PRC Social Insurance Law, social insurance in China includes basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. Both employers and employees must pay basic pension insurance contributions based on the employee’s wage category, as required by the relevant regulations. Employees participating in basic pension insurance schemes are entitled to receive monthly basic pensions if their accumulated contribution period has reached or exceeded 15 years when they reach the statutory retirement age. A notice issued by the Social Assurance Authority provides that retirement is permitted at age of 60 for male employees and between 50 and 55 for female employees. Social insurance (including pension insurance) payment obligations end at such voluntary retirement ages.

 

Company Law

 

The Company Law of the PRC, adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress on December 29, 1993, was amended for the first time at the 13th Session of the Standing Committee of the Ninth National People’s Congress on December 25, 1999; amended for the second time at the 11th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2004; revised at the 18th Session of the Standing Committee of the Tenth National People’s Congress on October 27, 2005; and Revised at the 6th Session of the Standing Committee of the Twelfth National People’s Congress on December 28, 2013, takes effect on March 1, 2014 (the “Company Law”).

 

Pursuant to the Company Law, (1) the term “company” shall refer to a limited liability company or a Company Limited by Shares; (2) the shareholders of both Limited Liability Company and Company Limited by Shares shall only be subject to the liability of the company to the extent of the capital contributions they have subscribed; (3) the minimum amount of registered capital of a limited liability company and the minimum percent of cash contribution by shareholders have been eliminated by revision in 2014.

 

Wholly Foreign-Owned Enterprise Law

 

The Law of the PRC on Wholly Foreign-owned Enterprises, or the WFOE Law, was adopted by the NPC on April 12, 1986 and was amended on October 31, 2000. Moreover, the Implementation Regulation of the WFOE Law was promulgated on December 12, 1990 and amended on April 12, 2001.

 

The ratio between its registered capital and total amount of investment shall be in conformity with the relevant regulations of the PRC, and the difference between its registered capital and total amount of investment equal to the amount of foreign exchange loans that the WFOE is permitted to borrow from its foreign investor.

 

Environmental Protection

 

The Environmental Protection Law, promulgated by the Standing Committee of NPC on December 26, 1989 and came into force on December 26, 1989, lays the foundation of the legal framework for environmental protection in the PRC. The Ministry of Environmental Protection under the State Council is charged with the administration of The Environmental Protection Law.

 

35

Table of Contents 

 

The Law on Prevention and Control of Environmental Pollution by Solid Wastes (“the Solid Wastes Law”), promulgated by the NPC on December 29, 2004 and came into force on April 1, 2005, provides that any disposition of hazardous wastes shall be in compliance with relevant provisions promulgated by the State. Moreover, it is forbidden to supply or entrust hazardous wastes to entities that do not have business licenses and qualifications for the collection, storage, utilization and disposition of solid wastes. The Air Pollution Prevention Law, promulgated by the Standing Committee of the NPC on April 29, 2000 and came into force on September 1, 2000, The Water Pollution Prevention Law, promulgated by the Standing Committee of the NPC on May 11, 1984 and came into force on November 1, 1984 as amended on March 15, 1996 and February 28, 2008 are also important laws in this area.

 

Under these regulations, a number of requirements for handling, storage, treatment, transportation and disposal of regulated substances and wastes must be complied with and enterprise that discharge wastes into air or waters must obtain a permit and pay the waste treatment fees. Violation of these regulations may cause the violator to be subject to injunction and/or fine. We have obtained all material approvals necessary for our business operations.

 

Property

 

The Law of the PRC on Property, or the Property Law, was promulgated by the Standing Committee of the NPC on March 16, 2007 and became effective on October 1, 2007. Under the Property Law, any creation, modification, transfer or termination of property rights shall only become effective upon registration with the relevant government authorities. All lawful property of the State, collective organization and individual are protected by the Property Law against embezzlement and encroachment.

 

The Law of the PRC on Land Administration, or the Land Administration Law, was promulgated by the Standing Committee of the NPC on June 25, 1986 and became effective on January 1, 1987 and as amended on December 29, 1988 and August 28, 2004. According to the Land Administration Law, the lands within territory of the PRC are classified into two categories, state-owned land and collective-owned land. The use right of state-owned land can be obtained through either government allocation or grant with grant fees paid.

 

It further prescribes that any entity who intends to conduct construction must construct on the state-owned land except as otherwise provided under the Land Administration Law. The collective-owned land shall not be granted, assigned or leased for use of agriculture-unrelated-construction unless it otherwise falls in the scope permitted under the Land Administration Law. Violation of such provisions under the Administration Law may result in fines and confiscation of the buildings constructed on the land.

 

The Urban Real Estate Administration Law was promulgated by the Standing Committee of the NRC on July 5, 1994 and became effective on January 1, 1995 and as amended on August 30, 2007. According to the Urban Real Estate Administration Law, if the real estate is mortgaged to third party the land where such real estate occupies shall also be mortgaged together.

 

Product Liability

 

Under the current PRC laws, manufacturers and/or vendors of defective products in the PRC may incur liability for loss and injury caused by such defective products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated by the NPC on April 12, 1986, a defective product which causes property damage and/or physical injury to any person may subject the manufacturer and/or vendor of such defective product to civil liability for such damage and/or injury caused therefrom.

 

The Product Quality Law of the PRC, or the Product Quality Law, was promulgated by the Standing Committee of the NPC on February 22, 1993, to supplement the PRC Civil Law aiming to protect the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control over the quality of products. The Product Quality Law was revised on July 8, 2000. Pursuant to the revised Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have their business licenses revoked.

 

The Law of Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated by the Standing Committee of the NPC on October 31, 1993, and became effective on January 1, 1994. The Consumers Protection Law provides further protection to the legal rights and interests of consumers in connection with the purchase or use of goods and services. At present, all business operations must observe and comply with the Consumers Protection Law when they provide their goods and/or services.

 

The Tort Law of the PRC, or the Tort Law, was adopted by the Standing Committee of the NPC and promulgated on December 26, 2009 and will become effective on July 1, 2010. The Tort Law establishes a separate chapter regarding product liability. Compared to previous laws and regulations in relation to product liability, the provisions of the Tort Law expressly provide that, in the event that any entity is clearly aware of the defects existing in the products but notwithstanding manufactures and distributes such defective products which finally cause others’ death or serious injury, those so infringed upon are entitled to claim punitive damages.

 

36

Table of Contents 

 

U.S. Regulations

 

Federal, state and local governments mandate a variety of laws and regulations aimed at serviceware products and packaging products. At the federal level, the Food and Drug Administration (“FDA”), the Consumer Product Safety Commission and the Environmental Protection Agency (“EPA”), among other federal agencies, have promulgated regulations that directly or indirectly affect the products we produce.

 

For example, the FDA is charged with, among other responsibilities, regulating industry to ensure that food contact substances are safe, approving materials for use in foodservice disposables, and setting safety standards for products made with recycled content. Unlike many other industrialized nations, the U.S. does not currently have national packaging recycling laws in place; such laws, where they exist, are at the state level.

 

The Affordable Care Act (“Obamacare”) requires restaurant chains with over 20 locations to display the calorie content of each food and drink item it serves on signs and printed menus. Such regulation may indirectly affect our product usage as the intention of such regulation is to encourage healthier eating and better food choices, including a decrease in consumption of food from fast food restaurants and quick service restaurants.

 

State and local governments regulate restaurant cleanliness standards, with which foodservice disposables must comply. And a number of states, including large states such as California and Florida, as well as cities and counties have passed regulations governing consumer packaging materials. Polystyrene foam bans are particularly widespread among local governmental regulations, particularly in California, which has more than 50 cities and counties that have restricted or banned foamed polystyrene containers. Although no state has yet to impose a statewide ban on polystyrene, numerous bills that would accomplish such ban have been promoted in various state legislatures.

 

C. Organizational Structure

 

Below is a chart representing our current corporate structure:

 

 

 

Our registered office in the Cayman Islands is at NovaSage Incorporations (Cayman) Limited, Floor 4, Willow House, Cricket Square, P.O. Box 2582, Grand Cayman KY1-1103, Cayman Islands, telephone +1.345.949.2648.

 

D. Property, Plant and Equipment

 

Property

 

There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We, including our wholly owned subsidiary Great Plastics, were granted land use rights for our facilities in Sanmen County and Songmen Town, which extend until between 2053 and 2060.

 

In the U.S., in October 2013, we committed with the Pennsylvania Department of Commerce to invest and build a factory in Allentown, Pennsylvania. On February 27, 2014, Fuling signed a lease of premises in Allentown, Pennsylvania for general office, manufacturing and warehousing purposes. The Allentown project contemplates construction of the factory, renovation of the rented premises in Allentown and the purchase and installation of 12 production lines of manufacturing equipment.

 

37

Table of Contents 

 

Following is a list of our properties, including the first four, which we lease:

 

Transferee/

Lessee/Owner

  Property  

Land/Building

Use Term

 

Space

(m2)

 

Ground

Floor Area

(m2)

 

Productive

Capacity

(ton)

 

Extent of

Utilization

  Products Produced
                             
Fuling USA   Commercial/industrial space at 6690 Grant Way, Suite 1, Allentown, PA 18106   2014-03-01 until 2024-05-31   8,175.47        4,800   40%(1)   Straws
                             
Fuling USA   Warehouse at 6370 Hedgewood Drive, Suite 120, Allentown, PA 18106   2016-06-01 until 2021-05-31   1,579           100%   N/A
                             
Taizhou Fuling   Factory building at 8 Shengpan Road, Guanweitong Village, Wenqiao County   2017-01-01 until 2018-12-31   5,120.00        6,000   100%   Knives and forks
                             
Taizhou Fuling   Factory building at Eastern New District, Wenling City   2016-05-03 until 2017-1-31 (orally agreed to extend to any day when Taizhou Fuling moves out)   7182.00      

3,600

  100%  

Cups

                             
Taizhou Fuling  

Non-residential building in

Ximen Village,

Songmen Town

  No expiration (rights acquired 2000-04-27)    177.58       (rent out)   N/A   N/A
                             
Taizhou Fuling  

Non-residential building in

Ximen Village,

Songmen Town

  No expiration (rights acquired 2000-04-27)    668.89       (rent out)   N/A   N/A
                             
Taizhou Fuling  

Land in South of

Binhai Road,

Songmen Town

  2007-03-27 until 2053-03-10       13,996.79   13,970    100%   Mainly knives, forks, plates and bowls
                             
Taizhou Fuling  

Land in South of

Binhai Road,

Songmen Town

  2007-03-27 until 2055-01-14       14,076.80           Same as above
                             
Taizhou Fuling  

Non-residential

building in South of

Binhai Road,

Songmen Town

  2013-07-25 until 2053-03-10    491.05               Same as above
                             
Taizhou Fuling  

Non-residential

building in South of

Binhai Road,

Songmen Town

  2013-07-25 until 2053-03-10   1,471.22               Same as above
                             
Taizhou Fuling  

Non-residential

building in South of

Binhai Road,

Songmen Town

  2013-07-25 until 2053-03-10    2,559.28                Same as above

 

38

Table of Contents 

  

Taizhou Fuling  

Non-residential

building in South of

Binhai Road,

Songmen Town

  2013-07-25 until 2053-03-10    1,847.10                Same as above
                             
Taizhou Fuling  

Non-residential

building in South of

Binhai Road,

Songmen Town

  2013-07-25 until 2053-03-10    3,694.20                Same as above
                             
Taizhou Fuling  

Non-residential

building in South of

Binhai Road,

Songmen Town

  2013-07-25 until 2055-01-14    7,717.56               Same as above
                             
Taizhou Fuling  

Land in Southeast

Industrial Zone,

Songmen Town

  2015-01-29 until 2065-01-15        2,576.00   N/A   N/A   N/A
                             
Taizhou Fuling  

Land in East of Jintang South Road of Eastern New District,

Wenling City

  2016-04-14 until 2066-04-06       132,980.00   N/A   N/A   N/A
                             
Great Plastics  

E02-2905 lot at

Binhai Xincheng,

Sanmen County

  2010-08-01 until 2060-08-01       30,349.00   20,000   100%   Mainly straws, plates, cups, knives and forks
                             
Great Plastics  

Factory building in

Binhai Xincheng,

Sanmen County

  No expiration (rights acquired 2014-02-21)   15,679.28               Same as above
                             
Great Plastics  

Factory building in

Binhai Xincheng,

Sanmen County

  No expiration (rights acquired 2014-02-21)    1,872.22               Same as above
                             
Great Plastics  

Factory building in

Binhai Xincheng,

Sanmen County

  No expiration (rights acquired 2014-02-21)   11,813.30               Same as above
                             
Great Plastics  

Dormitory building in

Binhai Xincheng,

Sanmen County

  No expiration (rights acquired 2014-02-21)    4,092.77      

(non-

production)

  80%(2)   N/A

 

(1) We began productive use in early June 2015.
   
(2) The dormitory has 130 rooms, and is able to accommodate 350 employees. Currently 90 rooms are occupied by 212 employees.

 

Fixed assets at our properties consist of office equipment, buildings, structures, ancillary facilities, and equipment for production and packaging of plastic foodservice disposals including plastic food containers, drinking straws, cutlery, cups and plates, and others.

 

Some of our real property and fixed assets are encumbered by secured loans from our creditors. China Construction Bank Wenling Branch has encumbrances on our land use right and building ownership rights in the property located at South of Binhai Road, Songmen town. The term of our loan with China Construction Bank is from July 29, 2013 to October 27, 2017. Industrial and Commercial Bank of China Wenling Branch has encumbrances on our land use right and building ownership right in the property located at South of Binhai Road, Songmen town. The term of our loan with Industrial and Commercial Bank of China is from September 25, 2013 to August 28, 2017.

 

None of our property is affected by any environmental issues that may affect our use of the property. At present, our plans to further develop, expand or improve these properties are funded through proceeds from our initial public offering and through our operating cash flows. Regarding details of our Allentown expansion and Wenling expansion, please see “Item 4. Information on the Company – B. Business review.”

 

39

Table of Contents 

In addition to our property rights, we also currently have agreements to warehouse our products for delivery to customers. We pay storage and handling fees based on the quantity of goods we are warehousing at most of such facilities. We expect to devote part of such facility to warehousing our products prior to delivering to our customers. We may, from time to time, enter into new agreements to meet our warehousing needs.

 

Plant

 

Currently, we have following five factories, four in China and one in U.S.:

 

  1. Wenqiao factory: 8 Shengpan Road, Guanweitong Village, Wenqiao County, Wenling City, Zhejiang Province, China
     
  2. Songmen factory: South of Binhai Road, Songmen Town, Wenling City, Zhejiang Province, China
     
  3. Sanmen factory: Binhai Xincheng, Sanmen County, Taizhou City, Zhejiang Province, China
     
  4. Wenling factory: East of Jintang South Road, Eastern New District, Wenling City, Zhejiang Province, China (We plan to move in to this new factory from a temporary rental plant nearby in the second quarter of 2017)
     
  5. Allentown factory: Allentown, PA, USA

 

We are in the process of constructing our Wenling factory and expanding our Allentown factory. Regarding details to our material plans to construct/expand our new Wenling factory and our Allentown factory, please see “Item 4. Information on the Company —B. Business Review - Wenling Expansion” and “Item 4. Information on the Company —B. Business Review - Allentown Expansion”.

 

Equipment

 

As labor has become more expensive in China, we have found that we have less of an advantage over similarly situated companies from certain other countries. As a result, we have focused on increasing automation to reduce our reliance on labor, especially for cutlery. Because we have developed some of our own machinery for producing and packaging our products, we believe we have advantages over less automated competitors.

 

We are using more and more fully automated machinery including automatic injection molding machines, robotic arms, and automatic delivery systems. For example, we developed a six-in-one automatic packing machine to meet our customers’ needs. This machine can combine six steps into one step. Therefore, it packs forks, cutlery, napkins and other plastic serviceware into a single plastic package. A normal packing machine would require seven workers to operate. This machine reduces labor demand to only four workers.

 

Most of our automatic machines are customized. For instance, we cooperated with a manufacturer to transform a normal injection molding machine into a professional, industrial-quantity injection molding machine for serviceware production. We also cooperated with an automation factory to produce robotic arms for our production system.

 

The following chart shows some of our advanced equipment.

 

Equipment   Function
     
Elemental Analyzer   Our elemental analyzers can detect 26 kinds of toxic heavy metal elements and detect a variety of regular and irregular sample of the power, plate, linear. Alloys, metal materials and plastic materials can be detected.
     
Injection Molding Machine   Our injection molding machine is also called an injection machine. It is our main molding equipment using plastic molding to make thermoplastic or thermosetting plastic into various shapes of plastic products. High power is applied to molten plastic to fill the mold cavity and injection. The dedicated robotic arm of the injection molding machine is able to automate transportation of products or running tools according to the predetermined requirement for the operation of automated production equipment.
     
Vacuum Magnetron Sputtering Coating Machine   Our vacuum magnetron sputtering coating machine mainly uses direct current (or intermediate frequency) magnetron sputtering and can be adapted to a wide range of coating targets, such as copper, titanium, chromium, stainless steel, nickel and other metal materials, which can be coated using a sputtering process. It can also improve film adhesion, reproducibility, density, uniformity and other characteristics.
     
Four-Layer Co-Extruded Sheet Machine   Our four-layer co-extrusion sheet machine is mainly suitable for PP, PS and other raw materials, production of various high-grade thermalformed sheets and stationery sheets. Widely used in the manufacture of various high-grade four-layer sheets, the machine is suitable for manufacturing high-grade beverage cups, jelly cups, food packaging and other packaging containers.
     
High-Speed Plastic Molding Machines (Computer Controlled)   Our computer controlled high-speed plastic molding machine is suitable for PS, modified PP and PET reel sheet. It can manufacture to a variety of specifications, including disposable fast-food containers, instant noodle bowls, western food boxes, food packaging for products such as candy and cake boxes, daily necessities, metal packaging, children’s toys and agricultural seedling trays.
     
Thermoforming Machine   Our thermoforming machine is mainly suitable for HIPS, PS, PVC, PET and other plastic sheet, using heating principles to form plastic sheets, including in particular the production of, among other items, various small spoons and plate covers.

40

Table of Contents 

 

From 2012 to 2016, we invested approximately $21 million on advanced equipment and technology to increase our productivity levels, increasing our annual per-production worker output from approximately $80,000 in 2012 to approximately $145,000 in 2016, an important 81% performance improvement.

 

We have established an automation department in 2015 to work on research and development for that aspect of our manufacturing process. We believe we still have room to continue to automate our production processes and enjoy additional savings in labor expenses and increased productivity.

 

The following pictures show some of the automation in our factories and product lines.

 

 

 

Injection Molding Machine (including robotic arm) in our Songmen factory.

 

 

 

41

Table of Contents 

 

High-Speed Plastic Molding Machines (Computer Controlled) in our Sanmen factory.

 

 

 

Four-Layer Co-Extruded Sheet Machine in our Sanmen factory.

 

Item 4A. Unresolved Staff Comments

 

None.

 

Item 5. Operating and Financial Review and Prospects

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.”

 

A. Operating Results

 

Overview of Company

 

We are a specialized production and distribution company for environmentally-friendly plastic serviceware with primary customers from the United States and European countries. We mainly conduct our operations in China and United States through our wholly owned subsidiary, Taizhou Fuling Plastics Co., Ltd. and its subsidiaries in both countries.

 

Our plastic serviceware products are made from environmentally-friendly material. Our products include disposable cutlery, drinking straws, cups and plates and other plastic products. Our largest customer base is in the United States. Our production facilities include four factories in Zhejiang Province, China and one factory in Pennsylvania, U.S., and we have obtained ISO9001 quality management system, ISO14001 environmental management system, HACCP, FDA food facility registration and GMP certifications. These certifications are crucial for businesses like ours that serve some of the most sophisticated purchasers of foodservice disposables in the world.

 

42

Table of Contents 

 

Our primary raw materials in production of our products are PP, GPPS, HIPS and PET, which are extracted from crude oil. Thus, our cost of raw material is highly impacted by fluctuations in the price of oil. Cost of revenues mainly includes costs of raw materials, costs of direct labor, utilities, depreciation expenses and other overhead.

 

Our largest product category is disposable cutlery. It includes forks, knives, spoons, general, specialized and multipurpose utensils (for instance, the spork), both in single- and multi-utensil packages. It accounted for 52% and 61% of our revenue for the years ended December 31, 2016 and 2015, respectively, and we believe it will continue to be a key area for growth in the coming years. Our other product categories are (i) drinking straws, (ii) cups and plates and (iii) other plastics products, which accounted for 14%, 27% and 7% of the total sales respectively for the year ended December 31, 2016 and accounted for 12%, 23% and 4% of the total sales respectively in the year ended December 31, 2015.

 

Direct Link, one of our subsidiaries was incorporated in the United States in 2011 and is engaged in the distribution of our products in the U.S. In May 2014, Fuling Plastic USA, Inc. (“Fuling USA”) was incorporated in the Commonwealth of Pennsylvania as a wholly-owned subsidiary of Taizhou Fuling. Fuling USA has established the Company’s first production factory in the U.S. and principally engages in the production of plastic drinking straw items. We have not established any subsidiaries in Europe and we rely on the sales forces located in China to export our products to European countries. In September 2016, Wenling Changli Import and Export Co., Ltd (“Wenling Changli”) was established in Wenling, China as a wholly-owned subsidiary of Taizhou Fuling. Wenling Changli principally engages in the export of materials to our Allentown facility.

 

As of March 10, 2017, our products are sold in 22 countries. Our customers now include Subway, Wendy’s, Burger King, Taco Bell, KFC (China only), Wal-Mart, and McKesson. In 2016, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount as published by QSR Magazine. We estimate we supplied the following percentages of these customers’ products in the United States in 2016. These percentages are management’s best estimates, based on orders from such customers and understanding of other supplier relationships.

 

Customer  Cutlery   Straws   Courtesy Cups 
A   100%   70%   * 
B   45%   45%   * 
C   24%   *    * 
D   *    100%   * 

 

* Less than 1%; please note that these customers are presented in random order and not in order of size in order to protect the confidentiality of the customers.

 

Sales to these four customers amounted in the aggregate to 23.5% and 28.1% of our total revenues in the years ended December 31, 2016 and 2015, respectively. None of these customers exceeded 10% of our total revenue in 2016 and 2015.

 

Revenue by Geographic Area *

 

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

 

   Year Ended December 31, 2016   Year Ended December 31, 2015 
Region  Amount   %   Amount   % 
United States  $94,899    90.48%  $85,145    93.26%
Europe  $3,194    3.05%  $2,588    2.83%
Australia  $472    0.45%  $635    0.70%
Canada  $982    0.94%  $1,082    1.19%
Central and South America  $926    0.88%  $222    0.24%
Middle East and Africa  $209    0.20%  $498    0.55%
China  $4,200    4.00%  $1,124    1.23%
Total  $104,882        $91,294      

 

* The revenue here does not include our income from sources other than our serviceware products, which are mainly sales of raw materials and recyclable waste.

 

43

Table of Contents 

  

Factors Affecting Our Results of Operations

 

Government Policy May Impact our Business and Operating Results.

 

We have not seen any significant 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 (as well as government policies affecting our customers) could affect the demand for our products and could materially and adversely affect our results of operations. Our products are currently not subject to the government restrictions in the PRC. However, any future changes in the government’s policy upon plastic related production industry or disposal rules may have a negative effect on our business. As our majority of business is from international trading, any future changes in the government policy affecting the importing and exporting industry may impact our revenue and profitability.

 

World crude oil prices may impact our profitability.

 

The price of our products’ main raw material is closely associated with that of crude oil. Fluctuating oil prices impact not only the cost of plastic resin, but also transportation costs. Normally, our customers and we mutually agree to adjust our price according to raw material price fluctuation. However, if we are unable to do that in the future, oil price fluctuation will impact our profitability.

 

The fast food industry is expected to grow slowly.

 

Our major customers operate in fast food industry in the U.S. The industry is expected to perform marginally better over the next five years as the U.S. economy improves and consumers continue to seek convenient meal options. While no severe revenue declines are expected, fast food restaurants will continue to operate in a slow-growth environment. Successful operators will need to adapt to changing consumer preferences as the traditional concept of fast food evolves to include a wider variety of options. As plenty of opportunities remain for new fast food concepts and products, the industry’s long era of growth is far from over. As a result of these trends, global fast food industry revenue is expected to grow at an annualized rate of 2.0% over a few years to 2020 to $248.7 billion. In addition, the demand for foodservice disposables in the U.S. is projected to increase 3.9% per year to $21.9 billion in 2019.

 

Competition is high and increasing.

 

The three largest U.S. suppliers of foodservice disposables account for a significant percentage of the industry. As of 2012, Dart Container Corporation, Reynolds Group/Pactiv and Georgia-Pacific collectively held approximately 29% of the U.S. market share in the foodservice disposables industry. Our industry is marked by a small number of strong competitors, with approximately 50% of our market controlled by the top 10 companies in the industry. Under such circumstances, we may be unable to compete effectively against such larger, better-capitalized companies, which have well-established long-term relationships with the large customers we serve and seek to serve. Competition in this industry is primarily based on price. Other significant competitive factors are quality and reliability of delivery.

 

Exchange rate fluctuations may significantly impact our business and profitability.

 

We sell a majority of our products in the United States (approximately 90.5 % based on the revenues for the year ended December 31, 2016, and approximately 93.3% based on the revenues for the year ended December 31, 2015). Historically, we have relied on lower wages and favorable exchange rates in China to make our products sold abroad competitive in price. As China's currency has fluctuated significantly against the U.S. dollar in the past year, our advantage in price competitiveness might be impacted. While having already begun to diversify risk by moving some of our manufacturing to the United States, we anticipate continuously producing the majority of our products in China. To the extent the Chinese RMB appreciates, our products could become more expensive and, as a result, less attractive to potential customers in other countries. Currently we do not have any foreign currency net investments which are hedged by currency borrowings and other hedging instruments.

 

44

Table of Contents 

 

Results of Operations

 

Years Ended December 31, 2016 and 2015

 

The following table summarizes the results of our operations during the fiscal years ended December 31, 2016 and 2015, 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)

 

   2016   2015         

Statement of Operations Data:

  Amount  

As %

of

Sales

   Amount  

As %

of

Sales

  

Amount

Increase

(Decrease)

  

Percentage

Increase

(Decrease)

 
                         
Revenues  $104,882    100%  $91,294    100%  $13,588    15%
Cost of goods sold   79,640    76%   67,646    74%   11,994    18%
Gross profit   25,241    24%   23,648    26%   1,594    7%
Operating expenses                              
Selling expenses   6,857    7%   6,437    7%   420    7%
G&A expenses   7,511    7%   6,149    7%   1,362    22%
R&D expenses   2,356    2%   2,092    2%   264    13%
Total operating expenses   16,724    16%   14,678    16%   2,046    14%
Income from operations   8,518    8%   8,970    10%   (452)   -5%
Other income (expenses)                              
Interest expense, net   (773)   -1%   (1,063)   -1%   290    -27%
Subsidy income   1,863    2%   902    1%   961    107%
Other income, net   365    0%   582    1%   (217)   -37%
Total other income (expenses)   1,455    1%   421    1%   1,034    246%
Income before income taxes   9,973    10%   9,391    10%   582    6%
Provision for income taxes   (2,030)   -2%   (1,442)   -2%   (588)   41%
Net income  $7,943    8%  $7,948    8%  $(5)   0%

 

Revenues. Revenues increased by approximately $13.6 million, or 14.9%, to approximately $104.9 million in 2016 from approximately $91.3 million in 2015. The increase in revenues was primarily driven by a 29.6% increase of sales volume. However, with the significant decline of crude oil prices, average selling price decreased 11.4% compared to the year ended December 31, 2015. Overall, sales revenue increased despite the negative impact from pricing.

 

Revenue by Product Type

 

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

 

   2016   2015   Variance 
   Amount   % of Sales   Amount   % of Sales  

Amount

Increase

(Decrease)

  

Percentage

Increase

(Decrease)

 
Cutlery  $54,618   52%   $55,242   61%   $(623)   -1% 
Straws   15,219    14%   11,092    12%   4,127    37%
Cups and plates   27,835    27%   20,938    23%   6,897    33%
Others   7,209    7%   4,022    4%   3,187    79%
Total  $104,882    100%  $91,294    100%  $13,588    15%

 

Cutlery

 

Revenue from cutlery decreased by $0.6 million, or 1%, from $55.2 million to $54.6 million in 2016. Sales volume of cutlery increased 16% or 3.9 million kilograms to 27.3 million kilograms but was offset by 15% decline in average selling price. Revenue from products made with nano-modified polypropylene material with our patented technology, increased by $2.3 million. This increase was driven by the increase of volume we sold, which increased by 2.3 million kilograms from 2015. The increase was partially offset by the decrease of selling price from $2.03 to $1.86 per kilogram.

 

Revenue of cutlery made from traditional polypropylene material and polystyrene materials decreased by $3.3 million or 11% from 2015. A 0.9 million kilograms increase in sales volume was more than offset by a 21% decline in average selling price from $2.95 to $2.34 per kilogram.

 

Revenue of cutlery made from cornstarch biodegradable material increased by $355,000 or 43.7% from 2015. The increase was attributed to the increased sales volume which was partially offset by declined average selling price.

 

45

Table of Contents 

 

Straws

 

Revenue for straws increased by $4.1 million, or 37% in 2016 compared with revenue in 2015. In 2016, the quantity sold increased by 1.4 million kilograms or 45% compared to that in 2015. However, as oil prices continued to drop in 2016, our average selling price decreased by 5.7%. Our price is very competitive in the U.S. market and our products have been receiving substantial interest from customers. We expect our sales volume will continue to increase in this category.

 

Our Allentown factory began operation in 2015 and has been 100% devoted solely to straw manufacturing. In 2016 and 2015, the Allentown factory manufactured 1,326,699 kilograms and 11,025 kilograms of straws respectively.

 

Cups and plates

 

Revenue for cups and plates increased by $6.9 million, or 33% in 2016 compared with revenue in 2015. Sales volume increased by 83% compared to 2015. The average selling price decreased from $4.74 to $3.44 per kilogram. We will continue to focus on growing this product category which has the highest growth potential in our industry.

 

Other products

 

Other products include products for family use, party and other entertainment purposes. Revenue from these types of products increased by $3.2 million, or 79% in 2016 compared with revenue in 2015. The revenue increase was mainly due to an increase of 42% in sales volume and a 26% increase in average selling price.

 

Revenue by Geographic Area *

 

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

 

   2016   2015  

Year-over Year

Increase

 
Region  Amount   %   Amount   %   Amount   Percentage 
United States  $94,899    90.48%  $85,145    93.26%  $9,754    11.46%
Europe   3,193    3.05%   2,588    2.83%   606    23.42%
Australia   472    0.45%   635    0.70%   (163)   (25.67)%
Canada   982    0.94%   1,082    1.19%   (100)   (9.24)%
Central and South America   926    0.88%   222    0.24%   704    317.12%
Middle East and Africa   209    0.20%   498    0.55%   (289)   (58.03)%
China   4,200    4.00%   1,124    1.23%   3,076    273.67%
Total  $104,882        $91,294        $13,588      

 

* The revenue here does not include our income from sources other than our serviceware products, which are mainly sales of raw materials and recyclable waste.

 

Our sales from the United States market grew significantly in 2016. It increased 11.5% from $85.1 million in 2015 to $94.9 million in 2016. Since the establishment of our Allentown manufacturing facility in 2015, demand from our existing U.S. customers have significantly increased and we have added new customers due to our presence in the U.S.

 

The Chinese market overtook the European market and became our second largest market in 2016. Sales from the Chinese market increased by $3.1 million, or 274% due to the significant increase of the fast food market in China. We are increasingly focusing on the Chinese market in 2016. The slight decrease for sales from other regions was primarily due to the shift of our focus to the US and China markets in 2016.

 

Cost of goods sold. Our cost of goods sold increased by approximately $12.0 million or 17.7% to approximately $79.6 million in 2016 from approximately $67.6 million in 2015, which is consistent with sales growth in 2016. As a percentage of revenues, the cost of goods sold increased by approximately 1.8% point to 75.9% in 2016 from 74.1% in 2015. The increase was due to higher labor cost, and rising raw material cost toward the end of 2016. During construction of our new Wenling factory, our three factories in China reached or exceeded 100% capacity. To avoid delay on customer orders, we added some temporary capacity by renting factory space in Wenling until we can move into the new factory in the second quarter of 2017. This added cost and had a slight negative impact on our gross margin in 2016.

 

The portion of our products produced by third-party manufacturers in the years ended December 31, 2016 and 2015 were both less than 1%. The associated impact on our gross margins is very limited considering the portion.

 

Gross profit. Our gross profit increased by approximately $1.6 million, or 6.7%, to approximately $25.2 million in 2016 from approximately $23.6 million in 2015. Gross profit margin was 24.1% in 2016, as compared with 25.9% in 2015. The decrease of 1.8% point was primarily attributable to higher labor cost, lower average selling price, and lower efficiency due to operating at a temporary production facility in Wenling. Toward the end of 2016, in the fourth quarter, oil prices began to rise and resin prices increased sharply. There is always a lagging effect of raising the product prices in response to raw material price increase. It takes usually more than a quarter and sometimes as long as two quarters to raise the product prices. As a result, fourth quarter margin was severely impacted.

 

46

Table of Contents 

 

Our cost and gross profit by product types are as follows:

 

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

 

   2016   2015   Variance 
   Cost   Gross Profit %   Cost   Gross Profit %  

Cost

Increase (Decrease)

  

Gross Profit %

Increase (Decrease)

 
Cutlery  $45,152    17.3%  $42,211    23.6%  $2,941    (6.3)%
Straws   11,569    24%   8,234    26%   3,335    (2)%
Cups and plates   17,365    38%   12,297    41%   5,068    (3)%
Others   5,129    29%   2,455    39%   2,674    (10)%
Taxes   425    N/A    2,449    N/A    (2,024)   N/A 
Total  $79,640    24%  $67,646    26%  $11,994    (2)%

 

Cost of revenue for cutlery products increased by approximately $3 million to approximately $45.2 million in 2016 compared to $42.2 million in 2015. Gross profit margin was 17% and 24%, respectively in 2016 and 2015. Gross margin decreased due to a 15% decline in average selling price partially offset by 8% decline in unit cost. Price competition was more severe during the first three quarters in 2016 when oil prices were lower. Raw material prices rebounded in the fourth quarter but the product price increase was resisted by the wholesale distribution market until early 2017. Cutlery represented the largest portion of sales at 52.1%.

 

Cost of revenue for straws was approximately $11.6 million in 2016 compared to approximately $8.2 million in 2015. The gross profit margin was approximately 24% in 2016 compared to 26% in 2015. The gross margin variance is considered as normal fluctuation in our business operation.

 

Cost of revenue for cups and plates was around $17.4 million and $12.3 million in 2016 and 2015, respectively. Gross profit margin was 38% in 2016 compared to 41% in 2015. As we planned to grow our sales volume in cups and plates, we had to be more competitive in pricing to grab market shares. In addition, raw material prices increased in the fourth quarter when we had the highest sales growth compared to prior year. Not being able to implement price increases until 2017 slightly impacted our overall margin for the year 2016.

 

Taxes included in costs represent the VAT paid for purchased inventory, which cannot be deducted to offset our sales tax. The amount of tax in costs can vary year to year depending on the timing and amount of purchases made throughout the year.

 

Selling expenses. Selling expenses increased by approximately $421,000, or 6.5% to approximately $6.9 million in 2016 compared to approximately $6.4 million in 2015. As a percentage of sales, our selling expenses were 6.5% and 7.1% in 2016 and 2015, respectively. The increase in selling expenses is consistent with the increase of revenues.

 

General and administrative expenses. Our general and administrative expenses increased by approximately $1.4 million or 22.1%, to approximately $7.5 million in 2016 from approximately $6.1 million in 2015. As a percentage of revenues, general and administrative expenses were 7.2% and 6.7% in 2016 and 2015, respectively. The increase was primarily attributable to the following factors:

 

(a) an increase in payroll and welfare expense of $0.8 million due to business expansion in China;

 

(b) an increase in rent expense of $0.5 million due to renting a temporary plant in Wenling since May 2016;

 

(c) an increase in amortization and depreciation expense of $0.25 million attributable to increased fixed assets related to our facility in Allentown, U.S. established in 2015.

 

Research and development expenses. Our research and development expenses increased approximately $264,000, or 12.6% to approximately $2.4 million in 2016 compared with approximately $2.1 million in 2015. We expect to increase our R&D expenditures proportionate to our revenue increase, as we continue to conduct research and development activities, especially seeking to increase the use of environmentally-friendly materials, develop biodegradable materials and reduce reliance on fossil-based raw materials.

 

Interest income (expense). Our net interest expense decreased by approximately $0.3 million to approximately $0.8 million in 2016, from approximately $1.1 million in 2015.

 

The average interest rates for our average outstanding loans in 2016 and 2015 were 4.37% and 4.77%, respectively. At the time of an initial loan application, different commercial banks determine loan interest rates based on various factors, including general economic conditions in China, internal bank lending policies, the applicant’s credit standing and relative bargaining power. From 2015 to 2016, People’s Bank of China has gradually lowered its prevailing interest rate. For one year commercial loans, interest rates decreased from 4.3% in the beginning of 2015 to 4.3% as of December 31, 2016. As a result, the interest rate for our average outstanding loan in 2016 was lower than in 2015.

 

The bank loan balances as of December 31, 2016 and 2015 were $17.8 million and $15.3 million respectively. The average amounts of loan outstanding for 2016 and 2015 were $16.5 million and $23.4 million, respectively. We borrow from commercial banks based on our working capital conditions and forecast of business needs. The average amount of loan outstanding in 2016 was slightly higher than 2015 due to expansion of our business.

 

47

Table of Contents 

 

There is no interest expense associated with notes payable but we are subject to a bank charge. The bank charge is usually 0.05% of the notes payable issued. For the years ended December 31, 2016 and 2015, bank charges related to notes payable were immaterial.

 

Subsidy income. Our government subsidy income was approximately $1,9 million in 2016 compared to approximately $0.9 million in 2015. Our government subsidy income was all granted by local governments in recognizing our achievements in various areas. All subsidies we received in 2016 and 2015 were one-time grants and may not occur again in the future. We cannot predict the likelihood or amount of any future subsidies.

 

Other income (expense). Other expense was approximately $65,000 and $105,000 in 2016 and 2015, respectively. The significant decrease is attributed to the favorable USD exchange rate against RMB in 2016.

 

Foreign currency translation gain. The Company recorded $0.3 million and $0.5 million of foreign currency translation gain in 2016 and 2015, respectively.

 

Income before income taxes. Our income before income taxes was approximately $10.0 million in 2016, an increase of approximately $582,000 compared with approximately $9.4 million in 2015. The increase was primarily attributable to increased sales and gross margin, partially offset by the increased general and administrative expense as discussed above.

 

Provision for income taxes. Our provision for income taxes was approximately $2.0 million in 2016, an increase of approximately $588,000 or 41% from approximately $1.4 million in 2015. The increase was due to the fact that more taxable income was generated from our Chinese subsidiaries compared to 2015. In 2016, taxable income generated from China was $13.2 million compared to $11.8 million in 2015.

 

B. Liquidity and Capital Resources

 

We are a holding company incorporated in the Cayman Islands. Total Faith, our BVI organized wholly owned subsidiary, owns Taizhou Fuling which in turn owns our U.S. and China assets through its subsidiaries. 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. 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 U.S. dollars, we have occasionally paid such amounts in RMB to an entity controlled by our management capable of paying such amounts in U.S. 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.

 

Construction in progress represents costs of construction incurred for the Company's new plant and equipment. The construction for the Company’s Allentown factory in the U.S. has been completed and put in use in July 2015. The Construction in progress as of December 31, 2016 represents cost of construction for its facility expansion in China. The Company started the construction of the Wenling factory in April 2016. The construction of the first phase is expected to be completed around the end of March 2017 with a total value around $13.0 million. As of December 31, 2016, the Company had approximately $2.79 million purchase commitments for construction and machinery purchase. These commitments represent the amount of agreements signed but not yet paid.

 

As of December 31, 2016, the Company has outstanding loans of approximately $17.8 million from various banks and entities. To secure this debt, the Company has pledged some of its properties and machinery, equipment, land use rights as well as other assets in China to several banks. Approximately $1.7 million worth of equipment was used as collateral for the loan from Pennsylvania Industrial Development Authority.

 

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 their ability to pay dividends out of their 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.

 

As of December 31, 2016, we had cash and cash equivalents of approximately $4.0 million and restricted cash of approximately $2.3 million. As of December 31, 2016, we also had certificates of deposits of $1.5 million which mature in December 2017. We did not have any other short-term investments. Our current assets were approximately $47.8 million, and our current liabilities were approximately $42.3 million, which resulted in a current ratio of 1.13:1. Total Fuling Global Inc.'s equity as of December 31, 2016 was approximately $49.3 million.

 

We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Presently, our principal sources of liquidity are generated from our operations, proceeds from our initial public offering and loans from commercial banks. In China, long-term loans are generally available; however, short-term loans are a more readily accessible source of financing. Long-term loans in China are usually approved by banks for capital expenditures only, such as fixed asset construction or property acquisitions. Our working capital requirements are influenced by the level of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.

 

48

Table of Contents 

 

Based on our current operating plan, we believe that our existing resources, including cash generated from operations, proceeds from our initial public offering, bank loans, bank notes payable, and advances from suppliers will be sufficient to meet our working capital requirement for our current operations over the next twelve months. We expect to be able to refinance our short-term loans based on past experience and our good credit history. We do not believe failure to refinance our short term loans from certain banks will have a significant negative impact on our normal business operations. In both 2016 and 2015, our operating cash flow was positive. In addition, our related parties including our major shareholders and affiliate companies are willing to provide us financial support. However, we may have negative cash flow in the future, and our related parties may become unable or unwilling to provide us financial support as needed. If this happened, the failure to refinance our short-term loans could potentially affect our capital expenditure and expansion of business.

 

During the period from January 1, 2017 to March 3, 2017, we repaid approximately $3.9 million bank loans and $1.1 million in notes payable that were due in 2016. We also borrowed approximately $5.4 million under new bank loans as well as approximately $1.3 million in new notes payable from various banks in China. If we cannot refinance from commercial banks, our major shareholders and affiliate companies could provide us financial support as needed. Lack of sufficient financial support from local banks or our related parties could potentially affect our capital expenditure and expansion of business. We do not believe failure to refinance from certain banks will have significant negative impact on our normal business operations.

 

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

 

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

 

   2016   2015 
Net cash provided by operating activities  $5,205   $7,961 
Net cash used in investing activities   (24,084)   (8,770)
Net cash provided by financing activities   7,697    15,058 
Effect of exchange rate changes on cash   (383)   (75)
Net (decrease) increase in cash   (11,564)   14,174 
Cash, beginning of year   15,574    1,400 
Cash, end of year  $4,010   $15,574 

 

Operating Activities

 

Net cash provided by operating activities was approximately $5.2 million in 2016, compared to cash provided by operating activities of approximately $8.0 million in 2015. The decrease in net cash provided by operating activities was primarily attributable to the following factors:

 

  The increase in account receivable balance corresponded to the trend of increase in sales. Our sales increased by 14.9% or $13.6 million in 2016 compared with 2015. However, sales increase was especially strong in the fourth quarter; it increased 37.5% compared to the same period in 2015.
     
  Inventory increased by approximately $3.2 million in 2016 compared with a decrease of approximately $1.1 million in 2015. The increase is associated with the increased sales demand. The Company prepared more inventory to prepare for increased sales.
     
  The accounts payable increased by $6.0 million in 2016, compared with a decrease of $2.7 million in 2015. The increase is consistent with the increase of our inventory.

 

Investing Activities

 

Net cash used in investing activities was approximately $24.1 million in 2016, an increase of approximately $15.3 million from net cash used in investing activities of approximately $8.8 million in 2015. The increase in net cash used in investing activities in 2016 was primarily attributable to increased payments associated with the construction in progress in 2016 for $12.7 million, as well as increase of payment made in 2016 for land use rights for $8.3 million.

 

Financing Activities

 

Net cash provided from financing activities was approximately $7.7 million in 2016, compared to approximately $15.1 million in 2015. The decrease in net cash provided from financing activities in 2016 was primarily attributable to (a) proceeds of shareholder contribution for $18.6 million from IPO in 2015, compared to $0 million in 2016; (b) offset by net proceeds from short term borrowings of $3.7 million in 2016, compared to net repayment of short term borrowings of $3.4 million in 2015.

 

49

Table of Contents 

 

In 2016, we used capital expenditures primarily to develop a new factory in Wenling and continue to equip our Allentown facility. In 2017, we expect that our capital expenditures will increase in the future as our business continues to develop and expand. Our material cash requirements in 2017 may include (i) investments of approximately $7 million in the new production lines and manufacturing facilities in our new factory under plan in China; (ii) purchase of equipment for approximately $2 million for the Allentown factory. As the demand for our products is expected to grow in the coming years, we will need to add additional manufacturing capacity in Wenling, China and in Allentown factory.

 

Our primary source of cash is currently generated from the sales of our products and bank borrowings in addition to proceeds from our initial public offering. 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 raises, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and bank borrowings, as necessary.

 

Loan Facilities

 

Short-term Borrowings

 

As of December 31, 2016, the details of all our short-term bank loans are as follows:

 

(All amounts in U.S. dollars)

 

      As of   As of 
      December 31,
2016
   December 31,
2015
 
Agricultural Bank of China (“ABC”)  (1)  $1,079,949   $1,155,321 
China Construction Bank (“CCB”)  (2)   -    1,232,343 
China Merchants Bank (“CMB”)  (3)   2,759,227    1,000,293 
PingAn Bank (“PAB”)  (4)   1,439,933    2,310,643 
China Citic Bank (“CITIC”)  (5)   -    1,622,457 
Industrial and Commercial Bank of China (“ICBC”)  (6)   3,239,848    4,079,145 
Bank of China (“BOC”)  (7)   3,425,467    3,864,625 
Zhejiang Mintai Commercial Bank (“MTB”)  (8)   5,759,730    - 
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “Long-term Borrowing” below)      86,808    - 
Total     $17,790,962   $15,264,827 

 

(1)

In February and July 2016, Great Plastics entered into a series of short-term bank loan agreements with ABC for $647,969 and $431,980, respectively. The terms of these loans are twelve months with variable interest rates based on the prevailing interest rates. The effective rates are from 5.0% to 5.06% per annum. The loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company.

 

In January and May 2015, Great Plastics entered into two short-term bank loan agreements with ABC for twelve and six months, respectively. The loans bear a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 30 basis points. The effective rates were 5.06% and 5.58% per annum, respectively. The loans were guaranteed by the assets of Great Plastics, a third party guaranty company and a shareholder of the Company. These loans had been repaid in full upon maturity.

 

(2) In February and March 2016, Taizhou Fuling entered into two loan agreements with CCB for total of $1.25 million for five and four months respectively. The loans bear fixed interest rate of 4.57% and 2.88%, respectively. These loans had been repaid in full upon maturity.

 

50

Table of Contents 

 

  In July 2015, Taizhou Fuling entered into a short term bank loan agreement with CCB for $1,232,343 for twelve months. The loan bears interest rate that equals to China's one year loan prime rate, plus 29.25 base points. The effective interest rate is 5.14% per annum. This loan had been repaid in full upon maturity.
   
  These loans are guaranteed by the Company’s principal shareholders and Zhejiang Special Plastics Technology Co., Ltd. (“Special Plastics”), an affiliated company owned by a shareholder of the Company. In addition, the Company has pledged land use rights, properties and machinery equipment of Taizhou Fuling as collaterals for the loans outstanding as of December 31, 2016 and 2015.

 

(3) During 2016, Taizhou Fuling entered into a series of seven short-term bank loan agreements with CMB for five to twelve months. The interest rates ranged from 1.10% to 6.09% per annum. $1,440,000 of them had been repaid subsequent after December 31, 2016.
   
  In October and December 2015, Taizhou Fuling entered into two short-term bank borrowing agreements for approximately $1.0 million (RMB 6.5 million) with CMB for six months. The loan bears a variable interest rate based on published six-month London Interbank Offered Rate (“LIBOR”), plus 60 basis points. The effective rates were 1.13% and 1.42% per annum, respectively. The loans are guaranteed by Special Plastics and Taizhou Fuling’s general manager and Chair. These loans had been repaid upon maturity.

 

(4) In March 2016, Great Plastics entered into three short-term bank borrowing agreements with PAB with a total amount of $2,159,899 for six months. These loans bear a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 30% of the prevailing interest rate. The effective rate is 5.98%. The loans are guaranteed by the assets of Great Plastics. These loans had been repaid upon maturity.
   
  In September 2016, Great Plastics entered into two short-term bank borrowing agreements with PAB with a total amount of $1,439,932 for six months. These loans bear a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 30% of the prevailing interest rate. The effective rate is 5.08%. The loans are guaranteed by the assets of Great Plastics.
   
  In March 2015, Great Plastics entered into three short-term bank borrowing agreements with PAB with a total amount of $2,310,643 for six months to one year. The effective rates were 6.4%, 7.06% and 6.8% per annum, respectively. The loans were also guaranteed by the assets of Great Plastics. These loans had been repaid upon maturity.

 

(5) During the year of 2015, Taizhou Fuling and Great Plastics, entered into a series of short-term bank borrowing agreements with CITIC. The terms of the loans are four to twelve months. The interest rate was equal to three-month LIBOR. The loans were fully repaid on March 17, 2016.
   
  In January 2016, Taizhou Fuling entered into loan agreement with CITIC for $1,151,946 for ten months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 135.5 base points. The effective rates were 5.57% per annum, respectively. The loan is guaranteed by Taizhou Fuling’s general manager. This loan had been repaid upon maturity.
   
  In April 2016, Great Plastics entered into a loan agreement with CITIC for $719,966 for six months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, minus 90 base points. The effective rates were 5.1% per annum, respectively. The loan is guaranteed by Special Plastics, Taizhou Fuling’s general manager and Chair. This loan had been repaid upon maturity.

 

51

Table of Contents 

 

(6)

In February 2016, Taizhou Fuling entered into a loan agreement with ICBC for $593,000 for five months, with fixed interest rate of 3.5%. This loan had been repaid upon maturity.

 

In April 2016, Taizhou Fuling entered into a loan agreement with ICBC for $647,970 for five months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 161.6 base points. The effective rate was 5.92% per annum. This loan had been repaid upon maturity.

 

In July 2016, Taizhou Fuling entered into two loan agreements with ICBC for $575,973 and $575,973 respectively for twelve and five months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 161.6 base points. The effective rate was 5.00% per annum. $575,973 of them had been repaid subsequently.

 

In August 2016, Taizhou Fuling entered into a loan agreement with ICBC for $647,970 for five months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 113.75 base points. The effective rate was 5.44% per annum.

 

In October 2016, Taizhou Fuling entered into a loan agreement with ICBC for $791,963 for twelve months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 70.25 base points. The effective rate was 5.00% per annum.

 

In December 2016, Taizhou Fuling entered into two loan agreements with ICBC for $719,966 and $503,976 respectively for twelve and twelve months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 70.25 base points. The effective rate was 5.00% per annum.

 

  During 2015, Taizhou Fuling entered into a series of short-term bank borrowing agreements with ICBC. The terms of the loans are five months to one year, with fixed interest rates ranging from 2.33% to 6.16% per annum. These loans are guaranteed by the shareholders of Special Plastics, its shareholders and third party individuals. In addition, the Company has pledged the land use right and properties as collateral.

 

(7) During the year in 2016 and the year ended December 31, 2015, Taizhou Fuling and Great Plastics entered into a series of short-term bank borrowing agreements and other financing agreements with BOC. The terms of the loans are three to twelve months, with fixed interest rates based on LIBOR (for loans dominated in USD) or prime loan rates issued by People's Bank of China (for loans dominated in RMB), plus certain base points. The effective interest rates vary from 1.56% to 5.9% per annum. The loans to Taizhou Fuling are guaranteed by Great Plastics and Taizhou Fuling’s general manager. The loans to Great Plastics are guaranteed by Taizhou Fuling’s general manager and Chair of the Board.

 

(8) In October and December in 2016, Taizhou Fuling entered into two loan agreements with MTB for $5,759,730 respectively for six and six months. The effective rates were 6.41% per annum, respectively. The loan is guaranteed by Taizhou Fuling’s general manager.

 

As of December 31, 2016 and 2015, land use rights in the amount of $9,084,213 and $1,499,417, property and buildings in the amount of $3,950,101 and $4,378,554 and equipment in the amount of $0 and $5,236,272, respectively, were pledged for the above loans.

 

Long-term Borrowing

 

On September 28, 2016, Fuling USA entered into a ten-year Machinery and Equipment Loan Agreement with the Pennsylvania Industrial Development Authority for $937,600, with fixed interest rate of 1.75%. This loan is collateralized by the machinery and equipment, worth approximately $1.72 million. As of December 31, 2016, the amount of long-term borrowing was $836,471, and $86,808 of which will be paid within a year.

 

52

Table of Contents 

 

Bank Notes Payable

 

The Company had the following bank notes payable as of December 31, 2016:

 

   December 31,
2016
 
ICBC, due various dates from January 12, 2017 to June 29, 2017  $1,564,479 
CMBC, due April 8, 2017 and April 24, 2017   345,584 
ABC, due various dates from March 28, 2017 to April 28, 2017   283,315 
CITIC, due various dates from February 5, 2017 to June 27, 2017   363,390 
Total  $2,556,768 

 

The Company had the following bank notes payable as of December 31, 2015:

 

   December 31,
2015
 
ICBC, due various dates from January 17, 2016 to June 23, 2016  $2,409,055 
CITIC, due various dates from January 28, 2016 to June 29, 2016   430,728 
Total  $2,839,783 

 

All loans and bank acceptance notes due as of the date of this filing have been repaid. In March 2017, the Company has repaid approximately $3.9 million in bank loans and $1.1 million in notes payable that were due in 2016 and has borrowed approximately $5.4 million in bank loans and $1.3 million in notes payable from various banks in China, which are short term in nature and guaranteed by Special Plastics, its shareholders and third parties.

 

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/notes receivable, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.

 

Statutory Reserves

 

Under PRC regulations, all of our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with accounting principles generally of the PRC (“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, 2016 and December 31, 2015. We are also party to certain debt agreements that are secured with collateral on our real property, but such debt agreements do not restrict our net assets and instead only impose restrictions on the pledged property. To the extent we wish to transfer pledged property, we are able to do so subject to the obligation that we settle the loan obligation.

 

53

Table of Contents 

 

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, 2016 and December 31, 2015.

 

   As of December 31, 
   2016   2015 
Statutory Reserves  $4,017,957   $2,868,844 
Total Restricted Net Assets  $4,017,957   $2,868,844 
Consolidated Net Assets  $49,334,539   $43,181,367 
Restricted Net Assets as Percentage of Consolidated Net Assets   8.14%   6.64%

 

Total restricted net assets accounted for approximately 8.14% of our consolidated net assets as of December 31, 2016. 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 $4.0 million and $5.5 million for the years ended December 31, 2016 and 2015, respectively for additions to and renovations of our workshops and office buildings; and purchases of equipment in connection with our business activities.

 

In 2017, our capital expenditures are expected to be approximately $9 million, and will be primarily related to (i) investments of approximately $7 million in the new production lines and manufacturing facilities in our new factory under plan in China, and (ii) purchase of equipment for approximately $2 million for the Allentown factory. We anticipate that our operating cash flow in 2017 will be as much as the $5 million generated in 2016 if not higher. We are also securing long term debt financing from banks in the U.S. and China in the amount of more than $3 million.

 

For more information regarding our material commitments for capital expenditure, please see “Item 4. Information on the Company.” 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 and proceeds received from our initial public offering to fund our capital commitments in the past and anticipate using cash generated from our subsidiaries’ operations to fund capital expenditure commitments in the future.

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Revenue recognition

 

Revenue from product sales is recognized, net of estimated provisions for sales allowances, when the merchandise is shipped and title is transferred. Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement); (ii) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received by the customer at its designated location in accordance with the sales terms;(iii) the sales price is both fixed and determinable, and (iv) collectability is reasonably assured. Historically, sales returns have been minimal.

 

We sell our products either under free on board (“FOB”) shipping point term or under FOB destination term. For sales under FOB shipping point term, we recognize revenue when product was loaded on the ships. 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 the product is delivered and accepted by customer. Product delivery is evidenced by signed receipt document and title transfers upon delivery.

 

54

Table of Contents 

 

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

 

We establish an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivable. 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.

 

Income Tax

 

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

 

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

 

Recently Issued Accounting Pronouncements

 

In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The new guidance is intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect this update will have a material impact on the Company's consolidated financial position, results of operations and cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” , to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

 

55

Table of Contents 

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows”. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for the Company in its first quarter of 2019. The Company is currently evaluating the impact of adopting ASU 2016-16 on its consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”. The amendments affect reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

 

C. Research and Development, Patents and Licenses, etc.

 

Research and Development

 

We are committed to researching and developing better ways to make our products more environmentally-friendly and cost effective and better ways to make our production methods more efficient. We believe scientific and technological innovations are integral to our operations and the mainstay of our competitive advantage and differentiation strategy. The barrier to entry to produce plastic foodservice disposables is relatively low; we believe that by devoting resources to finding new solutions to challenges facing our customers, we are able to improve our competitiveness, even where we are not the lowest cost provider of products, because we compensate with quality and service.

 

56

Table of Contents 

 

The R&D team has over 90 dedicated employees who are researchers and analysts focused on product development and design of systems to automate our production process. Quality control is an important aspect of the teams’ work and ensuring quality at every stage of the process has been a key driver in maintaining and developing brand value for our Company.

 

We have collaborated with the Technical Institute of Physics and Chemistry of the Chinese Academy of Sciences in research regarding foodservice disposables technology in materials, processes and systems. Current efforts focus on biodegradable product materials including PBS and cellulose synthesis of biodegradable material. It is through these collaborations that the company has managed to secure important breakthroughs resulting in proprietary knowledge and patents.

 

During years ended December 31, 2016 and 2015, we spent $2.36 million and $2.09 million, respectively, on R&D. The increase of the amount spent on R&D was due to more R&D projects in 2016. R&D expenditures in each year were for the following purposes:

 

   Year Ended December 31, 
   2016   2015 
  (in millions)  (in millions) 
Purpose        
Salaries  $0.60   $0.60 
Materials   1.36    1.23 
Other   0.40    0.26 
Total  $2.36   $2.09 

 

We expect to increase our R&D expenditures proportionate to our revenue increase in 2017.

 

The following chart shows some of our recent research projects.

 

Project  Source   Year 
         
Disposable Paper-Like Cups  R&D cooperation with
Chinese Academy of
Sciences
   2016 
         
High Quality Printing Paper  R&D cooperation with
Chinese Academy of
Sciences
   2016 
         
Paper Cup  Self-Developed   2016 
         
PET Cups with/without Printing  Self-Developed   2016 
         
PET Salad Bowl  Self-Developed   2016 
         
Injection Deli with Printing  Self-Developed   2016 
         
Thermoforming Deli with Printing  Self-Developed   2016 
         
PP School Tray  Self-Developed   2016 
         
Double Barrel  Self-Developed   2015 
         
Spoon Straw  Self-Developed   2015 
         
PP Plate  Self-Developed   2015 

 

57

Table of Contents 

 

PP Controlled Degradation Serviceware  Self-Developed   2014 
         
Melt-Grafted Polypropylene Cutlery  Self-Developed   2014 
         
Damping Gradient Distribution Function Package  Self-Developed   2014 
         
New Anti-Fog Lid  Self-Developed   2014 
         
Research of Serviceware Packaging Automation  Self-Developed   2013 
         
Application of Orientation Control in Serviceware  Self-Developed   2013 
         
New Antibacterial Compound Serviceware  Self-Developed   2013 
         
Toughening PLA Biodegradable Serviceware  Self-Developed   2013 
         
Mold for Folding Spork  Self-Developed   2012 – 2013 
         
PS/HIPS/SBC Plastic Alloy  Self-Developed   2012 – 2013 
         
High Temperature High Impact PET Transparent Lid  Self-Developed   2012 – 2013 
         
Starch Modified PBS Technology  Self-Developed   2012 – 2013 
         
PLA/PBS Composite Biodegradable Straws  Self-Developed   2012 
         
Starch-Based Full-Dissolved Material  Self-Developed   2012 
         
New Temperature Modified PLA Biodegradable Material  Self-Developed   2012 
         
New Coating Serviceware  Self-Developed   2012 
         
Modified Corn Starch-Based PBS Biodegradable Material  R&D cooperation with
Chinese Academy of
Sciences
   2011 
         
Cellulose Inorganic Filler Modified PBS Biodegradable Materials  R&D cooperation with
Chinese Academy of
Sciences
   2011 
         
Research of Biodegradable Food Packaging Material  Self-Developed   2011 
         
New Serviceware Coating Technology  Self-Developed   2011 
         
Research of Improving The Energy-Saving of Injection Molding Machine  Self-Developed   2011 
         
Research of Temperature Resistance of New Modified PLA Biodegradable Material  Self-Developed   2011 

 

58

Table of Contents 

 

Intellectual Property

 

Our Patents

 

We rely on our technology patents to protect our business interests and ensure our position as a pioneering manufacturer in our industry. We have placed a high priority on the management of our intellectual property. Some products that are material to our operating results incorporate patented technology. Patented technology is critical to the continued success of our products. However, we do not believe that our business, as a whole, is dependent on, or that its profitability would be materially affected by, the revocation, termination, or expiration of, or infringement upon, any specific single patent. We currently hold the following issued patents:

 

Proprietary name  Patent No.  Patent
type
  Application
Date
  Approval
Date
  Expiration
Date
  Authority
                   
Improvement to water barrel  ZL 2007 2 0109209.7  Utility model  2007.05.11  2008.02.20  2017.05.10  China State Intellectual
Property Office
                   
Particulate filtering drinking straw  ZL 2007 2 0107560.2  Utility model  2007.03.27  2008.02.20  2017.03.26  China State Intellectual
Property Office
                   
Straw with a fork  ZL 2007 2 0110304.9  Utility model  2007.06.06  2008.04.30  2017.06.05  China State Intellectual
Property Office
                   
Food and beverage heater for automobiles  ZL 2007 2 0109842.6  Utility model  2007.05.25  2008.04.30  2017.05.24  China State Intellectual
Property Office
                   
Straw with a spoon  ZL 2007 2 0111006.1  Utility model  2007.07.07  2008.07.02  2017.07.06  China State Intellectual
Property Office
                   
Brewing device  ZL 2008 2 0164651.4  Utility model  2008.09.11  2009.08.12  2018.09.10  China State Intellectual
Property Office
                   
Food grade polypropylene composite material and preparation and uses  ZL 2010 1 0116076.2  Patent  2010.03.02  2013.06.05  2030.03.01  China State Intellectual
Property Office
                   
Two section straw packaging and transmission system  ZL 2007 1 0156428.5  Patent  2007.10.26  2010.12.15  2027.10.25  China State Intellectual
Property Office
                   
Split-type goblets  ZL 2010 2 0684010.9  Utility model  2010.12.28  2011.08.03  2020.12.27  China State Intellectual
Property Office
                   
Plates  ZL 2010 3 0701465.2  Design  2010.12.29  2011.08.03  2020.12.28  China State Intellectual
Property Office

 

59

Table of Contents 

 

Cup with curled rim  ZL 2011 2 0049179.1  Utility model  2011.02.26  2011.08.24  2021.02.25  China State Intellectual
Property Office
                   
Spork  ZL 2010 2 0685416.9  Utility model  2010.12.28  2011.09.07  2020.12.27  China State Intellectual
Property Office
                   
Multipurpose fork  ZL 2010 2 0685497.2  Utility model  2010.12.28  2011.10.19  2020.12.27  China State Intellectual
Property Office
                   
Anti-counterfeit bags  ZL 2011 2 0049491.0  Utility model  2011.02.26  2011.10.19  2021.02.25  China State Intellectual
Property Office
                   
Combined serviceware package  ZL 2010 2 0684440.0  Utility model  2010.12.28  2011.11.09  2020.12.27  China State Intellectual
Property Office
                   
Hollow-handle cutlery  ZL 2010 2 0684221.2  Utility model  2010.12.28  2011.11.30  2020.12.27  China State Intellectual
Property Office
                   
Serviceware kit (toughened)  ZL 2011 3 0402067.5  Design  2011.11.07  2012.05.16  2021.11.06  China State Intellectual
Property Office
                   
Ice cream cup  ZL 2011 2 0561621.9  Utility model  2011.12.29  2012.10.03  2021.12.28  China State Intellectual
Property Office
                   
Cover/lid  ZL 2012 3 0240031.6  Design  2012.06.11  2012.10.31  2022.06.10  China State Intellectual
Property Office
                   
Cover remover  ZL 2012 2 0285999.5  Utility model  2012.06.16  2013.01.09  2022.06.15  China State Intellectual
Property Office
                   
Packaging barrel  ZL 2012 2 0288697.3  Utility model  2012.06.16  2013.01.09  2022.06.15  China State Intellectual
Property Office
                   
Bowls  ZL 2012 3 0542829.6  Design  2012.11.09  2013.04.10  2022.11.08  China State Intellectual
Property Office
                   
Plates (honeycomb design)  ZL 2012 3 0543240.8  Design  2012.11.09  2013.04.10  2022.11.08  China State Intellectual
Property Office
                   
Cutlery with removable structure  ZL 2012 2 0591687.7  Utility model  2012.11.09  2013.05.01  2022.11.08  China State Intellectual
Property Office

 

60

Table of Contents 

                   
Bowl for noodles  ZL 2010 3 0701464.8  Design  2010.12.29  2011.06.08  2020.12.28  China State Intellectual
Property Office
                   
Combined fork and cutlery  ZL 2010 2 0683337.4  Utility model  2010.12.28  2011.10.19  2020.12.27  China State Intellectual
Property Office
                   
Multipurpose clip  ZL 2011 2 0048688.2  Utility model  2011.02.26  2011.10.19  2021.02.25  China State Intellectual
Property Office
                   
Water dispenser bucket with handle  ZL 2011 2 0219976.X  Utility model  2011.06.27  2012.01.25  2021.06.26  China State Intellectual
Property Office
                   
Cup  US D724,426 S  Design  2014.07.24  2015.03.17  2029.03.17  United States Patent and
Trademark Office
                   
Plate  ZL 2015 3 0165070.8  Design  2015.05.27  2015.09.02  2025.05.26  China State Intellectual
Property Office
                   
Serviceware distribution organization  ZL 2015 2 0307980. X  Utility model  2015.05.13  2015.09.09  2025.05.12  China State Intellectual
Property Office
                   
High luminous suction cup  ZL 2015 2 0332164.4  Utility model  2015.05.21  2015.09.23  2025.05.20  China State Intellectual
Property Office
                   
High transparent children plate  ZL 2015 2 0343466.1  Utility model  2015.05.25  2015.09.23  2025.05.24  China State Intellectual
Property Office
                   
High transparent antiskid serviceware  ZL 2015 2 0343446.4  Utility model  2015.5.25  2015.9.23  2025.5.24  China State Intellectual
Property Office

 

61

Table of Contents 

 

Our Trademarks

 

In addition to our patents, we also rely on trademarks and service marks to protect our intellectual property and branding. Below is a list of our registered marks.

 

Mark  Owner   Classification Number(1)   Registration Date   Expiration Date   Authority
  Taizhou Fuling

Taizhou Fuling
   8 – #4712944

21 – #4712943
   2008.3.28

2008.12.28
   2018.3.27

2018.12.27
   China State
Administration
for Industry and
Commerce
                    
  Taizhou Fuling

Taizhou Fuling
   8 – #4712945

21 – #4712946
   2008.3.28

2008.12.28
   2018.3.27

2018.12.27
   China State
Administration
for Industry and
Commerce
                    
   Taizhou Fuling   21 – #1032903 2)   2009.11.16   2019.11.16   Intellectual
Office Property
Register
                    
  Taizhou Fuling

Taizhou Fuling
   8 – #11235808

21 – #11235777
   2013.12.14

2013.12.14
   2023.12.13

2023.12.13
   China State
Administration
for Industry and
Commerce
                    
  Taizhou Fuling   21 – #8441442   2011.7.14   2021.7.13   China State
Administration
for Industry and
Commerce
                    
  Taizhou Fuling   21 – #11235865   2013.12.14   2023.12.13   China State
Administration
for Industry and
Commerce
                    
  Taizhou Fuling   8 – #11236889   2013.12.14   2023.12.13   China State
Administration
for Industry and
Commerce
                    
  Great Plastics

Great Plastics
   8 – #9966708

21 – #9966694
   2012.11.21

2013.3.7
   2022.11.20

2023.3.6
   China State
Administration
for Industry and
Commerce
                    
  Great Plastics   8 – #9966716   2012.11.21   2022.11.20   China State
Administration
for Industry and
Commerce
                    
  Great Plastics

Great Plastics
   8-# 12489484

21-# 12489468
   2014.9.28

2014.9.28
   2024.9.27

2024.9.27
   China State
Administration
for Industry and
Commerce
                    
  Fuling USA   8 – #4291028   2013.2.19   (3)  United States
Patent and
Trademark
Office

 

62

Table of Contents 

 

(1) Classification 8 products consist of serviceware (knife, fork and spoon); knife and fork set serviceware; steel knives; chopping knives; ice hammers; spoons; wine ladles; long handle spoons and tongs for sugar cubes. Classification 21 products consist of non-precious metal serviceware (except knives, forks and spoons); enamel and plastic ware for everyday use (including basins, bowls, plates, kettles and cups); ice cream sticks; lunch boxes; utensils for household uses; covers for dishes; paper or plastic cups; ice creams spoons; non-precious serviceware and picnic baskets (including plates and dishes).
   
(2) Basing on #4712946 registration in China, we have registered the trademark at the International Bureau of the World Intellectual Property Organization (WIPO) under the Madrid Agreement and Protocol. Please see the details after this chart.
   
(3) The registration is valid as long as Fuling USA timely files all post registration maintenance documents.

 

Our Domain Names

 

We have registered 5 domain names, including fulingplastics.com.cn, fulingplasticusa.com, domoplastics.com (not yet operational), directlinkusallc.com and domoindustry.com. We also have the authorization from Ms. Guilan Jiang to use fulingplastics.com, We do not incorporate the information on our websites into this annual report and you should not consider any information on, or that can be accessed through, our websites as part of this annual report.

 

D. Trend Information

 

Industry Trends and Company Strategy

 

We have noted the existence of the following trends since the beginning of 2016, all of which are likely to affect our business to the extent they continue in the future. We are adopting strategies accordingly.

 

Industry operators will need to cater to environmental concerns in order to succeed

 

Business and consumer concerns over the environmental impact of plastic will gain importance as an industry trend over the next five years. Consumers will likely be more conscious of the environmental impact of paper and plastic products and look to purchase recycled and eco-friendly products. As a result, industry operators will need to cater to environmental concerns in order to succeed in the industry. For instance, according to Freedonia, McDonald’s reports that its corrugated clamshells contain at least 37 percent recycled content.

 

Our management believes companies that provide eco-friendly products can charge higher prices which usually offset more than the cost increase and thus achieve higher profit margins. On average, our eco-friendly products have 10% higher gross margin compared to our conventional products.

 

Innovation and cost cutting

 

The main material used to produce plastic products is plastic resin, a petroleum-based product. For this reason, fluctuations in global crude oil prices lead to changes in the input costs for plastic manufacturers. Crude oil prices are generally volatile.

 

The plastic resins we primarily use are polypropylene (“PP”), polystyrene (“PS”) which includes General Purpose Polystyrene (“GPPS”), High Impact Polystyrene (“HIPS”), and Polyethylene Terephthalate (“PET”). We began to use PET in 2016 to produce and fulfill orders of PET cups and cup lids. The following chart shows their percentages of our total cost of raw materials for the years ended December 31, 2016 and 2015:

 

   Year Ended December 31, 
Raw Material  2016   2015 
PP   49.05%   48.3%
GPPS   21.01%   28.46%
HIPS   2.62%   2.20%
PET   6.71    -%
Total   79.39%   78.96%

 

63

Table of Contents 

 

 

The following chart shows the monthly prices of PP, GPPS, HIPS, PET and Brent oil (one kind of crude oil) from January 2015 to February 2017:

 

   PP ($/LB)   GPPS ($/LB)   HIPS ($/LB)   PET ($/LB)   Brent Oil ($/barrel) 
2015                    
January  $0.730    0.910    1.010    -    47.870 
February   0.740    0.870    0.970    -    58.140 
March   0.725    0.870    0.970    -    55.930 
April   0.685    0.920    1.020    -    61.020 
May   0.675    0.950    1.050